Last week I saw a news item about a $100 million green bond issued by paper company Graphics Packaging Holding Co for a major expansion of its Kalamazoo, Michigan recycled paper mill. The company was accused of “sending foul odors wafting through the neighborhood surrounding the plant,” actions seemingly inconsistent with issuing a green bond. The article’s ultimate point was “how murky the definition of an environmentally-friendly bond is despite the growing hype.” I don’t take issue with that – green bond definitions/parameters and ESG in general are indeed ambiguous.

The article also pointed out that information about odor complaints from the community was not included in the bond prospectus. Yet there are flaws in accusing the mill as the source of these odors – flaws easily undetected without technical expertise. If ESG ratings bodies, investors or advisors don’t identify factual realities, companies may be inappropriately punished.

Boring Technical Information

Knowing about paper making, regulatory environmental filings, enforcement and permitting, I spent about 15 minutes digging around the Michigan Department of Environment, Great Lakes and Energy (EGLE) website.

Paper recycling is far less complicated than making virgin fiber products. At recycle mills, microbial activity from starch use (an additive and adhesive) is a common source of rotten egg (or – to put it delicately – “poop-like”) odors like the community complaints. Not the stereotypical smokestack emissions. Two facilities of interest are immediately adjacent to the mill – one being the City of Kalamazoo wastewater treatment plant that, according to aerial photos, has at least five large open top clarifiers. The other facility is a powder coating operation.

An engineering firm conducted a technical study of ambient odors in the area over a 60 day period and compared chemical fingerprints of odors from the mill, municipal wastewater treatment operations and other sources. The results showed

… the odor levels associated with the mill’s operations do not constitute an odor ‘nuisance’ situation at the neighboring community… Ninety percent (90%) of the odor measurements taken in the community locations either identified no odor or an odor associated with community types of odors (e.g., cut grass, asphalt/tar, wet mulch, flowers, burnt rubber, burnt plastic, mold/mildew, etc.)…

Measurable odor sources were also identified from the Kalamazoo wastewater treatment plant. I am not implying that the mill is odor free, but that there are other things to consider.

Enforcement History

Information on the EGLE website includes ten regulatory complaints/notices about the mill over seven years. Seven notices allege odors. The mill’s investigations into wind conditions at the time of the odor complaints indicate that the mill was not a plausible source, yet the mill continued investigating and implementing process changes to reduce potential odors. This included changing the chemistry of its wastewater treatment system to reduce sulfates (the odor causing chemical).

What This Means to You

My point isn’t to absolve the mill of anything. Rather, it is to show that users of ESG information need some technical expertise to accurately judge the context and accuracy of information on which they rely. One investor quoted in the article did not buy the bonds, presumably because of the odor matter although they may have had other concerns.

There are a few takeaways from this:

For companies issuing green bonds: consider broader stakeholder perception issues when developing prospectus and related materials. Are there potential ESG concerns in the media, public records or other documents that it would be prudent to address head on? These may not be related to the facility, project or even country for which the bond is issued.

For those using ESG information: realize that contextual information can be critical in understanding the reality of a particular matter. Technical expertise can be valuable in getting through that and finding opportunities others don’t. For example, it only took me a few minutes of looking at easily-located public information to sort through meaningful facts about this mill odor situation.

For those independently gathering and processing ESG information: admittedly, you are in a tough situation. Putting ESG data in anything other than E, S or G categories may not be your mission, but it is worth recognizing that surrounding facts and expertise may be important in making the data accurate and decision useful.

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