Does Unilever's €1bn climate fund lower its cost of capital?

On 15 June 2020 Unilever announced its Climate & Nature Fund: its brands would invest €1bn "over the next ten years" in land, forests, water and wildlife protection (Unilever PLC, 2020). A CFO hearing that asks at once whether the money comes back. A common answer is "capital will be cheaper". That is a testable hypothesis, and I wanted to see how far the published documents support it.

What did Unilever announce, and what did it not?

The press release of 15 June 2020 states: a €1bn fund over ten years; likely projects such as restoring land, reforestation, carbon sequestration, wildlife protection and water preservation; net zero emissions from all its products by 2039; and a deforestation-free supply chain by 2023 (Unilever PLC, 2020). It also reports that 89 per cent of forest-related commodities were certified and that water stewardship programmes would run in 100 locations by 2030 (Unilever PLC, 2020).

The release says nothing about cost of capital, interest rates, credit ratings or share price, and gives no annual spending schedule. That is the starting point: what was announced is a spending commitment, and "cheaper capital" has to come from somewhere else. The case file on Unilever's Climate and Nature Fund covers the fund in detail; the post on Unilever splitting off ice cream covers a different decision by the same group.

Two things follow, in my reading. First, a reader who quotes this fund as proof of cheaper capital is jumping from a spending announcement to a financing outcome with no data in between. Second, even the commitments the release does make, such as net zero by 2039 and a deforestation-free supply chain by 2023, are targets, and whether they are met is a separate question that a press release cannot answer. Those targets are the things a lender or investor could price, if they price anything at all, and the release says nothing about whether they do.

By which routes could a fund touch cost of capital?

I see two, and only one has an example in the documents I read. The weighted average cost of capital blends the cost of equity and the after-tax cost of debt at market-value weights. A fund could pull it down in two places.

The first is debt: a loan contract that ties the interest rate to an environmental target. The second is equity: investors see the company as less risky, or a new group of investors wants to hold its shares, so they demand a lower return. That second route is pure hypothesis; I have no library source showing it happening at Unilever or anywhere, and the link between ESG and profit remains contested.

What does a debt mechanism look like at Tesco?

Tesco's 2021 report describes two kinds of instrument. In July 2020 it refinanced its committed revolving credit facility with a "pricing adjustment" based on performance against selected ESG metrics; its proposal to refinance the £2.5bn facility also included an ESG price adjustment for the first time. In January 2021 it launched a bond linked to its commitment to cut greenhouse gas emissions, described as the first by a UK-listed retailer (Tesco PLC, 2021, p. 68). The report does not say whether that price adjustment is up or down, so I do not know whether it raises or lowers cost.

The bond's term is explicit: €750m maturing 2029, with the coupon stepping up by 25 basis points for the final three payments if its science-based target of a 60 per cent cut against a 2015/16 baseline is not achieved (Tesco PLC, 2021, p. 167). My multiplication, assuming annual coupons (the report does not state the frequency): 0.25 per cent of €750m is about €1.9m a payment, and at most about €5.6m over three payments. That is a small fraction of the €100m a year assumed in the table below, and the clause charges for missing the target; it does not reward a pledge.

How much cheaper must borrowing get for the spending to break even?

This is an order-of-magnitude sum, entirely hypothetical and not Unilever's figures. I have no Unilever debt or market-value number in the library, so I do not use one. Suppose a different group has €20bn of debt and spends €100m a year on a similar fund (an even spread, as above).

To break even on interest alone the fall has to be 0.5 percentage points, twice the 0.25-point step in Tesco's clause, and Tesco's clause applies to one bond.

On the equity side, a similar example: a perpetual cash flow of 100 a year discounted at 8 per cent is worth 1,250; at 7.9 per cent it is about 1,265.8, roughly 1.27 per cent more. A 0.1-point cut in the discount rate lifts value by more than 1 per cent, so value is sensitive to small changes; but nothing shows that a fund moves the rate by exactly 0.1 points. See the time value of money.

Can the ESG and profit research answer this?

Not directly. Friede, Busch and Bassen (2015) pooled 60 review studies (35 vote-count and 25 meta-analyses) covering over 2,200 individual studies to the end of 2014 (Friede et al., 2015). About 90 per cent found a non-negative relation between ESG and corporate financial performance, with an average correlation of about 0.15 (Friede et al., 2015). But their performance measures cover accounting profit, market prices, operations, perceptions and risk, and they do not analyse cost of capital (Friede et al., 2015). Among the vote-count reviews, only 15.5 per cent of portfolio studies found a positive correlation, against 56.7 per cent of non-portfolio studies (Friede et al., 2015).

Read it with two cautions: correlation does not show that a climate fund raises profit or lowers the cost of capital, and these studies do not compare companies that have such a fund with companies that do not. The post Does doing good pay? Four questions to ask before you believe it goes deeper into how to read this kind of evidence.

What evidence would settle it?

The four tests below are my proposal, not any author's. They show what data you need before saying "the fund made capital cheaper".

This post does not answer the question for Unilever. It says what to look for. A small owner can use the same table: before spending in the name of "cheaper capital", ask the lender whether any term is tied to a target, and measure the gap on a loan you already have.

Going deeper: what did I read and not read?

I read Unilever's press release of 15 June 2020 from an Internet Archive capture because the original page blocks automated access; I read only the release, not Unilever's annual report or debt documents. So I do not know whether Unilever has target-linked debt instruments. For Tesco I read the passages on refinancing, the sustainability-linked bond and dividends in the 2021 report, not the whole document.

I read Friede, Busch and Bassen (2015) in full in the open-access version. The sums with €100m a year, €20bn of debt and a perpetual cash flow of 100 are mine, not any company's data. This post does not say whether Unilever's fund is worth the money, and it does not say it is useless: there is no data yet to answer the cost-of-capital question.