French dairy giant Danone experiments with sustainability-linked coupon for corporate bonds

Project currently on hold because of KPI quality.

Danone, the French dairy products and bottled water giant, is experimenting with the issuance of corporate bonds that would base part of their return on ESG (environment, social and governance) targets. But the company has put the project on hold because it says sustainability performance indicators are not yet robust enough to be tied to a financial outcome. Speaking at a recent seminar held in Paris by Cheuvreux, the broker research arm of Crédit Agricole, the French bank, Pierre-André Terisse, chief financial officer at Danone, said it had started looking about a year ago at ways in which it could adjust part of the coupon for its bonds based on sustainability promises. The early-stage concept, he said, would be that Danone increase the coupon if it did not meet certain ESG targets and vice versa. He said the addition of ‘sustainability’ to bond returns aimed to reflect what he called Danone’s dual performance and ESG philosophy. He said the company had initiated the project with investors to look at the audit potential for ESG criteria.KPMG was advising Danone on a sustainability measurement framework, while Calyon, the corporate and investment banking arm Crédit Agricole was advising on the mooted bond issuance. Terisse said another obstacle to the project was calibrating the sustainability bonus/malus issue with investors: “The appetite is there, but the quality of the key performance indicators was not good enough to move ahead. We haven’t abandoned the project, but we’ve put it on hold for the time being.
“But we’re trying to start something here. The goal is to find a link between economic and bond performance with a set of ESG KPIs that reflect the interests of our various stakeholders.”
Colin Purdie, SRI credit fund manager at Aviva Investors, also speaking at the event, said one problem with basing a higher coupon on missed sustainability targets was that fund managers did not want to profit from ESG underperformance.