INVESTING WITH IMPACT YEARBOOK

FEB/MAR 2021 SUPPLEMENT_ VOL 16 ISSUE 123 www.kanganews.com

TIPPING POINT Market disruption in 2020 has done nothing to stop the growing momentum of sustainable debt in Australia. Market participants say critical mass is fast approaching.

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PRO-17044_Kanga Ad 280x210mm_v01.indd 1 5/3/21 4:00 pm KangaNews SUPPLEMENT TO FEB/MAR 2021 EDITION Contents VOLUME 16 ISSUE 123 www.kanganews.com COPUBLISHED ROUNDTABLE Australasian sustainable finance Head of content and editor LAURENCE DAVISON reaching the tipping point [email protected] 22 Deputy editor Sustainability can no longer be ignored by capital-market MATT ZAUNMAYR [email protected] practitioners, according to participants at a February roundtable Staff writer discussion hosted by KangaNews, Commonwealth Bank CHRIS RICH of Australia and Westpac Institutional Bank. [email protected]

Head of commercial Jeremy Masters 4 17 [email protected] MARKET NEWS COPUBLISHED FEATURE n State treasury corporations back on THE SUSTAINABLE- Head of operations track with Q4 2020 green issuance. HELEN CRAIG n KfW delves deeper into sustainability. FINANCE NEXUS [email protected] n Climate-awareness format scores for Commonwealth Bank of Australia is Chief executive EIB despite Kangaroo headwinds. turbocharging the sustainable-finance SAMANTHA SWISS n Green consumer finance [email protected] expands in operation within its institutional Australian ABS market. business. The team is focused on n Canberra Metro Design consultant ’s green PPP working with clients to gain deep HOBRA (www.hobradesign.com) evidence of critical mass. understanding of their ESG risks and n Contact’s second SLL hints at assisting with transition. The bank’s Photography DAVID SMYTH PHOTOGRAPHY (SYDNEY), electricity-sector ESG funding growth ambition is high. BEDFORD PHOTOGRAPHY (SYDNEY), potential. TIM TURNER (MELBOURNE), THE PHOTO (WELLINGTON), GALEXIA STUDIOS (MIAMI), GEORGE ARCHER (LONDON), TIGER TIGER (AUCKLAND), IRWIN WONG PHOTOGRAPHY (TOKYO) 12 SURVEY KangaNews, ISSN 1751-5548 (PRINT); ISSN 2207-9165 (ONLINE), IS PUBLISHED SIX Sovereign survey makes 38COPUBLISHED ROUNDTABLE TIMES A YEAR BY BONDNEWS LIMITED AND DISTRIBUTED FROM SYDNEY, AUSTRALIA. compelling case for GSS THE NEXT FRONTIER: PRINTED IN AUSTRALIA BY SPOTPRESS, FOR, AND PUBLISHED BY, BONDNEWS LIMITED, issuance GREEN HOME LOANS LYNTON HOUSE, 7-12 TAVISTOCK SQUARE, A new survey of sovereign borrowers LONDON WC1H 9LT, UNITED KINGDOM IN AUSTRALIA that have issued GSS bonds suggests © BONDNEWS LIMITED 2021. Clean Energy Finance Corporation REPRODUCTION OF THE CONTENTS OF THIS a strong rationale for joining the MAGAZINE IN ANY FORM IS PROHIBITED market. Issuers say their labelled and KangaNews gathered a group of WITHOUT THE PRIOR CONSENT OF THE market participants to discuss the PUBLISHER. programmes were relatively quick to deliver, enhanced transparency, found potential of green home loans and new investors and – in many cases – related funding implications. cut the cost of borrowing.

CAB average net distribution 14 3,240 for six-month period COPUBLISHED FEATURE ending 30 September 2020. THE BIG RENEWAL The transition to a low-carbon economy could produce a huge supply of investible assets. Westpac Institutional Bank is taking a lead position in renewable energy. Contents 20 46 COLUMN EVENT REPORT SUBSCRIBE ASFI roadmap unites Taking a lead on New the financial sector Zealand sustainable The Australian Sustainable Finance finance TODAY Initiative roadmap will bring together Market participants came together the finance sector to lead the drive at the KangaNews-Westpac New for a more sustainable, resilient and Zealand Sustainable Finance Summit prosperous Australia. 2020 to talk about a sector, economy and world in a state of high-velocity 32 flux. COPUBLISHED Q+A Global ESG acceleration 56 a rising tide for EVENT REPORT sustainable-debt Tying it all together – product and practice goals and commitments for 2021 and beyond KangaNews is a one-stop Susan Barron and Jake Hartmann information source on from Barclays share a view on global Market leaders diuscussed pace of anything relevant to sustainable-finance developments change, targets for the future and Australian and New and lessons for Australian borrowers hopes for measurable progress in Zealand debt markets seeking to align with international sustainable finance at the KangaNews – including in- and best practice. Sustainable Debt Summit 2020. outbound issuance. Each issue provides all the information market 35 62 participants need to FEATURE EVENT REPORT keep up to date with Chain of influence Sustainable finance in the deals and trends Australia: the bigger making headlines in the Australia’s national modern-slavery markets, in-depth issuer reporting deadline is looming on 31 picture and investor insights, and March 2021. There are capital-market Perspectives from across financial deal and league tables. consequences, most notably that buy- markets and the whole economy at side firms are taking steps to ensure the KangaNews Sustainable Debt KangaNews is published they have appropriate modern-slavery Summit 2020, covering the urgent six times a year, with risk controls in place. need for capital flows to shift to regular reports and support a critical transition. yearbooks adding to the suite of printed offerings. Subscribers 44 also have access to email COLUMN 70 updates on breaking New Zealand EVENT REPORT deals and news from Sustainable Finance Beyond labels, the KangaNewsAlert Forum – the year of corporate engagement service, as well as priority invitations to action marches on KangaNews events The New Zealand Sustainable Issuers, investors and other market and full access to the Finance Forum has unveiled its participants at the KangaNews www.kanganews.com “roadmap for action” – a pathway Sustainable Debt Summit 2020 spoke website. to sustainability focused on the of deepening commitments to ESG contribution that can, and must, risk mitigation. To subscribe or request be made by the financial system. a free trial please contact NZSFF’s new co-chairs provide an Jeremy Masters exclusive update on the progress being [email protected] made and the road ahead. +61 2 8256 5577 Accelerating clean energy investment

The CEFC has a unique role to increase investment in Australia’s transition to lower emissions. With the backing of the Australian Government, we invest to lead the market to address some Australia’s toughest emissions challenges.

The CEFC has been at the forefront of clean energy investing in the debt capital markets since we began investing in 2012.

We have invested some $608 million in 14 Australian green bonds, supporting many inaugural issuances from banks, universities, energy, property, retail and renewable energy projects. Our first green home loan with Bank Australia will help improve energy efficiency standards in homes across the country. We have also invested in a green bond linked to the first Australian equities index with a specific forward-looking focus on climate transition and decarbonisation.

We look forward to continuing our work with issuers and investors to lower Australia’s emissions.

For more information: Richard Lovell, Executive Director, CEFC [email protected] cefc.com.au MARKET NEWS

TRANSACTION ANALYSIS

Issuer: New South Wales Treasury State treasury Corporation Issuer rating*: AAA/Aaa corporations back on Pricing date: 20 October 2020 track with Q4 2020 Maturity date: 20 November 2030 Format: green bond green issuance Volume: A$1.3 billion (US$1 billion) Book volume at pricing: A$4.1 billion After a quiet start to 2020 (see chart 1), two of Margin: 35.8bp/ACGB Australia’s largest state-government funding Indicative margin: 35.8-38.8bp/ACGB agencies returned to the use-of-proceeds bond market with substantial new transactions in Q4. Geographic distribution: see chart 1 New South Wales Treasury Corporation (TCorp) Distribution by investor type: see chart 2 and Queensland Treasury Corporation (QTC) Number of investors: 68 both elected to issue in green-bond format, Lead managers: although the former’s previous labelled deal was a Commonwealth Bank of Australia, sustainability bond. National Australia Bank (NAB), UBS *Rating at issue. Corp and QTC are among the Australian dollar market’s largest issuers of green, social and sustainability bonds by « T volume and both have now issued three transactions – Issuer: Queensland Treasury Corporation primarily green bonds (see table). Issuer rating: AA+/Aa1/AA CHART 1. AUSTRALIAN SEMI-GOVERNMENT Pricing date: 10 November 2020 SYNDICATED GSS BOND ISSUANCE Maturity date: 10 March 2031 Format: Green bonds Social bonds Sustainability bonds green bond 3,000 Volume: A$1.5 billion

2,500 Book volume at pricing: A$2.8 billion Margin: 21.2bp/ACGB 2,000 Indicative margin: 21.3-24.3bp/ACGB 1,500 315 2,800 Geographic distribution: 1,800 see chart 1 1,000 1,800 Distribution by investor type:

VOLUME (A$M) see chart 2 1,250 500 750 Lead managers: Deutsche Bank, NAB, 562 300 315 0 Westpac Institutional Bank H2 16 H1 17 H2 17 H1 18 H2 18 H1 19 H2 19 H1 20 H2 20

SOURCE: KANGANEWS 22 FEBRUARY 2021

LARGEST AUSTRALIAN DOLLAR ISSUERS OF GSS BONDS (SYNDICATED DEALS) ISSUER VOLUME FIRST AUD TYPE(S) OF BONDS ISSUED NUMBER OF ISSUED (A$M) ISSUE DATE TRANSACTIONS New South Wales Treasury Corporation 4,900 9 Nov 18 Green, sustainability 3 European Investment Bank 4,500 25 Jul 17 Climate awareness, sustainability awareness 13 Queensland Treasury Corporation 3,500 15 Mar 17 Green 3 ANZ Banking Group 1,850 27 May 15 Green, SDG 2 KfW Bankengruppe 1,450 26 Mar 15 Green 4 International Finance Corporation 1,275 6 Mar 18 Social 11 Asian Development Bank 1,260 10 Sep 19 Green 4 National Housing Finance and Investment Corporation 1,192 21 Mar 19 Social 3 National Australia Bank* 1,100 4 Dec 14 Green, social 3 * Includes green residential mortgage-backed securities tranche. SOURCE: KANGANEWS 22 FEBRUARY 2021

4|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 CHART 2. TCORP AND QTC GREEN BOND GEOGRAPHIC DISTRIBUTION CHART 3. TCORP AND QTC GREEN BOND DISTRIBUTION BY INVESTOR TYPE Australia Asia Asset manager/insurance Bank balance sheet Official institution EMEA US Trading book Hedge fund

100 2 1 100 2 2 2 5 14 18 5 19 80 80 27 24 20 41 60 60

40 40

58 57 57 47 20 20 PROPORTION OF BOOK (PER CENT) PROPORTION OF BOOK (PER CENT) 0 0 TCorp QTC TCorp QTC SOURCE: NEW SOUTH WALES TREASURY CORPORATION, SOURCE: NEW SOUTH WALES TREASURY CORPORATION, QUEENSLAND TREASURY CORPORATION 2020 QUEENSLAND TREASURY CORPORATION 2020

ISSUER INSIGHTS

FIONA TRIGONA JOSE FAJARDO HEAD OF FUNDING AND BALANCE SHEET EXECUTIVE DIRECTOR, NEW SOUTH WALES TREASURY FUNDING AND LIQUIDITY CORPORATION QUEENSLAND TREASURY CORPORATION “The familiar asset pool “We planned on issuing a made marketing and new green bond in April, certification of the bond shortly after the release of a more straightforward our 2020 green-bond annual process as there is now report, but COVID-19 market extensive reporting on the assets that investors disruption delayed the timing.” can access. TCorp’s intention is still to build out its eligible assets and GSS funding further, “The success of [QTC's August, vanilla] however.” transaction, along with the continued interest from domestic and offshore investors in QTC “The volume of assets eligible to be included in green bonds, gave us confidence to issue a our programme will increase as investment in green bond. The pricing week presented an ideal infrastructure and social outcomes by the NSW execution window, following the Queensland and government increases. But we want to engage US elections.” extensively with investors on these before we include them in a transaction.” “While the number of participating accounts was similar to our 2029 deal, we saw an “TCorp did not want to issue a specific increase in ticket size. This demonstrates the COVID-19 bond as it could lead to reporting growing demand for certified green product.” issues in a few years’ time when the world has hopefully moved on from the pandemic. The “We could introduce a number of social assets intent of our programme is to deliver on broad to our pool, but our strategy is more focused social and environmental outcomes rather than on supporting the transition to a low-carbon focusing on the pandemic response.” economy and environmental sustainability.”

5 MARKET NEWS

ISSUER INSIGHTS KfW delves deeper into sustainability In a review of the 2020 funding year and outlook, executives at KfW Bankengruppe flagged investors’ increasing focus on issuer-level sustainability credentials but also reaffirmed that the agency expects increased issuance of green bonds in 2021. fW plans to raise €70-80 billion (US$84.9-97 billion) billion, which will be added to in 2021 with the planned €10 in international capital markets in calendar 2021. billion of issuance.” K This compares with €65.7 billion issued in 2020 to 30 November, via 160 transactions in 14 currencies, and €79.4 Issuer credentials billion issued in the same period in 2019, through 128 deals in According to Armbruster, KfW’s “DNA is green” and green 12 currencies. bonds will remain in focus. “After all, green bonds are regarded KfW expects issuance of “Green Bonds – made by KfW” to as a key capital-market product for the financial market’s increase to €10 billion in 2021, in a variety of currencies. This contribution to achieving a climate-neutral world. They are an compares with green-bond issuance of €8.3 billion in 2020 to outstanding instrument for us to mainstream the principle of 30 November and €8.1 billion in full-year 2019. sustainability in the capital markets.” During 2020, KfW expanded its green-bond programme’s However, he also acknowledges that issuer-level framework. In addition to its renewable-energy standard sustainability credentials are becoming at least as important as promotional programme it has also been funding an energy- labelled bonds for investors. efficient construction promotional programme via green bonds. KfW has made strides in its corporate sustainability objectives but says there is no question of resting on its laurels. “Oversubscription in KfW’s green bonds In the last two years, the bank has undertaken detailed analysis, within the context of its sustainable-finance roadmap project, to has resulted in a ‘greenium’ compared assess ways it can assist the German federal government better with conventional bonds, of around to meet sustainability and climate targets. 1 basis point. We saw the same with Karl Ludwig Brockmann, group officer, sustainability at the green Bund. [KfW] aims to keep its KfW in Frankfurt, says developing the roadmap has also meant KfW is following the mandate issued by the German federal green bonds at the same liquidity level government under its climate action programme 2030 further as its conventional bonds.” to develop KfW into a transformative promotional bank that PETRA WEHLERT KFW BANKENGRUPPE supports the evolution of economic sectors and the financial market to a greenhouse-gas-neutral future. Tim Armbruster, Frankfurt-based treasurer at KfW, With the backdrop of mainstreaming sustainability into its comments: “In this way, we have succeeded in raising our operations and financing, KfW could have the option of issuing green bonds to benchmark volume in euros and US dollars. all its bonds from a sustainability framework and not printing We have thus developed the market in the same direction as use-of-proceeds green bonds at all. the Bund: building a green curve with liquid bonds for global Armbruster says, however, that it is hard to predict how investors.” the market will develop. “The KfW roadmap aims to map all According to Armbruster, KfW’s goal continues to be to our promotional activity to 99 per cent of the UN Sustainable support quality and liquidity in the green-bond market. He Development Goals so in future it could be said that all our comments: “Adding together KfW’s issuance and that of the financing activity is sustainable. Right now, though, the green Bund makes volume of around €20 billion from the ‘green- bond is a good programme for the market as it allows us to offer bond Bund family’ in 2020. This constitutes a clear, strong a lot of transparency with regard to reporting.” signal from Germany.” Brockmann adds: “As a sustainability officer, my task is to KfW has benefited from its green-bond issuance. Petra mainstream sustainability into all of KfW’s business processes Wehlert, head of capital markets at KfW in Frankfurt, – including staff, bank operations and financing. In principle, comments: “Oversubscription in KfW’s green bonds has if we get to the point at which everything we do is sustainable resulted in a ‘greenium’ compared with conventional bonds, of there should be no difference between a conventional bond and around 1 basis point. We saw the same with the green Bund.” a green bond. Having said this, the green-bond programme Wehlert says KfW “aims to keep its green bonds at the same offers very sophisticated reporting based on deep scientific liquidity level as its conventional bonds”, adding: “This should evaluation. I’m not sure we could offer this level of impact be possible as we have green-bond lines of €6 billion and €4 reporting for all the financing KfW does.” •

6|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 TRANSACTION ANALYSIS Climate-awareness format scores for EIB despite Kangaroo headwinds European Investment Bank (EIB) started Australian dollar deal flow for 2021 on 5 January, with a record-breaking climate-awareness bond (CAB) transaction – by some distance the largest Kangaroo transaction of a slow start to the new year. The same issuer added a 15-year point to its Kangaroo CAB curve just over a month later.

Issuer: European Investment Bank CHART 1. EIB 2027 DEAL GEOGRAPHIC DISTRIBUTION Issuer rating: AAA/Aaa/AAA Pricing date: 5 January 2021 Maturity date: 15 July 2027

Format: climate-awareness bond Australia 24% Volume: A$1.25 billion (US$968.4 million) Asia (ex. Japan) 41% Volume at launch: EMEA 19% A$300 million Japan 8% Margin: 26bp/s-q swap Other 8% Indicative margin: 26bp/s-q swap Geographic distribution: see chart 1 Distribution by investor type: see chart 2 Number of investors: “more than 50” SOURCE: EUROPEAN INVESTMENT BANK 8 JANUARY 2021 Lead managers: ANZ, RBC Capital Markets, TD Securities CHART 2. EIB 2027 DEAL DISTRIBUTION BY INVESTOR TYPE « Issuer: European Investment Bank Issuer rating: AAA/Aaa/AAA

Pricing date: 9 February 2021 Real money 50% Maturity date: 19 February 2036 Bank 36% Central bank/ 14% Format: climate-awareness bond official institution Volume: A$200 million Volume at launch: A$150 million Margin: 34bp/s-q swap

Indicative margin: 34bp/s-q swap SOURCE: EUROPEAN INVESTMENT BANK 8 JANUARY 2021 Lead manager: Nomura

ISSUER INSIGHTS

ALDO ROMANI HEAD OF SUSTAINABILITY FUNDING “Catering to GSS bond demand is a key driver EUROPEAN INVESTMENT BANK of EIB’s issuance activity and the bank is keen to “We generally feel there continue engaging the market on its evolving is growing alignment of programmes. EIB can be taken as a test case. interest and goals between Not only has it stated ambitious green financing the issuer and investor targets in support of the European Green Deal, communities, and we it has also clarified that it will align its tracking are pleased to see EIB’s methodology for green finance with the approach to sustainability and transparency framework of the EU taxonomy regulation.” resonate with investors.”

7 MARKET NEWS

TRANSACTION ANALYSIS Green consumer finance expands in Australian ABS The Australian market saw the pricing of a pair of green-labelled, consumer-finance asset-backed securities (ABS) on the same day in October 2020, in the middle of the local securitisation market’s busiest week of the COVID-19 era. Deal sources say the execution process allowed the deals to print successfully despite the hectic week, and that the green element was additive to demand.

FLEXI ABS TRUST 2020-1 CHART 1. HUMM AND BRIGHTE DEALS GEOGRAPHIC DISTRIBUTION

Issuer: humm Australia Offshore

Collateral: unsecured, consumer, BNPL 100

receivables 22 Pricing date: 22 October 2020 80 56 Volume: A$250 million (US$193.7 million) 60 Volume at launch: A$250 million (capped)

Green tranches: 5/7 40 78 Total volume of green tranches: A$96.5 million 44 Pricing on top-rated tranche: 115bp/1m BBSW 20

Geographic distribution: see chart 1 PROPORTION OF DEAL (PER CENT) 0 Distribution by investor type: see chart 2 humm Brighte Arranger: Commonwealth Bank of SOURCE: NATIONAL AUSTRALIA BANK 30 OCTOBER 2020 Australia (CBA) Lead managers: CBA, CHART 2. HUMM AND BRIGHTE DEALS National Australia Bank (NAB) DISTRIBUTION BY INVESTOR TYPE « Real money Balance sheet

100 1 BRIGHTE GREEN TRUST 2020-1 18 80 Issuer: Brighte 60 Collateral: unsecured, consumer, BNPL 99 green receivables 40 82 Pricing date: 22 October 2020 Volume: A$190 million 20

Volume at launch: A$190 million (capped) PROPORTION OF DEAL (PER CENT) 0 Green tranches: 7/7 humm Brighte Total volume of green tranches: A$190 million SOURCE: NATIONAL AUSTRALIA BANK 30 OCTOBER 2020 Pricing on top-rated tranche: 195bp/1m BBSW Geographic distribution: see chart 1 Distribution by investor type: see chart 2 Arranger and lead manager: NAB

8|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 ISSUER INSIGHTS

JOHN ROHL BIANCA SPATA HEAD OF CORPORATE DEVELOPMENT GROUP TREASURER BRIGHTE HUMM “As a debut issuer and “We were keen to see still a relatively young momentum build in the lending institution, we had RMBS market before a particularly important considering our own marketing task in the lead- issuance return. Our ongoing up to our deal. We received engagement with the strong indications of support throughout the market led us to identify a preferred execution marketing process, giving us the confidence to window.” launch despite other supply.” “We have been issuing Climate Bonds Initiative- “We engaged with some investors that were new certified green notes since 2016, and in 2019 to the ABS market entirely. A second transaction we executed a deal with green notes down will likely come within 12-18 months of the first.” the capital spectrum – the first of its kind in the Australian market. Specific green investor support continued in the latest deal, adding diversity to the book.”

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MARKET ANALYSIS

government plans for adaptation to and mitigation of climate Green PPP evidence change. Furthermore, all Australia’s states and territories have announced net-zero emissions by 2050 targets and all are of critical mass in embarking on large spending programmes to combat the economic downturn. environmental finance Katharine Tapley, head of sustainable finance at ANZ Canberra Metro executed Australia’s first in Sydney, says this presents a significant opportunity for green loan for a public-private partnership the application of sustainable finance. “Through PPPs, (PPP) with a refinancing of Canberra’s electric governments can come to the table with sponsors, asset light-rail system. Deal sources say the loan is operators and lenders to embed principles of sustainability not structurally unique from other certified in the planning and development of infrastructure. In doing green loans, but the application of labelled so, attaining green certification when it comes to refinancing green finance to PPPs potentially opens a becomes a fait accompli.” large pipeline of opportunities for banks and Charles Davis, managing director, sustainable finance and ESG at CBA in Sydney, says a lot of innovative thinking is investors that are increasingly focused on taking place across the infrastructure sector. Canberra Metro’s green assets. loan, he adds, was particularly noteworthy for how the public he A$280 million (US$216.9 million) five-year and private sector worked together to provide innovative refinancing had MUFG as financial adviser and green financing solutions that support the transition to a low-carbon T structuring adviser. ANZ and Commonwealth Bank economy. of Australia (CBA) were green-loan coordinators and ING, Davis says the increasing focus of lenders and investors on Mizuho, National Australia Bank and SMBC joined the green assets means certified sustainable product can provide lending syndicate. Canberra Metro is owned by Aberdeen borrowers with deeper pools of liquidity and, potentially, better Standard Investments (ASI), Pacific Partnerships, John Holland pricing outcomes. Certification, he says, remains a key signal and Mitsubishi Corporation. to investors that a project has clear, defined green attributes or Bill Haughey is ASI’s Sydney-based head of infrastructure outcomes. investment and asset management – Australia, and a Canberra All the banks involved in Canberra Metro’s loan have targets Metro board director. He says the loan process began with for volume of lending to ESG outcomes, emissions-reduction conversations between the borrower and its lenders, and was targets across their lending portfolios, or both. Tapley tells influenced by similar structures overseas. KangaNews there is increasing competition among lenders to “There have been a number of green loans for similar be involved in these projects as they seek to meet ambitious PPPs in Europe but they have not yet become commonplace sustainable-finance targets. in Australia,” he explains. “We felt this project had the right Pricing on Canberra Metro’s loan has not been disclosed but criteria for green accreditation and our lenders also recognised deal sources say the terms are competitive. that this would be of interest.” There is already a large universe of investable projects that Similar light-rail projects in New South Wales (NSW) could be accredited as green or sustainable to meet the rising and Queensland have been included in eligible asset pools for level of demand. Haughey says ASI is involved in projects labelled bond issuance by the states’ treasury corporations. The that are in line for refinancing and are under consideration for Canberra project has arguably even clearer green credentials labelled certification. as, unlike the grids the NSW and Queensland rail systems run “States and territories are procuring projects and many of off, Australian Capital Territory’s power is 100 per cent derived these have strong ESG outcomes that to date have not been from renewable energy. well publicised. There does not need to be a huge shift for Furthermore, 93 per cent of the project’s vehicle many current projects to obtain green or sustainable finance,” components are recycled and nearly 6 per cent are recovered Haughey comments. and diverted from landfill. These factors helped the loan to be Existing projects could also be candidates for labelled bond certified under the Climate Bonds Initiative’s criteria for low- refinancing. Tapley explains that bond investors typically prefer carbon transport. not to take construction risk but functioning assets that are coming up for refinancing are potentially ideal candidates for Critical mass the green-bond market. “We hope this PPP provides evidence The loan may be the first of its kind in Australia but deal of the benefits that can be gained from sustainable finance and participants are optimistic about the opportunity for similar opens the floodgates for project proponents to consider using projects. Infrastructure investment will feature prominently in it,” she says. •

10|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 MARKET ANALYSIS Contact’s second SLL hints at electricity-sector ESG funding growth potential Contact Energy says its second sustainability-linked loan (SLL) – a four-year, NZ$75 million (US$54.2 million) bilateral facility provided by MUFG Bank – reinforces the borrower’s commitment to sustainable-debt financing. MUFG, meanwhile, suggests its first SLL in New Zealand also illustrates a growing opportunity in the electricity sector as a whole. lex Waite, director, corporate and investment banking at between bank and borrower’s climate goals. At global level, MUFG in Auckland, believes the electricity sector offers MUFG has a target of ¥20 trillion (US$192 billion) of ESG A tremendous potential for ESG funding growth in New investment and Waite says a natural target for these funds are Zealand – and not just because of the scale of existing assets. assets and borrowers with existing ESG frameworks. Around 85 per cent of power running through the grid already MUFG’s focus is in particular on the environmental comes from renewable sources but New Zealand is also on the aspects of Contact’s framework. These actually only account verge of a significant step up in electrification and thus overall for around 40 per cent of the borrower’s external sustainability energy demand. rating, provided by RobecoSAM – which also covers social and “The electricity sector only accounts for about 6 per cent of New Zealand carbon emissions. Other industries “SLLs complement the sustainability require significant process heat and it is these that are greater ambitions of our board and contributors,” Waite says. “Demand for electricity will go up as management as well as having mutual these industries look at alternatives and this in turn will require investment – this is the link to financing.” benefits for lenders. We will be having In the electricity sector itself, Waite points to indicators like conversations with all our lenders.” a Climate Change Commission proposal to end the import of KARINA WITTY CONTACT ENERGY petrol cars to New Zealand from 2030 as a sign of the likely need for more renewable electricity. governance aspects including corporate citizenship, codes of On an individual entity level, Genesis Energy is exploring conduct, stakeholder engagement, supply-chain management options to increase its renewable baseload-power capacity and and privacy as well as carbon footprint and reporting. thus rely less on the Huntly coal and gas facility. Contact, which The loan terms include a two-way pricing impact, presented its interim results on 15 February, has a looming rewarding Contact for meeting ESG goals with an improved decision on whether to proceed with the development of a margin but also including a pricing penalty if the borrower falls new power station on the Tauhara geothermal field – a project short of agreed targets. Contact and MUFG are not disclosing reported to have a potential cost of NZ$600 million. the loan pricing terms or the size of the sustainability-linked Similar financing-relevant decisions are also being margin adjustment. taken outside the generation space, such as Synlait Milk’s A uniform approach makes sense as Contact continues installation of New Zealand’s first electrode boiler in 2019. the process of bringing as much of its debt book as possible This, the company says, offsets the equivalent of nearly 10,000 under its ESG framework. The book has three primary sources: households’ annual emissions relative to a coal boiler. bank loans, US private placements and domestic bonds. The company intends to explore options for incorporating Contact’s return sustainability into its future capital-markets issuance, says With renewable assets already in place and more potentially to Contact’s Wellington-based corporate treasurer, Karina Witty. come, New Zealand electricity generators are linking their debt In loan funding, she also tells KangaNews that Contact hopes funding to sustainability criteria. Contact is a market leader: to transition all its bilateral facilities to SLL format as a means it finalised a NZ$1.8 billion green borrowing programme in of maximising the benefit to the issuer from good sustainability 2017, became New Zealand’s first corporate green-bond issuer performance. in February 2019 and debuted in the SLL market via a NZ$50 “The sustainability-linked price adjustment – in either million bilateral facility with Westpac early last year. direction – is relatively small so its impact is less significant if Nick Congdon, Auckland-based managing director and it comes from just one or two facilities,” she explains. “SLLs head of MUFG’s New Zealand corporate and investment complement the sustainability ambitions of our board and banking business, says the introduction of Contact’s green management as well as having mutual benefits for lenders. We borrowing programme in 2017 made clear the alignment will be having conversations with all our lenders in due course.” •

11 SURVEY

Sovereign survey makes compelling case for GSS issuance A new survey of sovereign borrowers that have issued green, social and sustainability bonds suggests a strong rationale for joining the market. Issuers responding to the survey, which was published by Climate Bonds Initiative on 15 January, say their labelled programmes were relatively quick to deliver, enhanced transparency, found new investors and – in many cases – cut the cost of borrowing.

BY LAURENCE DAVISON

total of 22 sovereign issuers have printed green, from GSS transactions was dictated by government policy, social and sustainability (GSS) bonds as of the well ahead of other listed factors including EU or climate end of November 2020, according to Climate bond taxonomies. Bonds Initiative (CBI) – 19 of which provided Meanwhile, developed-market borrowers ranked their information for the survey. This includes eight governments as the most important single driver of the decision Adeveloped-market nations – Belgium, France, Germany, Hong to issue – ahead of finance ministries and debt management Kong, Ireland, Luxembourg, the Netherlands and Sweden – and offices (DMOs) themselves, and well ahead of investor demand. 11 emerging economies. Emerging-market borrowers had the same top three motivating CBI says survey responses cover 97 per cent of issuance factors in a different order – ministries coming top ahead of volume to date. The 19 sovereigns participating have printed 32 DMOs and government, but again with investors some way back. GSS bonds with total volume of US$93 billion equivalent. In policy terms, every single respondent to the CBI survey said Issuers name four key benefits from sovereign GSS issuance: the decision to issue GSS bonds was part of a larger strategic or investor diversification, proof of concept – attracting new policy initiative, which in 14 cases includes a deadline for reaching investors to the asset class – communicating an issuer message to a net-zero emissions – most commonly 2050. broader audience and a “greenium” pricing benefit. Goals are diverse and issuer-dependent, though. CBI says they include “promoting sustainable and green finance, overall PATH TO MARKET government agendas and legislation to reach the Paris Agreement overeign GSS issuance is facilitated by clear government goals, as well as tackling all dimensions of sustainability at once”. policy and support for this type of issuance. The largest It notes, for instance, that Thailand’s focus is on tackling climate Sproportion of survey respondents – including more than change and poverty together while Luxembourg has a specific goal 80 per cent of developed-market issuers – say use of proceeds of becoming a sustainable-finance hub.

CHART 1. GSS BOND INVESTOR COVERAGE CHART 2. DID GSS BOND ISSUANCE ATTRACT NEW INVESTORS? COMPARED WITH VANILLA ISSUANCE Yes No Higher Similar Lower N/A 12 12

1 10 10 1 3

8 8 1 1 4 6 6

5 4 4 8 7 5 2 2 2 NUMBER OF SURVEY RESPONSES 0 NUMBER OF SURVEY RESPONSES 0 Emerging economy Developed economy Emerging economy Developed economy

SOURCE: CLIMATE BONDS INITIATIVE 15 JANUARY 2021 SOURCE: CLIMATE BONDS INITIATIVE 15 JANUARY 2021

12|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 13 SOVEREIGN GSS BOND PRICING OUTCOMES 84 per cent and 74 per cent of survey respondents naming these ISSUER MATURITY PRICING ISSUANCE ORIGINAL PRICING as topics of investor interest. YEAR DATE CURRENCY VOLUME OUTCOME (US$M OR In many cases, issuers were rewarded with an uptick in EQUIVALENT) demand for GSS product – though the picture is not entirely Poland 2021 12 Dec 16 EUR 800 New-issue conclusive. Some countries – including Germany, Hungary, premium France 2039 24 Jan 17 EUR 7,500 Greenium Luxembourg and Poland – report at least one instance of GSS Poland 2026 31 Jan 18 EUR 1,200 On the curve book coverage being roughly double the rate experienced in Indonesia 2023 22 Feb 18 USD 1,250 On the curve their preceding three conventional bond auctions. However, Belgium 2033 26 Feb 18 EUR 5,500 On the curve other issuers experienced a more marginal uptick and at least Lithuania 2038 30 Apr 18 EUR 20 New-issue premium one emerging-market issuer says it got less coverage for its GSS Ireland 2031 10 Oct 18 EUR 3,500 On the curve issuance than for a vanilla bond (see chart 1). Indonesia 2024 12 Feb 19 USD 750 On the curve GSS books may not always be bigger on an outright basis but Poland 2029 28 Feb 19 EUR 1,700 On the curve sovereigns report that they have found new investors with this Poland 2049 28 Feb 19 EUR 600 New-issue premium type of issuance (see chart 2). Netherlands 2040 21 May 19 EUR 6,700 Greenium On average, issuers report that they placed 44 per cent of GSS Chile 2050 17 Jun 19 USD 1,400 Greenium issuance with specialist investors – ranging from around 10 per Chile 2031 25 Jun 19 EUR 1,000 On the curve Chile 2040 21 Jan 20 EUR 1,400 On the curve cent for Thailand to 100 per cent for the Seychelles. Of the 19 Chile 2032 22 Jan 20 USD 750 Greenium sovereign issuers that responded to the survey, 11 say they actively Hungary 2035 02 Jun 20 EUR 1,700 On the curve favour investors that describe themselves as green or socially Indonesia 2025 16 Jun 20 USD 750 Greenium responsible in GSS transactions. Thailand 2035 13 Aug 20 THB 975 Greenium The evidence of superior pricing outcomes for sovereign GSS Germany 2030 2 Sep 20 EUR 7,700 Greenium Luxembourg 2032 7 Sep 20 EUR 1,800 New-issue issuance if anything appears to be clearer. Of the 23 sovereign premium GSS bonds for which yield-curve data are available, CBI believes Mexico 2027 14 Sep 20 EUR 900 On the curve nine priced with a “greenium” – a tighter margin than vanilla Egypt 2025 29 Sep 20 USD 750 Greenium issuance – while a further 10 came to market without a normal Germany 2025 4 Nov 20 EUR 5,900 Greenium

SOURCE: CLIMATE BONDS INITIATIVE 15 JANUARY 2021 new-issue premium (see table). CBI says: “This suggests that, broadly speaking, there is a Most issuers – 16 out of 19, including all the developed supply-demand imbalance pointing to a shortage of sovereign economies – established a GSS working group to develop their GSS bonds… The greenium [became] more pervasive in the own issuance frameworks before entering the market. This latter half of 2020 but cannot be guaranteed for every GSS bond. bespoke work enabled borrowers to issue in support of specific Beyond the green label, normal bond-market dynamics can and national priorities. do influence pricing outcomes.” “Most issuers went through a budget-tagging exercise to determine exactly which expenditures were suitable for inclusion,” ONGOING COMMITMENTS CBI says. “In most cases, this involved scrutinising each budget overeign issuers that are already active in the GSS market line and identifying whether it could be classified as green or not. for the most part appear committed to returning. CBI The process was often accompanied by discussions with ministers, Snotes that six of the 19 have already issued more than one working groups and cabinets as well as [being] supported by third GSS bond and the same number has tapped an inaugural line. parties such as structuring advisers and underwriters who could Looking forward, 12 say they intend to issue more GSS bonds, contribute expertise on what investors considered green and what four to tap outstanding lines – including two that will do both constituted market best practice.” – and just five say they are not committed to future issuance. Despite this level of work, sovereign issuers report a relatively CBI points out that some sovereigns, such as Luxembourg quick path to market. The vast majority say they were able to price and Sweden, do not need to meet funding requirements through a GSS transaction within a year of deciding to enter the market. borrowing and thus have less impetus to issue again. Overall, CBI adds, the commitment to returning to market “suggests there is DEAL OUTCOMES a pipeline of projects available for financing through GSS bonds, nvestors may not be a primary motivating factor for the and perhaps GSS bonds can catalyse governments into a more decision to issue GSS bonds but sovereign borrowers report focused approach to prioritising expenditures designed to tackle I substantial interest in their transactions. climate and social issues”. A large majority of survey respondents – including every Even so, sovereign GSS issuance remains a drop in the developed-market issuer – reports “greater depth of questions” ocean of global sovereign debt. CBI points out that just two of from investors at GSS roadshows compared with their the world’s 10 largest government issuers had entered the GSS experience from conventional issuance. The focus of investor market by the end of 2020 though three more have indicated an interest is use of proceeds and linkage to national policies, with intention to do so in 2021. •

12|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 13 COPUBLISHED FEATURE

THE BIG RENEWAL One of the most exciting aspects of sustainable finance from a capital-market perspective is the potential for the transition to a low-carbon economy to produce a huge supply of investible assets in a world that has been capex constrained. Westpac Institutional Bank is taking a lead position in Australia’s renewable-energy space – a key sector for investment growth.

erhaps contrary to some perceptions, renewable- risk in the fossil-fuel space suggest the most rational course of energy facilities are not new in Australia. Solar action will be to replace the expiring capacity with renewable started playing a role in the national power grid 10- energy. 15 years ago, wind facilities have existed for more States and territories are mainly well progressed with the than two decades and before these the country transition to renewables – perhaps most notably the Australian derived a small portion of its grid power from Capital Territory and South Australia. Most have made flightpath hydro generation. commitments to either or both of a proportion of power from PRenewables contributed around 15 per cent of Australia’s renewables or net-zero carbon emissions (see table). total electricity generation by the end of 2018 according to It is the states that will drive investment in renewable energy. International Renewable Energy Agency data. This is comparable The scale of the task is vast even at current commitment levels. with the US but significantly lower than other developed nations: Myles Walkington, relationship manager, infrastructure and the equivalent figure for Germany was 46 per cent, for the UK 33 utilities at Westpac in Melbourne, points to NSW’s now-legislated per cent and for New Zealand 84 per cent. energy roadmap as an example. Australia’s renewable-energy contribution had climbed to “Part of this is what is called ‘renewable-energy zones’ – around 20 per cent of the total by the end of 2020 according effectively the placement of a lot of renewable-energy generation to Westpac. But there is clearly still significant potential in the in areas where it makes sense and ensuring the appropriate transition process – and the time to do it is fast approaching if it network connections are in place to deliver the energy to where has not already arrived. it needs to go. The state government’s expectation is that these The vast majority – around 90 per cent – of coal-fired renewable-energy zones could attract more than A$30 billion generation capacity in New South Wales (NSW) will reach the [US$23.2 billion] of private investment over the next 10-15 end of its functional lifespan by the mid-2030s. The increasing years,” Walkington says. cost-effectiveness of renewable-energy sources, growing global concern about the impact of climate change and stranded-asset WIDER OPPORTUNITY or is electricity transition merely a story of like-for- AUSTRALIAN STATE AND TERRITORY PROGRESS ON RENEWABLE ENERGY like generation replacement. There is no shortage of STATE/TERRITORY NET-ZERO PROPORTION OF PROPORTION investment opportunities in the generation space and EMISSIONS RENEWABLE ENERGY OF RENEWABLE N TARGET TARGET ENERGY IN 2019 Westpac has supported more than its share of these (see box on Australian Capital 2045 100% 100% facing page). Territory But two further system-wide issues are also at play: the fact New South Wales 2050 None 17.1% that a predominantly renewables-based electricity grid works in a Northern Territory 2050 50% by 2030 8% Queensland 2050 50% by 2030 14.1% fundamentally different way from a fossil-fuel-powered one, and South Australia 2050* 100% by 2030 52.1% the likelihood that aggregate demand for grid power will grow 200% of current substantially as part of an economy-wide low-carbon transition. Tasmania 2050 95.6% need by 2040 “One aspect of the transition is the shift from very large power Victoria 2050 50% by 2030 23.9% stations with heavy load interconnect shipping into a central grid, Western Australia 2050 None 20.9% to more distributed energy with smaller power stations that tend *Also to reduce emissions by 50% below 2005 level by 2030. to be further away,” says David Scrivener, global head of energy, SOURCE: CLEAN ENERGY COUNCIL, STATE GOVERNMENTS 2020-21 infrastructure and resources at Westpac in Melbourne.

14|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 POWERED UP: WESTPAC’S COMMITMENTS AND PROJECT OUTCOMES Westpac Institutional Bank’s renewables team says the pace of project financing in their sector has never been greater. The bank is committed to deploying balance sheet and deals are closing thick and fast. “Westpac recognises that is a financial risk, and the project. Westpac was a main looks forward to being engaged climate change is one of the need for collective action, lender in this project. in this process to help lower most significant issues that transparency and disclosure. electricity prices in NSW.” will impact the long-term The developer expects prosperity of the global The bank has so far lent A$10.1 energy generation and grid Less than two months earlier, economy and our way of billion (US$7.8 billion) to connection to commence by Fotowatio Renewable Ventures life,” says the bank’s 2020 climate-change solutions and July 2022 and, when complete, announced that it had closed Sustainability Performance has committed to providing a to deliver enough power to the financing agreement for Report. “As a financial further A$3.5 billion of such supply approximately 250,000 its 115MW Metz Solar Farm institution, we believe the most lending by 2023 and A$15 households. This will mean near Armidale, NSW – again constructive role we can play billion more by 2030. The renewable energy being used with Westpac as a main lender. is to work with customers and pipeline of projects funded to “help fill the gap left by the In this case, the funding is communities to respond to the and to fund in the near future expected closure of the [coal- being provided via a green challenge of climate change.” suggests meeting these targets fired] Liddell power station”. loan that is compliant with may not be a major challenge. Loan Market Association Five core principles guide and Anton Rohner, chief executive green-loan principles and inform Westpac’s approach On 11 February, UPC\ at UPC\AC Renewables green-projects requirements. to climate change: the need AC Renewables Australia Australia in Hobart, said: “It’s to transition to a net-zero- announced that it had closed exciting to achieve financial The Metz Solar Farm has emissions economy by 2050, financing of the first, 400MW, close on a merchant basis for secured approval for its grid the complementary nature stage of its New England such a large project, which is connection from the Australian of economic growth and Solar Farm in Uralla, New the first of many such projects Energy Market Operator and a emissions reduction, that South Wales (NSW) – part of we have in Australia. UPC\AC substation has been completed addressing climate change what is intended eventually Renewables Australia views by Transgrid. The project creates opportunities, to become a 720MW solar this project fitting into the NSW also has a power-purchase that climate-change risk generator and 400MW battery government roadmap and agreement with Snowy Hydro.

He explains that this aspect of planning for the power intermittent styles of generation – are already demanding network forms another piece of the NSW energy roadmap – not investment capital. just designating and developing renewable-energy zones but also Either way, the capex component will be substantial. “We are adding suitable connections to them so they can reliably transmit still working through questions around how to plan a network energy when and where needed. This marks notable progress, under these conditions. Who operates and has control of it will Scrivener adds, from a historical focus on building projects while also become an interesting issue,” Scrivener says. neglecting the fact that they might be at the end of skinny, low- The importance of answering these questions will only be capacity transmission lines. heightened by the wider process of electrification. Take-up of Of perhaps even more significance is the way demand electric vehicles is still minimal in Australia but 2019 government patterns will shift as the source of power generation changes. In analysis predicted that half of new vehicle sales will be electric by particular, increased take-up of household solar generation is likely 2035 even at the current rate of market growth. The transition to produce the “duck curve” – a pattern of electricity supply and away from petrol-powered cars will naturally mean more demand demand that increasingly flexes around daylight hours (see chart on the electricity grid. on p16). As household solar generation increases during the day, The extent of this additional demand may be impossible to demand for electricity from the grid drops. As the sun sets and estimate accurately as Scrivener suggests a wholesale transmission people return home in the evening, network demand rises to a to electric vehicles brings several variables into play. peak. “The question to answer is when users plug in,” he suggests. Household battery storage is still a nascent technology, “If they all do so at the same time, peak energy demand will go although some energy retailers are exploring how they can work through the roof. On the other hand, if everyone times charging with households to install batteries to help manage supply and their cars when wind power is abundant – for example in the demand. Meanwhile, major projects like Hydro Tasmania’s very early morning when there is also typically lower demand “battery of the nation” – a 4.5-5GW battery that will be used on the network – there might not be the need for as great an to balance the grid as it moves from coal-fired power to more increase in capacity.”

15 COPUBLISHED FEATURE

“The grid was designed a century ago and needs to be made fit for purpose. The good news is that all the regulated transmission distribution companies are alive to this change. But it is inevitable that we will need a significant amount of capital to deal with the transition.” DAVID SCRIVENER WESTPAC INSTITUTIONAL BANK

The same applies, Scrivener continues, if there is a continued generators were given a guaranteed tariff by the government for buildout of solar power in the sunnier states and improved the life of the project. Australian renewable-energy assets still interconnection between the states to distribute this power. A offer attractive investment opportunities but they tend to carry figure of A$80 billion might not be an unreasonable estimate of merchant-power risk – which makes investment-grade bond the scale of investment needed to power a full-scale transition to issuance challenging. electric vehicles, he argues. Even so – and setting aside the theoretical potential for more “The grid was designed a century ago and needs to be made esoteric funding mechanisms like multiple-project securitisation – fit for purpose,” Scrivener concludes. “The good news is that all the scale and breadth of the transition task in Australia is likely to the regulated transmission distribution companies are alive to this provide debt-capital-market opportunities. change. But it is inevitable that we will need a significant amount “The more likely piece is in electricity transmission, of capital to deal with the transition.” investment in which will drive additional capital-market issuance,” says Scrivener. “Typically, a regulated-utility company is one FUNDING METHODS piece of an entity that also builds bespoke transmission lines for he pipeline of this capex to the debt capital market is likely renewable-energy projects on an unregulated basis. These entities to be protracted but should in time produce new credit can secure 25-year contracts and we have seen some capital- Tissuance – potentially in labelled-debt format. The slow market issuance off the back of them, including long-dated, transmission is a result of the age-old disconnect between bond 25-year paper being written.” financing and greenfield infrastructure development. It is also possible that renewable-energy projects with “Debt capital market issuance has not to date been looked at mainstream, established sponsors from the electricity and for renewable-energy projects that are done via traditional project resources sectors could be used as eligible assets for use-of-proceeds financing,” Walkington acknowledges. “This primarily reflects the green bonds. There may be something of a Goldilocks factor here, fact that they tend to be in the sub-to-just investment-grade credit however. Scrivener points out that while standalone projects may profile.” not offer a bond-market-suitable credit profile, the other side of The Australian policy landscape remains relatively infertile the same coin is that major global energy companies – the likes soil for the type of revenue certainty bond markets tend to crave. of BP, Shell and Total – tend to be cash-rich and thus not in great Scrivener explains, for instance, that some German renewable- need of capital-market funding for specific projects. energy project finance has achieved bond-market funding because The middle road is likely to be local power and utility companies, and banks themselves. Near- term conditions have all but removed TYPICAL SPRING DAY ELECTRICITY DEMAND IN CALIFORNIA Australia’s major banks from wholesale

26,000 funding markets, but they are likely to be keen to explore further green-bond issuance 24,000 as and when they return. Electricity 22,000 transition could be a crucial source of

20,000 suitable assets. 2012 (actual) “Green lending will inevitably drive 18,000 2013 (actual) more green-bond issuance. From a Westpac 16,000 2014 perspective, lending to renewable-energy 2015 MEGAWATTS 2016 14,000 projects can be wrapped up in our green- 2018 2017 2019 bond programme – which should enable 12,000 2020 Westpac to issue more green bonds. The 10,000 decision ultimately is with group treasury

0 but certainly the billions of dollars of capex 12am 3am 6am 9am 12pm 3pm 6pm 9pm will create more capacity for our green SOURCE: CALIFORNIA INDEPENDENT SYSTEM OPERATOR 2013 programme,” Scrivener suggests. •

16|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 COPUBLISHED FEATURE

THE SUSTAINABLE-FINANCE NEXUS Commonwealth Bank of Australia is turbocharging the sustainable-finance operation within its institutional business, including some key new hires and more to come. The team is focused on working with clients to gain deep understanding of their ESG risks and, from there, assisting with transition. The bank’s ambition is high.

he Commonwealth Bank of Australia (CBA) Meanwhile, another new hire – Camille Wynter, associate institutional business and environmental, social director, sustainable finance and ESG – previously worked for and governance (ESG) factors are no strangers. AMP Capital in the Sustainable Investment Team where she was The bank has incorporated ESG risk into its responsible for company board engagement and proxy voting institutional lending for some years, and more across Australian equities. recently has been involved in the evolution of “With Bláthnaid and Camille, we have added incredibly sustainable-debt products in Australia including arranging a exciting and broad skill sets covering the corporate market – Tnumber of benchmark transactions. including a borrower’s understanding of the product set – and the The bank now has a dedicated sustainable-finance and investor piece,” Davis says. “We didn’t go to market specifically ESG team led by Charles Davis, Sydney-based managing targeting those two skill sets, though. The key was getting the director. This specialist team was established in response to “the right people with knowledge of this market, and we are incredibly significant and increasing focus on sustainability and ESG across lucky to have found individuals with fantastic backgrounds that our whole stakeholder base”, Davis says. The team will work cover as broad a range as we could possibly hope for.” with front-line bankers across the CBA institutional banking The build-out of the sustainable-finance and ESG team is and markets business to leverage knowledge that already exists not yet complete, and Davis says the goal is to continue to invest. throughout the organisation. “It is a significant investment for the bank but one that is wholly Davis says CBA has strongly focused on building its team, justified given the importance of the area for us and our clients, adding to longstanding members new hires from outside the and of the role financial institutions can play in this area.” bank that have “a slightly different perspective from the traditional banker”. Among the former is Sydney-based executive director, CLIENT ALIGNMENT Louise Hatton, who has been heavily involved in the ESG sector BA is seeking to align its sustainable-finance operation for a number of years. with the evolving nature of client needs in a market that New hires to date bring knowledge and experience developed Chas moved beyond banks pitching a relatively narrow in the corporate and asset-management sectors. Bláthnaid Byrne range of ESG products, primarily focused on green bonds. has joined CBA as director, sustainable finance and ESG having Instead, Davis says, the market is moving quickly and the spearheaded AGL Energy’s sustainable-finance efforts in her conversation is increasing in sophistication. Banks, whether acting previous roles in the gentailer’s group treasury and decentralised- as lenders or advisers, need to offer a deep level of understanding energy functions. She has also been involved in the NGO both of the ESG universe in general and of individual clients’ sector, lending her expertise to large organisations focused on interaction with it. The need is only growing as the transition- environmental and social outcomes. investment opportunity expands and, at the same time,

“I want to try to help clients understand the optimal way to execute bespoke and nuanced transactions. Each client is on its own trajectory and at a different point in its journey, but we want to help them all have an end goal in place as well as to offer advice on steps they need to take to get there.” BLÁTHNAID BYRNE COMMONWEALTH BANK OF AUSTRALIA

17 COPUBLISHED FEATURE

GEARING UP FOR A BIGGER INVESTMENT OPPORTUNITY There is growing excitement in Australia about the potential for environmental transition – especially in the electricity generation and distribution space – to provide a massive new investment opportunity. Social outcomes are a step further away from the market mainstream but sustainable finance could unlock more of them, too. The environmental component moving forward, particularly task is difficult to quantify, for other market stakeholders. of environmental, social and in electrification.” but undeniably large. “It is certainly true that the governance (ESG) finance social aspect of ESG is harder has traditionally been the Electricity generation “Just taking the electricity but we think it is equally most readily addressed and and distribution needs system itself, in Australia we important to galvanise capital also the most aligned with substantial investment over are now thinking about a to support positive social capital-markets funding. the coming decades. This is bigger change than ‘just’ having outcomes,” she comments. The nexus of climate and to reduce reliance on fossil 100 per cent of today’s capacity finance will only become more fuels, while at the same from renewables, perhaps Byrne says applying important in Australia as the time the grid is expected to with a buffer, to numbers sustainable-finance practices scale of financing required experience overall demand that are well in excess of this. to social outcomes requires to manage the forthcoming growth from developments The potential for the demand additional thinking and work transition to a low-carbon like the electrification of side combined with export but insists the market is “very economy becomes clear. transportation including opportunities for Australian much ready” to welcome such personal motor vehicles. renewables clearly points to a product as it emerges. For “We have been very focused huge opportunity,” says Davis. example, the sustainability- internally on the potential Grid infrastructure itself is linked loan CBA structured opportunity set,” reveals also likely to need substantial Social outcomes for Wesfarmers in 2020 – a The type of investment A$400 million (US$309.9 required to revolutionise million) bilateral facility – “We have been very focused internally on the Australia’s electricity sector is a aligned a social metric with potential opportunity set. This is one reason relatively natural fit for capital indigenous employment. markets, while also providing we are so excited about sustainable finance in a plethora of opportunities to “This made perfect sense general – because we see it as a real opportunity incorporate sustainable-finance for Wesfarmers,” Byrne techniques and products. continues. “But it is important moving forward, particularly in electrification.” Accessing capital markets for alignment to be in place: it CHARLES DAVIS COMMONWEALTH BANK OF AUSTRALIA more widely to respond is not the case that we would to social needs is the next recommend including a social Charles Davis, managing investment as it transitions frontier of market evolution. metric in every potential director, sustainable finance from a hub-and-spoke transaction that comes to us. and ESG at Commonwealth model of generation and Bláthnaid Byrne, director, First and foremost, we need Bank of Australia (CBA). “This distribution to more localised sustainable finance and ESG at to decide if it makes sense is one reason we are so generation and storage – for CBA, says making steps toward and then decide what the excited about sustainable instance including household this frontier is part of the bank’s most appropriate metric is finance in general – because solar and battery setups. remit as it also increasingly for the goals and aspirations we see it as a real opportunity The scale of the capex becomes a subject of interest of the borrowing company.”

sustainable-finance practices are more widely used beyond the its journey, but we want to help them all have an end goal in environmental space (see box on this page). place as well as to offer advice on steps they need to take to get Davis tells KangaNews: “We seek to understand deeply what there.” our clients are looking to achieve in this area and this quickly As a general rule, corporate Australia has made significant rolls into discussions about transition. Products and services strides on ESG engagement in relatively short order. Byrne points are at the end of this discussion rather than being a leading to awareness of and interest in sustainability-linked loans (SLLs) origination tool.” as an example. When the product emerged in Europe almost four The CBA team will help this process of hooking client years ago, she suggests, most Australian treasurers would not have progress to the right parts of the sustainable-finance matrix. known what it was. By 2021, the SLL forms a key part of the “I want to try to help clients understand the optimal way to product mix in most conversations with corporate borrowers. execute bespoke and nuanced transactions,” Byrne comments. “I don’t think it is the case anymore that we need to go out “Each client is on its own trajectory and at a different point in to clients and teach them about the importance of ESG,” Byrne

18|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 “We seek to understand deeply what our clients are looking to achieve in this area and this quickly rolls into discussions about transition. Products and services are at the end of this discussion rather than being a leading origination tool.” CHARLES DAVIS COMMONWEALTH BANK OF AUSTRALIA

continues. “They are aware and they are coming to us – and accept a margin reduction for this type of issuance. “We were not we are more than happy to help them on the journey because it seeing investor willingness to pay up for ESG transactions even matches our aspirations as a bank, too.” at the start of last year, whereas broadly we are now observing The expertise CBA is deploying does not just apply to tangible evidence of bond premia,” Davis reveals. “Books are its own balance-sheet lending, either. Davis comments: “It is becoming much stronger, supported by market technicals and the about whatever product or service fits best and satisfies a client’s growth in investors’ green mandates.” need. This could be debt capital markets, lending, derivatives, the supply chain or green deposits – it is almost a case of name a KNOWLEDGE HUB product and there is an ESG aspect to it.” eveloping and disseminating this type of market The goal is for CBA as an institutional bank – not just the intelligence is as much an internal task as a client-facing sustainable-finance function – to bring the ESG lens to everything Done. Davis explains that his team is not and will not it does. By doing so, it will assist clients to develop the metrics and be the main CBA interface with external investors – this will transition pathways that best support their businesses, give them continue to be the institutional sales group, which already has the optimal financing outcomes and generate recognition from established relationships. stakeholders including investors. “It is the sales operation that brings us nuanced feedback, “We are very much focused on the client’s needs,” says Byrne. for instance highlighting orders up front and keeping abreast “It is not about getting a certain number of bond transactions or of how relativities work between ESG and non-ESG product,” derivatives, or to support a target volume of loans. It is about what Davis explains. “They also work closely with our bond-issuance makes sense for a client and bringing it the suite of products that teams on where pools of capital can be found. The role of the fits.” sustainable-finance team is to provide support, if and where required, on the wider sustainability themes – as well as helping “It is not about getting a certain number of bond with client pitching and banker education.” transactions or derivatives, or to support a target The approach is similar when it comes to borrower clients: corporate treasurers should not expect the CBA ESG team to be volume of loans. It is about what makes sense their primary contact but can be confident that its expertise will for a client and bringing it the suite of products increasingly permeate all dealings with the bank. Acknowledging that fits.” that his team “cannot attend every meeting”, Davis adds: “A big BLÁTHNAID BYRNE COMMONWEALTH BANK OF AUSTRALIA part of our role is educating bankers. This is a skill that every single banker and product partner should be incredibly well Bringing up-to-date intelligence to borrowing clients also versed in – as they are with all the other products and services means understanding the views and preferences of investors within the bank.” beyond the bank’s balance sheet – and this is another key focus The relative infancy of the sustainable-finance market in for CBA. Davis points to the CBA-KangaNews Fixed Income Australia means all stakeholders are at an early stage of their own Investor Green, Social and Sustainability Survey – published journeys. CBA’s goal is to continue to build knowledge for all for the first time in 2020 – as a landmark piece of work in its bankers to be well versed in the subject and specifically in understanding Australian debt investors’ depth of engagement understanding their clients’ ESG positioning. Where there are with the topic. coordinator roles that require more intricate work around CBA is also using transactional data points, such as those structuring, complexity or detail, the sustainable-finance and ESG generated by its position as a lead manager on New South Wales team will be involved directly. Treasury Corporation’s A$1.3 billion green-bond deal in October Davis says: “Our absolute desire is to be a leader in this field. last year, to back up findings like those from the survey. This is not just to be a leader in having the most balance sheet out The bank had early insights into Australian investors’ of the door in sustainable format but to be a leader in bringing increasing willingness to pay a premium for labelled use-of- the full breadth of products and services within the broader proceeds bonds as the survey suggested nearly two-fifths would sustainability world to our clients.” •

19 COLUMN

purpose, strategy and risk-management frameworks. This ensures risks and ASFI roadmap unites opportunities are managed by the board and executive team, and that the culture of the organisation can enable a more the financial sector sustainable business model. Jacki Johnson and Simon O’Connor, co-chairs of the Australian It also recognises that the finance sector needs to invest in the capacity of Sustainable Finance Initiative, explain how the initiative’s future leaders to ensure they have the skills roadmap, launched in November 2020, will bring together and capabilities necessary to deliver a more sustainable, resilient and prosperous future the finance sector to lead the drive for a more sustainable, for all Australians. resilient and prosperous Australia. To ensure the finance sector can help contribute to SDG 10 – reduced he Australian Sustainable Climate change is affecting us at a inequality – several recommendations Finance Initiative (ASFI)’s slower pace than COVID-19. But the under the leadership domain call to work roadmap provides a plan long-term impact will be more dramatic with First Peoples to ensure financial to align Australia’s financial even than what we faced in 2020. The products are available and accessible system with a sustainable, ASFI roadmap helps us identify what to meet specific needs, and to gain Tresilient and prosperous future for all we need to do in the short, medium knowledge from their leaders on change Australians. This initiative is industry- and longer term to make sure we are not and resilience. led but values the engagement and having to respond in crisis mode. ASFI recognises the role banks, involvement of federal, state and local This means ensuring an orderly insurers and investors can play in truth- government as well as Australia’s financial transition to compete in a world that will telling and shared learning to create regulators. It uniquely brings together not reward carbon-intensive economies a stronger future together. The final the insurance, banking and investment or organisations and mitigating, for all recommendation under the leadership domain calls for financial-sector “We recognise organisations will identify where they want participants to continue to engage at an to invest and seize a competitive advantage, playing to international level, to position Australia in their strengths. We argue it is the collective effort across all a way that can secure our future in a global economy. recommendations and the whole financial sector that will ensure Australia has a sustainable, resilient and prosperous future.” Integrating sustainability The second domain focuses on integrating sectors to work together to help Australia Australians, the risk of more frequent sustainability into practice. The 13 deliver on its commitments to the Paris weather events that create damage to recommendations in this domain focus Agreement, Sendai Agreement for Disaster businesses, homes and communities. on establishing a sustainable-finance Reduction and the UN Sustainable We would like to take this opportunity taxonomy, ensuring we have a consistent Development Goals (SDGs). to recap the roadmap recommendations language and clear definitions that As we move into 2021 with the hope and then update on the current make it easier to understand products, that we are putting the challenges of 2020 focus of ASFI and its members. The processes and services that will contribute behind us, we need to pause and reflect recommendations are grouped under to stronger environmental and social on what Australia achieved in 2020. four critical domains. Recognising these performance. Importantly, we showed our collective will take leadership, practice, building ASFI calls for the Australian capability during a global pandemic. resilience for all Australians and creating a government to join as a signatory, Resilience is often defined as sustainable financial market to succeed. alongside other governments, to the maintaining system stability while being International Platform on Sustainable able to adapt in a way that can respond to Embedding sustainability into Finance. Australia can learn from other the changing circumstances around us. We leadership countries but importantly can also make a have maintained financial-system stability There are eight recommendations to strong contribution to others in the areas while responding to a continuously help embed sustainability into leadership. in which we are doing well. changing environment. This shows how ASFI recognises that environmental and An obvious one is Australia’s quickly Australians can adapt to change social responsibility needs to be embedded performance on SDG 3 – good health when the need to do so is urgent. through integration into an organisation’s and wellbeing. Australia is in the top 10

20|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 21 countries for response to COVID-19, Australians recognises nine which helps create a competitive advantage actions that will help ensure for Australia and all its citizens. the goal. ASFI recognises that The roadmap also has specific we cannot have a resilient recommendations for companies on the future for our financial Task Force on Climate-related Financial system, organisations, Disclosures. This helps investors and communities or citizens if customers understand the risks and we are not inclusive in the opportunities each company is managing way we deliver products and as the carbon transition occurs. It is services or we do not assist in JACKI JOHNSON SIMON O’CONNOR important to recognise that several improving financial and risk Australian financial institutions are leading literacy. This group of recommendations Next steps for ASFI in this area. provides guidance on what needs to ASFI is in a transition phase. The One of the most critical be considered collectively and by each steering group of senior executives from recommendations under this domain is organisation. across the financial sector supported by the need for the development of national Australia’s financial regulators is working and state data sets to help incorporate the Building sustainable-finance to help support the implementation value of nature and environmental assets markets of the recommendations by individual into financial valuations. This fourth domain recognises seven organisations. This will lead to more transparent actions that are important to help Australia Some organisations are more advanced and accurate valuations helping guide the become a leading sustainable-finance than others. ASFI will launch a follow-up choices we make. It supports several of the market. Australia’s banks, insurers and report in early April that will provide case SDGs but specifically will help Australia investors are all keen to play their part studies from across the financial sector achieve SDG 13 – climate action, SDG in making this happen. The strength of on how institutions are working with the 14 – life below the water, SDG 15 – life Australia’s COVID-19 response provides roadmap. We hope this will assist other on the land, SDG 11 – sustainable a strong base. If we align and facilitate entities consider how they can use the cities and communities, and SDG 12 – a transition to net-zero emissions by roadmap to help accelerate the systemic responsible consumption and production. 2050 we will ensure we remain globally change we require and, importantly, make Without valuing our natural assets, we competitive. their own organisation more resilient and run the risk of eroding value for future An important recommendation sustainable. generations. The impact will be felt on within this group is the need for banks, We have also established a working our social, environmental and economic insurers and investors to work together group to help set up a permanent futures. to promote risk-mitigation efforts. ASFI. This will likely be a small body A key call-out for the financial sector Investment products can be created to that monitors and reports on roadmap is to lead by example in the way products help fund future resilience. Australia progress as well as working with industry and services are labelled. This will help has the opportunity to innovate in such associations and financial institutions to customers and investors be clearly financial instruments as resilience and convene the whole sector on issues such as informed on the choices they make when social-impact bonds. These are examples a sustainable taxonomy. In general, its goal they invest or purchase a product. Many where investments can be made to provide will be to coordinate in areas that require customers want this information as they for a more resilient future under changing insurers, banks and investors to come consider how they can help support climate conditions. together to strengthen the financial system Australia’s transition to a more inclusive The four domains show how for generations to come. and environmentally strong future. financial institutions can play their role in Australia might have been later than The financial sector recognises it has delivering a more sustainable future. Not other countries to develop a sustainable an important role in helping Australians all the roadmap recommendations are finance roadmap. But the hope is that be more informed and improving financial relevant to all organisations. We recognise by being industry-led with government and risk literacy. The companies that organisations will identify where they engagement we can accelerate its embrace this as an opportunity will be want to invest and seize a competitive implementation and create an orderly more likely to meet increasing demand for advantage, playing to their strengths. We transition to a net-zero carbon world and a more ethical and sustainable products. argue that it is the collective effort across more inclusive society. all the roadmap recommendations and It is an opportunity we need financial- Enabling resilience for all Australians the whole financial sector that will ensure institution leaders to embrace and be The important group of recommendations Australia has a sustainable, resilient and energised by – a real opportunity to make collated under enabling resilience for all prosperous future. a lasting difference. •

20|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 21 COPUBLISHED ROUNDTABLE

AUSTRALASIAN SUSTAINABLE FINANCE REACHING THE TIPPING POINT ustainability can no longer be ignored by capital-market practitioners – according to participants at a February roundtable discussion S hosted by KangaNews, Commonwealth Bank of Australia and Westpac Institutional Bank. Deal flow is likely to increase as a result, but the consequences are vastly wider and deeper.

PARTICIPANTS n Bláthnaid Byrne Director, Sustainable Finance COMMONWEALTH BANK OF AUSTRALIA n Gary Carroll Managing Director and Chief Executive G8 EDUCATION n Michael Chen Head of Sustainable Finance WESTPAC INSTITUTIONAL BANK n Gavin Goodhand Senior Portfolio Manager ALTIUS ASSET MANAGEMENT n Louise Hatton Executive Director, Sustainable Finance and ESG COMMONWEALTH BANK OF AUSTRALIA n Michael Larkin Group Treasurer LENDLEASE n Simon Milne Senior Manager, Treasury ISPT n Mike Roan Chief Financial Officer MERIDIAN ENERGY n Joanna Silver Head of Sustainable Finance WESTPAC NEW ZEALAND n Marayka Ward Senior Credit and ESG Manager QIC n Tracey Wood General Counsel and Company Secretary G8 EDUCATION

MODERATOR n Laurence Davison Head of Content and Editor KANGANEWS

PROGRESS SO FAR unlikely despite it being set several years ago. Some market commentators are even saying Australia’s existing 2030 target Davison If the purpose of sustainable finance may be too difficult to achieve. is to direct capital flows to where they are By looking at this from the top to start with, the point I am needed to support environmental and social making is that more capital will be required to fund low-carbon change, where are the Australian and New projects and technologies even with the current status quo, let Zealand markets relative to the required run alone if there is any tightening of targets for 2030 and beyond. rate? On sustainable finance, labelled green, social and n CHEN It is a pretty big question and there are multiple ways to sustainability (GSS) products have been successful. But they tackle it. More than 100 countries have committed to net-zero alone will not be sufficient to fund the projects we need. On emissions by 2050 and, leading up to the UN climate change the other hand, a lot of renewable-energy and green-building conference in Glasgow in November this year, several have projects have been established without labelled products. What tightened up their 2030 targets. has emerged out of the bank capital-weighting discussion is In Australia, a question mark hangs over a 2050 how finance helps in transition – not just sustainable-finance commitment and a tightening of the 2030 target seems products in and of themselves.

22|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 n HATTON This is about the whole finance industry n WARD It is hard to buy at the moment and we struggle to get transitioning all clients across all industries. The transition is our hands on paper all the time. But we need to maintain a about replacing the machinery we currently have in place to run longer-term view of what we are buying. the economy. We are doing a lot of work around commitments we have We have to look at this from all angles. The transition is made recently, in conjunction with frameworks that have come about having conversations with every organisation, one by one, out such as the EU taxonomy. We are thinking about what and engaging with each on the opportunities. This is where sort of issuers will be around over the medium term and what finance can provide support. industries are substitutable. Sustainable finance is a very important part of this, and it is As such, we are becoming quite concerned about the future clearly an incentive. But there are many ways in which we need for oil – based on the scope of commitments to electric vehicles, to bring capital solutions to the transition. This requires a lot particularly from countries that are saying there will be no more more than just the specialists within each organisation solving sales of petrol-based engines after a set date. We now think oil problems. It means a different way of thinking and will require could potentially be substituted even before coal is phased out. a total rethink of some businesses’ operations. While we are struggling to buy paper at the moment we are n BYRNE There is a wall of liquidity out there looking to find also busily setting parameters for what kinds of investments we a home and this can be a supportive factor. But the supply of need to be involved in, and what we are not going to buy over sustainable finance is yet to be fully realised. the next 5-10 years. n SILVER New Zealand is fortunate in that it has had a relatively n GOODHAND Even last year a number of issuers in coal or stable climate policy and a strong renewable-energy base for coal-related industries tried to come to the domestic market and some time – which also helps support and create opportunities struggled. We know that a couple of them did not continue for green-asset financing. with transactions and another priced quite a bit wider than However, the market is dominated by residential and anticipated – which was put down to ESG factors. commercial property, energy, and some green-transport assets. There are early signs that ESG risks are beginning to Meridian Energy, Contact Energy and Mercury have all come be priced by capital markets, and this trend will continue to market, for example – but they are all from the energy sector. to grow. The emphasis on, and in some cases mandatory While there has been progress in the New Zealand market, we implementation of, Task Force on Climate-related Financial lack diversity in sectors and structures. Disclosures (TCFD) and government commitments to net We are working to change this. Two weeks ago, we saw zero allow investors to see more detail on climate risk within the draft New Zealand Climate Change Commission (CCC) organisations. Over time, this will allow organisations to price budgets. These signal where certain sectors need to go and risk in a slightly different way. how our nationally determined contribution under the Paris There were several important announcements last year. For Agreement is not sufficient so needs to be tightened. We example, New Zealand announced draft legislation that would anticipate these will drive more boardroom conversations on mandate TCFD reporting for around 90 per cent of the assets climate risk, the strategic response to it and, therefore, more under management in New Zealand by as early as 2023. The commitment to sustainable assets. UK government announced that large asset managers will have to report against TCFD, which is expected to be in place by Davison Picking up on the comment about 2022 or 2023. availability of liquidity, is it, paradoxically, not the n BYRNE This pricing of risk is surprisingly useful for corporates. best environment for the transition we need It is difficult for companies in transition industries to make because borrowers are not struggling to find investment decisions without price signals from investors. The funds – regardless of their ESG credentials? fact that these are coming through now will be welcomed. Just looking at the Australian credit market, n GOODHAND Continuing this thought, bank announcements for instance, there is a huge disequilibrium last year around not financing new thermal coal further adds to between supply and demand. the issue of where businesses get capital from. It changes pricing

“It is not until an issuer has gone through the sustainable- finance journey that they understand all the nonfinancial benefits. It is possible to understand conceptually but I do not think anyone really gets it until they have gone through it.”

MICHAEL CHEN WESTPAC INSTITUTIONAL BANK

23 COPUBLISHED ROUNDTABLE

WHERE NEXT FOR LABELLED ISSUANCE? A market that fully integrates environmental, social and governance (ESG) aspects in risk management and pricing could have no use for labelled ESG products. The Australasian market is some way from this end point, however.

DAVISON What is the end Disclosures (TCFD), TNFD [the as long as we do what we say world where the labels are state of use-of-proceeds Task Force on Nature-related we are doing with them. not needed but I think they and sustainability- Financial Disclosures] or are currently a good thing. linked issuance? Will anything else. I could see this On the other hand, it is labelled bonds continue in time deciding the appetite important to remember If a deal is not green-labelled to be relevant as the of debt investors rather than a that execution is a key I think there would still be market evolves? label or bespoke instrument. factor – execution drives a need for a consistent price and the biggest thing means of comparison n WARD Hopefully we will not DAVISON How would for an issuer is liquidity. If across issuers as to whether need them, in time at least. issuers feel about not we can generate a two- or or not they are green. Investors will be able to look at requiring labelled issuance three-times oversubscribed a company like Lendlease and to highlight ESG credentials? deal book, it offers us a n HATTON I hope for a future understand from the way the really good deal outcome. where ESG is fully integrated in company communicates that n MILNE I am not a great reporting and we are confident sustainability and responsibility believer in use-of-proceeds Having access to different that organisations are doing is part of its DNA. It would instruments. The goal should capital tools can only be what they say they are doing. be great if a label were not be becoming a green borrower, an advantage because it But there will always be a need required to highlight this. not just to take a dollar and means we are not dependent for validation of some kind. use it for a green purpose. on a few investors. This n BYRNE I tend to think that I take a whole-of-business applies no matter how It is important to understand we are in a transition period view: that everything we do, much money is floating what is behind reporting. There and that eventually the focus as a trustee of property funds, around in global markets. is only so much that can be will shift from instruments to should have a sustainability disclosed publically, so it is vital companies’ actual reporting. lens applied to it. n LARKIN I do not doubt some to have validation and be able investors are capable of doing to ask questions. This should This will mean ESG reporting At the end of the day, capital is the ESG work but there are allow organisations that are becomes far more embedded fungible. If we are meeting our benefits around consistency, genuinely transitioning to have in financial reporting, whether ESG targets there should be transparency and reaching an advantage. This will push it is aligned to the Task Force no issue with using funds for a broad audience. I can see organisations that are talking on Climate-related Financial “general corporate purposes” the reasons for wanting a but not doing as much acting.

“THERE ARE BENEFITS AROUND CONSISTENCY, TRANSPARENCY AND REACHING A BROAD AUDIENCE. I CAN SEE THE REASONS FOR DESIRING A WORLD WHERE LABELS ARE NOT NEEDED BUT I THINK THEY ARE CURRENTLY A GOOD THING AS A MEANS FOR DIFFERENTIATING OURSELVES.”

MICHAEL LARKIN LENDLEASE

dynamics over time even though we have excess liquidity in the n WARD In the last 12 months, one of the things we have seen system. with cultural change is that we are really living through an era n HATTON Many chief financial officers are very engaged, of hyper transparency. Specifically, we have seen a number of including asking what they need to do to to transition their organisations driving high-level management changes because organisations to ensure they maintain the same access to finance. of nonfinancial risks. Making public disclosures about transition plans is important. On the investor side, it would be hard to game the system. It is challenging for some ‘browner’ organisations to One could barbell a portfolio that invested in some of the transition and we, as providers of capital, need to play a role cheaper deals that come to market with weaker ESG credentials here. The ‘green end’ is where so much of the demand is and then have labelled bonds on the other side. But investors, currently, but it is actually the organisations in between where asset consultants and our clients are closely watching and are we are going to get maximum leverage through the transition. very engaged with what goes into portfolios. The same hyper

24|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 transparency will not let anyone get away with this type of thing communities, trust and being thought leaders in understanding for too long. what children will need in future. I struggle to think of any The capability-building piece is another important point aspect that is not completely intertwined with ESG. to make. We are all talking about responsible investment, n WOOD We are certainly seeing an acceleration of ESG as a key sustainability, TCFD reporting and taxonomy frameworks – investment driver on the equity side. In the last 12 months we but we are living and breathing them all day, every day. We have experienced a couple of instances of shareholders moving have to bring everyone along if we are going to embed these us from one fund into another – in both cases the new one through the financial system. being highly ESG-focused. I think this shows an increasing One of the things we have rolled out this year is an internal recognition of the social function. training programme for all our investment professionals. A lot n ROAN I would also come back to the theme of being in the of this is about building confidence among traders and portfolio midst of an economic transformation, driven by a desire for us managers, including talking to them about TCFD reporting and our children to be able to continue living where we are. As and carbon emissions. this plays out, there must be a change in capital allocation. The When cash traders and portfolio managers understand what capital to support this transformation must flow to those that the climate-change problem is and are not scared about the are able to, and capable of, investing in solutions. terminology, they can understand the benefit of perhaps paying It is more of a change-of-pace question than anything else, up a little bit for a sustainability-linked bond and contributing by which I mean financial flows moving from maintaining to a coupon step-up and step-down process. existing quality of life to the transition. This balance between n WOOD As a listed company, we certainly have to be aware quality of life in Australia and New Zealand now and making of what our equity investors are looking at from an ESG sure we maintain it moving forward means we will become even perspective, and the extent to which this drives their investment more interested in companies that are able to provide solutions, decisions. ESG is a focus at corporate level but investors and we will require an increasing volume of capital to provide certainly drive some of our thinking, too. these solutions to all of us. There are political, regulatory, We try to be very aware not just of what we are doing but investment and personal angles to this theme. how it is communicated. A lot goes on at the grassroots of our We see the pace of change increasing. In the grander sea of early-learning centres that is effectively all about sustainability, international capital flows we are a relatively small company so we are starting from a good foundation. from New Zealand, but equity markets are moving to invest in It would have been hard for us to execute something like a companies that provide solutions to the transformation more sustainability-linked loan even 3-5 years ago, though. We were directly. We were picked up by BlackRock as part of its clean- not quite as mature in our thinking and we were using a lot of energy fund, for instance – which shows that investors are out disparate systems. It has taken some time to lay the groundwork there and are looking. for establishing targets and a programme of improvements Our biggest issue in finance is not that green-financing designed to help us meet them. We have got ourselves ready to frameworks and products do not exist. It is the demand for issue this type of debt at about the same time as the market has our service on the path to a cleaner economy. Picking up what really started asking for it. Joanna Silver said earlier, the initiatives presented by the CCC will start to drive the pace of change locally. ISSUER INITIATIVES Davison What are the key findings of the CCC Davison Are investors, equity and debt, report and will they be implemented? pushing change or are we reliant on individual n ROAN It sets up carbon budgets over future-year increments actors and companies ‘doing the right thing’? and says New Zealand needs to transition away from fossil-fuel n CARROLL ESG is compelling for us because it is 100 per vehicles and industrial-heat processing as it heads for a zero- cent aligned with our overall strategy delivery. Our business carbon-emissions future. We are still in a consultation period, delivers education to children, which is all about connection to but this is the key CCC proposal for the next 15 years.

“The pricing of risk is surprisingly useful for corporates. It is difficult for companies in transition industries to make investment decisions without pricing signals from investors. The fact that these are coming through now will be welcomed.”

BLÁTHNAID BYRNE COMMONWEALTH BANK OF AUSTRALIA

25 COPUBLISHED ROUNDTABLE

LINGERING IMPACT OF THE sustainability-linked debt, they now also want to wrap PANDEMIC environmental and social factors. COVID-19 has brought COVID-19 was a traumatic global experience that will undoubtedly have out these social themes. profound and long-lasting consequences. If anything, it has heightened focus on environmental, social and governance (ESG) factors. This inclusion of social factors reflects the UN Sustainable DAVISON Has the pandemic during a stressful period and companies had ever really Development Goals at a changed ESG finance we received feedback that considered these elements of macro level and is also close thinking or was the demonstrated a much deeper their business. It was a marked to home in addressing factors trajectory already set? appreciation of the educational change in recognition of what like unemployment and value our sector provides. is important. Investors were poverty. I think this shapes a n CARROLL From a business This is quite apart from the also thinking about where more balanced sustainable- perspective, we felt a very economic value of the place they put their money to work finance marketplace. significant impact from we have in the supply chain and what they finance. COVID-19. The major lockdown from a labour perspective. n BYRNE It has also made that came into effect nationally Regulatory developments everyone more aware of the last March saw attendance This recognition is very in Australia also drove importance of the environment halved across our sector – pleasing for us. We are keen engagement with our around us. Whether because G8 Education included. The to see it remain in place in clients. We normally expect of COVID-19 or the bushfires sector was not viable at that future, part of which is about to see three or four ESG in early 2020, there is a new level of attendance, so the advancing children’s own questionnaires from clients general level of awareness. government stepped in to understanding of sustainability. each year. Last year we had 25 provide a survival package in six months. Our investors One thing we recognised in specifically for our sector. n WARD I agree that the are much more interested 2020 is the importance of pandemic brought forward in what they are financing nature for people’s wellbeing, Together with JobKeeper, thinking on sustainability. It is and why – and the pandemic particularly when it comes this kept the sector viable difficult to be positive about brought this forward. to mental health. In the long and enabled us to maintain going through a pandemic, Victorian lockdown, people who our employment level. It was but it allowed people to n SILVER I think some had access to green spaces helpful, of course – but it sit back, take stock and companies saw more clearly were much better off than also demonstrated our social consider what is important. the link between environmental those who were stuck at home commitments and the critical limits and the ability of the on teleconference all day. role we play in the economy. The dearth of GSS issuance in economy to function. The the first half of 2020 was not level of engagement we are This awareness can permeate Another thing that emerged reflective of what was going on having on sustainable debt into different areas, including from the pandemic was that in the background. There was suggests a much larger and into peoples’ professional lives, parents engaging with their a lot of strategic change and more diverse market. and get people thinking about children at home while they nondeal roadshows. We saw sustainability in their business were in lockdown reinforced many debt-investor updates Another nuance we have operations. This can lead to a the value of the teaching we where companies led by talking noticed in the last six more strategic shift in thinking provide on an everyday basis. about their clients, staff and months is that where about how sustainable finance We rolled out online learning workplace health and safety. customers were proffering can be used in implementing packages to help parents cope This was the first time some environmental targets in their business changes.

“I AGREE THAT THE PANDEMIC BROUGHT FORWARD THINKING ON SUSTAINABILITY. IT IS DIFFICULT TO BE POSITIVE ABOUT GOING THROUGH A PANDEMIC, BUT IT ALLOWED PEOPLE TO SIT BACK, TAKE STOCK AND THINK ABOUT WHAT IS IMPORTANT.”

MARAYKA WARD QIC

From an economic perspective, these two transitions are I could not tell you if there will be a massive transition in massive for New Zealand. The expected growth in electricity industrial-heat processes in the next two or five years, but I do consumption over the next 15 years is somewhere around 75- know that to get to the goal of net-zero carbon emissions we 100 per cent of current consumption – and it all has to come must eliminate our fossil-fuel vehicle fleet and transition away from renewable sources. from our current industrial-heat processing.

26|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 “We are certainly seeing an acceleration of ESG as a key investment driver on the equity side. In the last 12 months we have experienced a couple of instances of shareholders moving us from one fund into another – in both cases the new one being highly ESG-focused.”

TRACEY WOOD G8 EDUCATION

Davison We have seen some property-sector demand across our businesses. From a treasury perspective, it issuers taking the lead on ESG in Australia. makes it relatively easy to go down the path of green financing But it would still be possible to operate – and because we are following where the business is already heading. access capital – without these commitments. Overall, I think we are getting traction and we will see a lot What is the driver for these businesses? more change in the not-too-distant future. But we still need to n LARKIN I think the answer to the question in relation to do more. financing is the same as it is across the board – we all need to be n MILNE ISPT is at the start of its sustainability journey. I more ambitious. This is not to say where we are at in financial approached our banks about 12 months ago on the subject markets is a bad thing. We just all need to be a lot more of applying a sustainability framework across all our debt ambitious still. financing. I’d like to think we will have something in place Nonetheless, today we are talking about oil substitution or with our lenders in the coming months. We have also set some issuance being challenged for coal-adjacent companies and I very robust ESG targets across our funds and at corporate level, think this is a measure of how much our mindset has changed under which are further internal stretch targets. already. We can also see clear benefits from ESG issuance, Our board and CEO want to know what the advantage of whether it is stickier demand, better secondary performance or the sustainability framework will be – what is in it for us, given even pricing benefits at issuance. we already have these targets in place. In a world where we are talking about access and cost of As treasurers, we are also often benchmarked on basis points funding being more challenged for issuers with climate risk, of funding cost and the success of execution, and the reality I think it is not hard to imagine the discussion moving away is our banks are not incentivised to offer us a discount for from what the benefit is from being a ‘green’ issuer to focusing sustainability-linked loans. The banks themselves get no capital on the additional cost and impact on market access if one is discount from APRA [the Australian Prudential Regulatory not. Authority] for this type of lending. So yes, we are seeing momentum but there is a way to Our reason for doing it is based on a view that banks will go yet and, like everything around trying to address climate focus more on ESG metrics in their credit processes in future. change, we need to push harder. I do not believe banks’ decisions to lend will be purely dictated As to whether we do things because they are right or by ESG, but it will form part of the decision. I’ve always because we are being pushed, I think in our case it is both the assumed this was a long way off, but I’m starting to wonder if it right thing and good business sense. We are fortunate in having might be closer than I think. a company founder who 50 years ago was talking about the “triple-bottom line”, and about companies’ social licence and Davison Does this suggest that, at this point in our impact on communities. It has always been an important time, it is more about ‘future proofing’ for ISPT part of who we are. than responding to current market pressure? We think our sustainability capabilities provide competitive n MILNE Yes – it is about getting ahead of the curve in some advantage. It is a point of differentiation and a key driver of ways. But it is also about walking the talk. If we say we are

“We know use of proceeds will only target a particular part of the economy, and that is industries that are already well on the way to net-zero emissions. The finance sector needs to focus on sectors that are not easy to transition. It is here where we should be applying sustainable financing structures.”

GAVIN GOODHAND ALTIUS ASSET MANAGEMENT

27 COPUBLISHED ROUNDTABLE

taking certain measures at corporate level, we should tie our have chosen to return – including Contact, Argosy Property funding platform into that ESG strategy. and Auckland Council. This matches global developments, like Total’s announcement that it wants to make all its debt Davison How does an issuer like G8 Education sustainable. – which is more closely aligned with social This trend of consistent return and commitment to the than environmental outcomes – develop sustainable-debt marketplace highlights the advantages of this measurable targets? market. We just need to tell the story widely. Companies in n WOOD Our sustainability report maps out the areas that our Europe are going from dipping their toes to mainstreaming investors and other stakeholders find important. The quality sustainable finance and I think New Zealand will follow – in of our centres is measured against a national framework and the next 18 months. standards, and of course the assessment of our centres forms Finally, we have to remember the pricing advantages are not one of our quality measures and targets. yet clear in the New Zealand market. Climate Bond Initiative’s We actually have five or six quantifiable targets, around issuer and investor survey tells us issuers do not execute green things like child safety, staff training and centre-manager bonds because of pricing advantages. In the survey, 91 per turnover – the latter has a real impact on centre quality. The cent of issuers said their green bond drove deeper engagement targets are quality- and safety-based rather than environmental, with investors and 98 per cent said it attracted new investors. which is consistent with a materiality assessment. Around 70 per cent said demand for their green bond was higher than demand for their vanilla issuance. ISSUANCE OPTIONS There is a confluence of drivers overlaid by deeper bank engagement with climate policy. There is a political, regulatory Davison The reality is that most credit and individual awakening to these issues that is only going to borrowers are choosing not to issue their grow further. debt in any kind of labelled format. Are the n WARD We look at the whole issuer rather than the transaction. advantages of labelled sustainability debt not Total’s announcement that it will only fund via the labelled yet perceived as significant enough? market is great, but if it brought a labelled bond to the n SILVER There has been an impressive amount of engagement Australian dollar market tomorrow we probably would not buy in the past 12 months. In the next few years we will see a it. tipping point and an adoption of sustainable debt akin to what We have been working our way through the draft IIGCC we have seen globally – driven by a confluence of factors we [Institutional Investors Group on Climate Change] framework have already discussed. for how to get to net-zero emissions and how to categorise the Primarily I think it will boil down to competitive and companies we invest in. Total’s forward capex plans do not investor pressure. To get to that point, we need more leaders correlate with what we would expect of it from a responsible- like Meridian engaging in sustainable structures and we need investment perspective. We cannot see in the capex plans where greater awareness of the benefits. Banks have a key responsibility it is funding renewable energy. here, which is why it is a vital focus for us. n GOODHAND The key thing is the overall group strategy and Another consideration is the maturity of debt instruments how an issuer is moving toward meeting objectives like the and structures. Use-of-proceeds green bonds have historically Paris Agreement. This is the key when issuers come with these dominated the market, but in the last 12 months we have seen products. greater use of social bonds and in the last three years an increase n ROAN We are all aware there are two angles to issuing any form in sustainability-linked structures, which are more flexible and of GSS product: the issuer’s own green credentials and investor open the door to more companies. The market-awareness and education. A lot of investors probably do not know about the engagement opportunities are broadening and deepening. underlying credentials – and this is the education piece. It is also worth saying that, while there have only been a I would not underestimate the importance of the few sustainable debt transactions in New Zealand, the majority underlying green credentials, though. Companies have to make

“As treasurers, we are also often benchmarked on basis points of funding cost and the success of execution, and the reality is our banks are not incentivised to offer us a discount for sustainability-linked loans. The banks themselves get no capital discount from APRA.”

SIMON MILNE ISPT

28|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 “There has been an impressive amount of engagement in the past 12 months and in the next few years we will see a tipping point and an adoption of sustainable debt akin to what we have seen globally.”

JOANNA SILVER WESTPAC NEW ZEALAND

changes to their organisations and firm commitments, and the funds or projects we manage – the lens we apply to all our there will be some that do not have these in place. funding activity is to consider whether there is a pathway to As an organisation, we are just a manifestation of belief in a doing something in green or ESG format. It will not work for future where we have to control the amount of carbon we put everything, but it comes back to who we are and where our into the atmosphere. The GSS products companies are offering business is going. This is how the treasury team can support the are not a ‘nice to have’ in this context – they must have them if group’s sustainability strategy. they want others to understand that their business has a future. n MILNE On the loan side, the reality is the SLL kicker is not This is moving faster in financial markets than a lot of huge – which goes back to my point about APRA not offering people might appreciate. In particular, in the last year or so banks capital relief for sustainable lending. investors actually backing companies that have these credentials Margins are already very competitive in the lending market has become much more prevalent. If your credentials as a and, as a borrower, I actually do not like the idea of banks business – the products you are selling and their relation to lending to me at a loss. It makes for tough conversations later the effect on the climate – are questionable, you may find on if a bank has an unprofitable relationship with an issuer. your business left behind quite quickly as investors become concerned about your longevity. PRODUCT EVOLUTION n LARKIN Trying to say definitively that there are pricing benefits from sustainable issuance is still difficult. I have read a Davison Will the corporate issuance landscape lot of research covering various markets and I think the picture in Australia change toward more sustainability is becoming clearer that there is. But we did not do a green issuance? bond because we thought we would get an additional 5 basis n HATTON I think there is momentum. As Michael Larkin says, points at issuance. employee engagement is a big factor. People connect with the As Mike Roan says, sustainability is fundamental to how we topic once they understand the benefits. We have seen this with do business. In our industry, we are seeing increased demand Commonwealth Bank of Australia’s own bond issuance – that from governments, investors, communities and customers for the engagement made a big difference. better environmental performance. When it comes to corporates, my opinion from speaking I mentioned earlier the range of non-price benefits. Another with clients is that there is an enormous groundswell of thing I would highlight is employee engagement. The response support. I think we are still only at the tip of many companies we received internally through doing our green bond was unlike even understanding that they may have the credentials for anything we have done in treasury in the eight years I have been issuance. There is a lot of work to do to get these credentials at Lendlease. It captured the enthusiasm of the employee base sharpened so issuers can put frameworks in place, but and helped us tell our story from a different perspective, both awareness is growing. internally and externally. Green-bond issuance or sustainability-linked financing Looking ahead, across the board – in bank or bond actually helps with all the other things corporates are doing – markets and whether it is from our own balance sheet or for like TCFD commitments and other regulatory disclosure.

“There are pockets of passion within organisations but there are also only so many things people can do. If they can see a connection between what they are doing in one part of the business and another, the benefits begin to double and triple.”

LOUISE HATTON COMMONWEALTH BANK OF AUSTRALIA

29 COPUBLISHED ROUNDTABLE

“Our business delivers education to children, which is all about connection to communities, trust and being thought leaders in understanding what children will need in future. I struggle to think of any aspect that isn’t completely intertwined with ESG.”

GARY CARROLL G8 EDUCATION

There is an enormous amount of work involved in Immediately I saw the benefit in my tennis game – and now I identifying the necessary credentials. Large organisations am telling everyone to do pilates classes. typically have a lot going on so one of the key considerations is I tell the story because the way in which Michael Larkin making the necessary connections. There are pockets of passion and Mike Roan talk about their respective companies’ journeys within organisations and if they can see a connection between comes from a place of lived experience and confidence. what they are doing in one part of the business and another, the We need to get the story out because, in my conversations benefits begin to double and triple. with treasurers and others, there is often still a perception issue Often, an issuer will begin with direct use of proceeds and around the time and cost components of sustainable finance, evolve from there, once they realise it is not that hard and that and whether there is enough incentive to do it. Or they will say they could do more. They will then piece together everything they are already green enough so see no reason to do it. else that is happening in the organisation. When issuers pull It is not until an issuer has gone through the sustainable- these pieces of the puzzle together they can create a narrative finance journey that they understand all the nonfinancial where everything fits in. benefits. It is possible to understand conceptually but I do not n SILVER I agree – though in New Zealand we have found think anyone really gets it until they have gone through it. the reverse, that customers want to use a sustainability-linked n BYRNE The perception of missing targets and reputational structure as a first stepping stone before they go to use of damage around sustainable finance is also important. This again proceeds. But it is the same principle. goes to the importance of education – we can explain that this When I spoke earlier about issuers dipping their toes in the is not how it is viewed by the banks. water I didn’t mean to imply lack of commitment. I am getting n WARD If a green bond comes we look at the structure and at the fact that starting small but aligning to global principles what it is financing. Then we may or may not buy it. I really is a good thing. Investors we have spoken to indicate that like sustainability-linked structures for the reasons Michael they invest in issuers rather than issuance, so it is critical that Larkin talks about: it gets the whole business to buy in. If we are issuers align with principles and demonstrate full organisational going to achieve targets like net-zero emissions in investment alignment and commitment to outcomes. portfolios, we need a wider transition to happen. n GOODHAND It is certainly not just about green and social Investors need to be brave and to consider whether having bonds – it is the whole of the financing structure. We know use a coupon adjustment of 20 basis points is really going to matter of proceeds will only target a particular part of the economy, in in the scheme of things. I think market participants get a bit other words industries that are already well on the way to net- caught up around the pricing aspect of the structure. It is our zero emissions. job as fiduciaries to manage two-way pricing and how we deal The financial sector needs to focus on sectors that are with missed targets is an issue, but I think these have been used not easy to transition. It is here where we should be applying as excuses to an extent. sustainable-financing structures. In offshore markets, green and social bonds had record MARKET SHAPE issuance in 2020 – so we know there is growing demand for the product and other sustainable-style structures. Davison GSS issuance in Australia and New n CHEN This is an important question. The crux of it is whether Zealand took a while to return after the crisis the reason we are not seeing more issuance is the cost-benefit period in 2020. At the same time, there has analysis not stacking up. been a lot of talk about increased ESG focus in I’d like to give an analogy. For quite a while, my wife has the pandemic era. How did 2020 affect market been trying to convince me to go to pilates classes with her – development? and I had been saying ‘no thanks’. I understood why she goes n CHEN We saw acute financial-markets dislocation in the first but I thought it was not for me. Finally, in January I took the half of 2020. This meant borrowers and investors had a period plunge and took a fortnight of classes because I found out a of getting their heads around what was happening while the friend was doing them and he said it helped with his cycling. markets were effectively shut.

30|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 “We are in the midst of an economic transformation, driven by a desire for us and our children to be able to continue living where we are. As this plays out, there must be a change in capital allocation. The capital to support this transformation must flow to those that are able to, and capable of, investing in solutions.”

MIKE ROAN MERIDIAN ENERGY

Another dynamic has also dampened the market here. The We have had a lot of discussions over the years on the banks are typically among the biggest issuers of GSS bonds. But development of the Australian dollar bond market. My the Australian banks have had liquidity from the Reserve Bank perspective is that the shift in interest toward ESG is happening of Australia so have not had a funding need. much faster that than a lot of other changes we have seen in this Nonetheless, social bonds had a good year in Australia, with market. I think we will look back in a couple of years’ time and overall issuance nine times larger than in 2019. After June, the be surprised at how quickly things changed. tune changed. Once issuers had their houses in order there was n ROAN We were in a bit of a ‘hurry up and wait’ mode last a lot of interest in sustainable finance. If anything, interest was year. We greened our financing programme but we also had an heightened by the pandemic. aluminium smelter that was deciding on whether to continue Transactions take some time to come to market, though, so consuming in New Zealand. This meant we were unable to we saw a busy Q4 and we have a number of transactions closing invest confidently in new assets to support underlying growth in the near future. I expect 2021 will be a strong year. in electricity as the transition plays out. n SILVER In New Zealand, we saw Meridian green its entire debt That decision has been made now and we have already programme in August – which was a very challenging time. The seen interest in investing in growth from interim statements company maintained a solid focus on sustainability despite the by energy companies in New Zealand. I cannot comment constrained and unique operating environment. for Meridian yet but I expect broadly that this will continue Other than this, the New Zealand market followed the throughout 2021 given the decision by the smelter to stay, and global market to an extent. From March to September, we due to the statements from the CCC and its certification by only saw sustainability bonds from Kāinga Ora – Homes and politicians. Communities, which reflected the market’s pause on green for a I agree that we will be stunned by the pace of change if greater focus on social factors. we look back in two years’ time. Sustainability is becoming a I think social bonds will be a big piece of the market central theme for every company and it ultimately comes back for a long time. It is my understanding that, because of the to business sustainability. Everyone needs to be paid at some pandemic, we have regressed by around two decades on all the point, and debt and equity investors need to have confidence UN Sustainable Development Goals relating to poverty. that companies can sustain cash flows. Everyone in business is At the same time, there is also a lot of green financing to be aware that we are only as good as the products we are selling, done. Green issuance in New Zealand shot up from September, and if the product does not have a future no-one is going to with deals from Argosy, Mercury and Auckland Council. This lend us any money. The explosion of sustainable and green was when global COVID-19 cases appeared to be stabilising products will be a fascinating phenomenon to look back on. around the world, allowing total green-bond issuance in Q4 to n HATTON I completely agree that the pace of change has make 2020 a record year. accelerated. At the beginning of COVID-19, liquidity issues New Zealand trails Europe and, to a lesser extent, Australia were paramount – but once this abated everyone began to think in sustainable finance. But I do not think this is a reflection of about recovery and growth. We are still early in this stage, at New Zealand companies’ focus on sustainability. I think it is least for some sectors. more about the extra work required to satisfy regulators and ESG then became a greater focus for a lot of companies. It then be able to access the retail market in New Zealand. This moved up the list of priorities, thanks to a range of contributing adds complexity. factors. We know about all the net-zero commitments, the n LARKIN Our issuance is driven by a number of company- election of Joe Biden in the US, the fact that TNFD [Task specific factors, which is not unusual for corporates that are Force on Nature-related Disclosures] is coming and the increase not frequent issuers. This means there is danger in looking for in shareholder resolutions. I also think COVID-19 has been patterns of activity from half-year to half-year. Certainly there an example of how a systemic risk can play out, and we know was a sense in the second half of 2020 that collectively we had climate change will be a much larger and longer-lived risk. all stepped back from the brink, which opened market options Companies want to transition and become more resilient to for issuers. these shocks. •

31 SUSAN BARRON GLOBAL HEAD OF GREEN AND SUSTAINABLE CAPITAL MARKETS BARCLAYS JAKE HARTMANN DIRECTOR AND HEAD OF DEBT CAPITAL MARKETS, AUSTRALIA AND NEW ZEALAND BARCLAYS

GLOBAL ESG ACCELERATION A RISING TIDE FOR sustainable- debt product and practice The global sustainable-debt market has traditionally taken its lead from Europe but its innovations are increasingly being adopted globally. Susan Barron, global head of green and sustainable capital markets at Barclays in London, and Jake Hartmann, the bank’s Sydney-based director and head of debt capital markets, Australia and New Zealand, share a view on global developments and lessons for Australian borrowers seeking to align with international best practice.

t is widely acknowledged that more than 40 per cent. But there Group is a great example of market demand for environmental, social was also a notable increase in social- development. and governance (ESG)-related and sustainability-bonds as well as We also led ANZ’s inaugural SDG debt has historically been led sustainability-linked issuance. tier-two in November 2019 and noticed Iby Europe. But how fast is demand While Europe continues to represent some useful takeaways from the two growing – in Europe and elsewhere the largest contributor to the global deals. We had 47 repeat investors and – and how is this demand shaping market issuance volume, we also note nearly 80 new investors in the second issuance patterns? strong increases in the Asia-Pacific deal, only 16 months after the first. n BARRON While the global pandemic region and the Americas. Public-sector ANZ is also the first bank to be a has created and continues to create borrowers remain important market repeat issuer of SDG tier-two in euros, challenges in capital markets, it has also contributors, to market development which I think is incredibly important for prompted an acceleration of ESG as a – including social initiatives – and also all potential issuers as it lends credibility theme. issuance volume. to the structure as a long-term market This has manifested itself in a Finally, growth has been and is innovation rather than a one-off deal. number of ways. For instance, through expected to continue to be driven by A small subset of investors is still increased investor focus on ESG in the support of policymakers, regulators trying to get its head around the the form of integration and dedicated and the increasing standardisation of interplay between bank capital and investments across climate and social ESG as companies integrate green- or ESG use of proceeds, but this is a themes. social-impact targets with their strategies technical question that could take up We have also seen significant and decisions. This latter development an entire article. I think the growth in growth in ESG bond issuance. In 2020, is fuelling ESG growth and product new investors, the repeat issuance and almost US$500 billion equivalent of development through instruments such the bonds’ subsequent performance such bonds was issued globally, which as sustainability-linked bonds (SLBs). are excellent indicators of the market’s exceeded original market estimates n HARTMANN I think the recent €750 growing maturity. of US$325-400 billion. Green bonds million (US$909.6 million) SDG [UN continued to represent the majority Sustainable Development Goals] tier- What is the state of play when of this issuance, equating to slightly two deal that we led for ANZ Banking it comes to investors’ product

“I’m sure most market stakeholders hope to reach a point at which all debt is ESG. For now, the market is still developing and issuers as well as investors are at different stages of their own ESG journeys – including how best to fully integrate ESG with risk analysis.”

SUSAN BARRON

32|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 33 COPUBLISHED Q+A

preferences globally? Is labelled n HARTMANN I’m not sure it is true to how best to fully integrate ESG with green, social and sustainability (GSS) say it is as easy to access capital without a risk analysis. issuance still the gold standard or are good ESG story. When we meet global We continue to be buoyed by the investors now equally welcoming of investors now, increasingly we find growth and interest in ESG but remain sustainability-linked product? mainstream credit analysts don’t need hopeful that all market stakeholders n HARTMANN We started to get feedback an ESG person in the room to dig in will continue to work together to reach from investors from late in 2019 that to ESG issues with a borrower. They appropriate and practical long-term goals-linked product, as opposed to may not be as deep or fluent as an ESG solutions. use of proceeds, was in some ways their analyst but they are getting there. I think n HARTMANN As we think about what preference. Investors want to feel that this tells us that, particularly in Europe, the timeline might be, I am encouraged they are effecting change – incentivising the ESG component is becoming part by the fact that nearly every conversation companies to change their behaviour of the regular credit process. The stick I have with corporate Australia has an rather than just funding assets that is that it is part of credit screening – a ESG focus – either from treasury or from already exist. market-access question. boards and management. n BARRON An issuer’s ability to promote n BARRON Other market participants Borrowers want to understand what and align its sustainability goals are also providing guidelines and best they can do to communicate their ESG and strategy with specific financing practice: credit-rating agencies are efforts to the market. Our role is to help instruments is positive and has been incorporating ESG into their analysis, borrowers take their first steps – whether well received by investors. In addition to policymakers and regulators are it means looking at a framework, specific use-of-proceeds instruments, SLBs also supporting ESG disclosure, and stock labelled issuance or adjusting fixed- provide this opportunity. exchanges are creating dedicated ESG income investor materials. Issuance of sustainability-linked segments. The local market for ESG issuance instruments has increased since the ESG debt can have a helpful is also improving, which will provide publication of the ICMA [International role to play too, as it provides a clear additional options alongside deeper euro Capital Market Association] principles in and tangible indication to all market and US dollar markets. We look forward June 2020. But it is also complemented stakeholders not only of broader to bringing our global ESG expertise to by the versatility to structure instruments sustainability commitments but also collaborating with our new partners at that incorporate the different demands of specific projects and targets. Barrenjoey Capital Partners to deliver issuers and investors. Australian dollar issuance as well. All expectations are that we will Two-way pricing for sustainable debt see significant growth in sustainability- is an interesting concept but it has Developments in sovereign markets linked instruments and that they can been suggested that bond investors in particular seem to have cemented complement use-of-proceeds debt. are less comfortable with it, for a pricing advantage for GSS issuance. various reasons, than bank lenders. How reliable is this in global markets, Sustainable finance needs to have Does this type of issuance still have a and is it moving the dial for issuers? an even greater impact on capital role to play in the product mix if ESG n HARTMANN Some market participants flows to play its part in achieving analysis becomes a fully integrated are now advertising the availability of a Paris Agreement and other targets. part of risk analysis? significant pricing advantage for GSS One of the challenges is that this is n BARRON I’m sure most market bonds. I would caution issuers that there not a capital-constrained world. How stakeholders hope to reach a point at is more to it. A lot of factors go into any compelling is the claim that issuers which all debt is ESG. For now, the bond transaction and any one of them need to have a robust sustainability market is still developing and issuers as can water down an expected pricing story without the ‘stick’ of not having well as investors are at different stages advantage. Generally, pricing is not the access to capital without one? of their own ESG journeys – including primary reason for accessing this market.

“Issuers cannot change their business plans overnight, but they can spend time working on a sustainability framework that they announce to the market as the way they want to do business – and then back it up with issuance.”

JAKE HARTMANN

32|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 33 COPUBLISHED Q+A

“While much of the issuance volume can be attributed to public-sector entities, we have also seen various private-sector companies wishing to contribute to the growth of social bonds. This notably includes companies with socially aligned mandates, such as healthcare and education.”

SUSAN BARRON

This being said, we believe there was helpful for an issuer that is keen to bring market guidelines, such as those provided a 5 basis point pricing advantage on the a use-of-proceeds transaction. by ICMA. These are usually also recent ANZ transaction we led versus At the same time, progressing from jurisdiction-agnostic. where the issuer might have printed in green to sustainability format is also As the sector develops, grows and non-ESG format. something of a natural progression for innovates, a wider range of market In Europe, we are seeing this issuers as they become more familiar stakeholders will become more active advantage move to the 5-10 basis point with the SDG framework. participants including, for example, range. Of particular note, and this is Another value of social issuance is regulators and policymakers. These a more recent development, we are that many borrowers are keen to make entities will also be able to provide telling prospective issuers in the US ESG part of their funding ecosystem support. dollar market that there is likely a 0-5 but are not in industries where it is easy We all have a responsibility and basis point pricing advantage from ESG to identify green assets. There may be opportunity to come together and make issuance. This is a long way from where a lot more they can do on the social or clear decisions, so everyone is equipped we were in late 2019, particularly in sustainability side. with the best possible information the US. This is where the conversation starts and maximum disclosure to support on sustainability-linked funding, where successful outcomes. Is it still too hard for private-sector the focus is on investment in outcomes companies to incorporate and and communities – areas where the What advice would you give to an measure social impact in sufficient company can make a difference outside Australian issuer that has yet to scale to support regular and growing its specific area of operation. be convinced that it is worth the social-bond issuance? n BARRON The update of the ICMA deployment of resources necessary to n BARRON We have definitely seen Social Bond Principles in response to execute a deal? significant growth in the social-bond COVID-19 clarified that financing n HARTMANN There is a lot of focus on market with issuance volume in 2020 COVID-19-related initiatives could be ESG and interest in how to approach more than eight times greater than considered social assets. bringing it to market. What we are saying 2019. While much of the issuance One of the traditional discussion is that the debt space is one of the most volume can be attributed to public- points with social bonds was always how visible ways to make this connection. sector entities, which have mandates to define the target population – which Issuers cannot change their business that are closely aligned with social issues individuals would benefit from a project plans overnight, but they can spend time and outcomes, we have also seen various or asset. With COVID-19, it became working on a sustainability framework private-sector companies wishing to clear that a target population can be that they announce to the market as the contribute to the growth of social ‘everyone’. It continues to feel that the way they want to do business – and then bonds. This notably includes companies market is collaborative, with issuers, back it up with issuance. with socially aligned mandates, such as investors and market makers focused on Some issuers are working on these healthcare and education. what is practical. frameworks even in the absence of an These factors have supported the immediate need to go to funding markets. market conversation to develop not only As the sustainable debt market They want to demonstrate that they social themes but also consistent social- evolves, how should market are taking steps toward issuance and impact metrics, which together will participants maintain rigour and communicating these to investors. We hopefully continue to support growth. avoid any possible accusation of suggest all issuers consider this approach. • n HARTMANN Issuers are aware that greenwashing? identifying auditable green assets is a n BARRON I do not believe any issuer Disclosures regarding the content of this article time-consuming and, in some cases, would deliberately seek to issue debt that are provided at https://www.investmentbank. challenging project. Broadening the may be considered inappropriate. The barclays.com/disclosures/important-nonresearch- basket of potential assets can be very market continues to use best-practice content-disclosures.html

34|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 PB FEATURE

Chain of influence Australia’s national modern-slavery reporting deadline is looming, on 31 March 2021. There are capital-market consequences, most notably that buy-side firms are taking steps to ensure they have appropriate modern- slavery risk controls in place.

BY CHRIS RICH

ntering force on 1 January 2019, Australia’s to maintain an online register of modern-slavery statements – a Commonwealth Modern Slavery Act 2018 requires feature designed to ensure reputational risk compels entities to entities based or operating in Australia with annual submit statements. consolidated revenue of more than A$100 million (US$77.5 million) to report annually on the risks MARKET CONSEQUENCES Eof modern slavery in their operations and supply chains. he new law requires entities’ statements to capture the risks Modern slavery encompasses a range of practices where of modern slavery in supply chains as well as operations offenders use coercion, threats or deception to exploit victims and T– a scope that captures financial lending and investments. undermine their freedom, according to the Department of Home Investors say the effect on their industry, and therefore potentially Affairs. These include human trafficking, slavery, servitude, forced on capital markets, is significant. labour, debt bondage, forced marriage and the worst forms of Even for smaller investors that do not meet the consolidated- child labour. revenue threshold, the guidance for reporting entities considers The International Labour Organisation and Walk Free asset managers to be part of their clients’ supply chain. estimate that globally, more than 40 million people live in Although it is not a requirement to monitor individual conditions of modern slavery. The COVID-19 pandemic is likely investees or loan recipients, the federal government guidance to increase this number. expects that reporting entities “assess at an overarching, thematic Aligned with the UN Guiding Principles on Business and level whether they may be exposed to modern-slavery risks Human Rights, the global standard for preventing and addressing through their investment arrangements or financial lending business-related human rights harm, the new Australian law practices”. requires reporting entities to describe the modern-slavery risks in Indeed, ensuring that investors report on their portfolio links their supply chains and operations, and the actions taken to assess is a key objective for the Australian act after similar legislation and address these risks – including due diligence and remediation in the UK in 2015 received little engagement from the investor processes. Reporting entities also have to describe the effectiveness community, says Måns Carlsson, head of ESG research at Ausbil of their actions. Investment Management in Sydney. Carlsson is a member of Entities that meet the criteria to submit modern-slavery the Department of Home Affairs’ modern-slavery reporting statements to the Australian Border Force must do so within requirement advisory committee, which is working with the six months of when their reporting period ends. The legislated government on effective implementation of the act. deadline for submission, 31 December 2020, was extended by KangaNews understands the attention given to modern-slavery three months because of the pandemic. While there is no penalty statements, and fundamentally the task of ensuring appropriate for noncompliance, the law also requires the federal government modern-slavery risk controls are in place, has significantly ramped

“We tell companies that they may not have all the answers but we expect them to be honest about where they get things and to show a concerted effort to improve over time. We expect companies to assess where modern-slavery risk sits within their operations and supply chains.” KATE TURNER FIRST SENTIER INVESTORS

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is an indicator of modern-slavery “I suspect as more and more modern- risk. Companies are limited to slavery statements get published what they can practicably discover investors and nongovernment and do due diligence on – but not organisations will start comparing what knowing how far down modern- slavery risk potentially goes is in organisations are doing.” itself a modern-slavery risk,” Hii MARAYKA WARD QIC tells KangaNews. Some companies are taking their reporting requirements more up since mid-2020 for entities, reporting-eligible or otherwise, as seriously than others, largely in line with their equivalent risk the 31 March 2021 deadline looms. In particular, asset managers’ profile. “It is getting a lot of oxygen as one of the requirements is engagement with clients on the issue has risen substantially. that modern-slavery statements must be approved by the board Several industry bodies have developed toolkits to provide and signed by at least one director,” Hii continues. a framework for investor reporting. The Australian Council of Some companies have a few hundred suppliers in their chain, Superannuation Investors (ASCI) and Responsible Investment which is no insignificant number by any means. But others have Association Australasia’s comprehensive guide is of particular note, tens of thousands – making oversight a challenging task. The key buy-side firms say. risk-mitigation measure, subject experts say, is having modern- In November 2020, meanwhile, investors with a collective slavery risk controls in place and a process of remediation when A$5.8 trillion (US$4.5 trillion) under management launched and if modern slavery is found in the supply chain. their own coalition to address the harm caused by modern “At a minimum we expect companies to run a risk-based slavery. Named Investors Against Slavery and Trafficking mapping exercise of their supply chain, which would provide (IAST) APAC, the group sent a statement to 100 Australian a good starting point for achieving better visibility. We use the Securities Exchange (ASX)-listed companies to guide their global slavery index to identify high-risk countries, followed approach to modern slavery. IAST APAC was convened by by a number of toolkits used to identify high-risk sectors,” Liza First Sentier Investors (FSI), Aware Super, AustralianSuper, McDonald, Melbourne-based head of responsible investment at Fidelity International, Ausbil Investment Management and ASCI. Aware Super, tells KangaNews. “As investors, we see modern slavery, human trafficking and Engaging with its nearly 80 fund managers since May last labour exploitation as something that goes beyond ethics. Business year, McDonald says Aware Super – like the superannuation models and value chains that rely on underpaid workers, weak industry in general – has sought to understand how modern- regulation or illegal activities such as forced labour and other forms slavery risk is currently approached in the corporate sector. of modern slavery drive unsustainable earnings,” IAST APAC says. “We have gone through a process of asking our asset managers The statement outlines the best-practice principles for whether they invest in any of the high-risk countries or whether modern-slavery reporting. It builds on CCLA Investment they have companies in their portfolios with operations in the Management’s initiative, called “find it, fix it, prevent it” and is high-risk sectors,” she explains. backed by the UN Principles for Responsible Investment, which The most important aspect is how asset managers engage with established guidelines and expectations to stamp out modern underlying companies active in high-risk categories. “At the end slavery in response to poor engagement under the UK law. of the day, if fund managers are investing in these areas and not This initiative provides the framework for which IAST APAC engaging with companies we may identify those asset managers intends to collaborate with companies in buy-side portfolios. as high risk and work with them to improve their practices, “As investors, we expect companies to meet their reporting and including how they are conducting their ESG [environmental, compliance obligations and in doing so encourage them to social and governance] screening,” McDonald says. examine broader risks of labour exploitation as a leading indicator FSI published its first modern-slavery statement in September of modern slavery,” IAST APAC explains. 2020, though it has been engaged with the issue of human rights in the investment chain for more than five years. While it is not RISK CONTROL planning to change the way it manages modern-slavery risk as lthough – and perhaps because – precise definitions of a a result of the new law, structured mandatory reporting will company’s supply chain and operations are not explicitly provide it greater insight, Kate Turner, Sydney-based responsible Aenshrined in the Australian law, Andrew Hii, partner at investment strategist at FSI, tells KangaNews. Gilbert + Tobin in Sydney, says there is no limit on how far into After forming a working group in early 2020, FSI created its sphere of influence an entity needs to look. This is a particular a modern-slavery toolkit that provides detailed background issue in financial markets where investments can be at arm’s information on related risks as well as best-practice case studies. length. “The fact that a company can have a very long supply “We developed our toolkit based on previous work we had done chain where it may not know who is sitting at the bottom of it on human rights. The general thesis behind it is that the first step

36|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 if we find an incident of modern slavery in one of the companies we invest in is never to divest from the “There is a very fine line between poor company – because our obligation labour practices and modern slavery. As is to ensure the victims receive an investor, if you are not looking into remedy,” Turner explains. human rights you are missing the point.” “Our process starts off with MÅNS CARLSSON AUSBIL INVESTMENT MANAGMENT working with the company to ensure there is adequate remedy for victims. If we feel they are not taking enough steps to do this we have an escalation process, hurdle for investment in a company with known issues of modern often in collaboration with other investors, to speak about slavery,” Turner explains. our views publicly and use our voting rights. Divestment is Underpinning the remedy process is the fact that, with 40 the last step.” million victims globally, modern slavery is not an issue that will be A focus on remedy is also central to how QIC is dealing with fixed on day one of any reporting regime. modern slavery-risk. “The legislation requires that, if we are found “We tell companies that they may not have all the answers to have caused or contributed to the practice of modern slavery, but we expect them to be honest about where they get things we have to remediate – putting the victim back in the position and to show a concerted effort to improve over time. We expect of nonslavery and making sure processes are amended,” Marayka companies to assess where modern-slavery risk sits within their Ward, Brisbane-based senior credit and ESG manager, liquid operations and supply chains rather than just trying to meet the markets group at QIC, tells KangaNews. reporting requirements,” Turner says. QIC released its first modern-slavery statement in December With COVID-19 as a huge conributor, Carlsson says many 2020. Ward adds that some of the issues the asset manager has more people have fallen into slavery. He believes confronting come across have already been addressed by companies. modern-slavery risk is a chance for investors to engage further, But it is important to be vigilant about where in supply if they are not already, with human-rights risk. “There is a very chains modern-slavery risk can occur and to be proactive about fine line between poor labour practices and modern slavery. As an it. “QIC’s real-estate team invests in shopping centres and our investor, if you are not looking into human rights you are missing risk areas there are in security and cleaning services. One of the the point,” he says. things we do to minimise risk is to require cleaning staff not to be Regardless of how the harmonisation pans out, and while the subcontracted – they have to be employees – because this is where Commonwealth law has no direct ‘stick’, reputational risk is on companies start to lose their chain of command,” Ward says. the radar. “I suspect as more and more modern-slavery statements get published investors and nongovernment organisations will SPHERE OF INFLUENCE start comparing what organisations are doing,” Ward says. ow far down the supply chain investors should go to In its guidance to reporting entities, the federal government be considered best practice is yet to be conclusively estimates the A$100 million consolidated-revenue threshold to Hanswered. Tier-one is broadly what has been settled on for apply to 3,000 organisations. As of 24 February, 324 statements the first batch of modern-slavery statements, though IAST APAC had been lodged to the online register, covering 728 entities. encourages companies progressively to expand beyond this. The mass publication of modern-slavery statements will also “Starting at tier-one is acceptable but it is not good enough to help establish best practice. “We have already commissioned stop there. Over time it is expected that companies will go down research from a provider of ours to look at the statements of ASX to tier-two and tier-three as well as developing how they assess 200 companies. We will get a sense of best practice from this, as their supply chain,” McDonald says. well as seeing who the laggards are,” McDonald says. For example, QIC, in conjunction with ESG data provider Best practice will have to develop quickly if SDG target 8.7 and professional services firm Fair Supply, undertook a baseline – ending modern slavery by 2030 – is to be met. The Australian measure of exposure to modern-slavery risk to tier-10 of investees’ act requires entities to describe the effectiveness of their modern- supply chains. “It does not identify instances of modern slavery slavery risk controls and investors are putting in place a series of but it helps us hone in on where we as credit analysts really need KPIs to measure their own progress toward the 2030 goal. to look more closely at the potential risks and talk to companies Collaborative engagement between asset managers and about it,” Ward explains. companies will be key to moving the dial on modern slavery, In fixed income, FSI seeks to integrate modern-slavery risk Carlsson says. “Companies often use the same suppliers. They can assessments through its credit-research process. “Our credit learn a lot from one other as this is a systemic risk that applies to analysts produce an internal credit rating that integrates how a everyone, not a competitive one. The more we collaborate, the company is managing its exposure to ESG risk. There will not better off everyone is as companies are more likely to respond to necessarily be a blanket screen not to invest, but there will be a 10 investors than just one.” •

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THE NEXT FRONTIER: GREEN HOME LOANS IN AUSTRALIA ustainable-finance development in Australia has tended to focus on the institutional sector. But a vast quantity of assets on bank balance sheets S are residential mortgages, which to date have been almost untouched by environmental considerations. Clean Energy Finance Corporation and KangaNews gathered a group of market participants at the cutting edge of green home-loan development to discuss the product’s potential and its funding implications.

PARTICIPANTS n Gavin Goodhand Senior Portfolio Manager ALTIUS ASSET MANAGEMENT n David Jenkins Head of Sustainable Finance NATIONAL AUSTRALIA BANK n Jane Kern Senior Manager, Impact Finance BANK AUSTRALIA n Grace Tam Director CLEAN ENERGY FINANCE CORPORATION

MODERATOR n Laurence Davison Head of Content and Editor KANGANEWS

PROPERTY’S POTENTIAL There is also a massive sector of residential-mortgage lenders in Australia. If everyone does their bit to help customers Davison What is the significance of residential understand what it means to build a green home, and the property as a source of emissions, and what benefits they would receive from doing so, it would be a win- difference could green home loans make? win for everyone. n TAM Property accounts for 23 per cent of Australia’s emissions n JENKINS Residential mortgages are a huge proportion of and residential property accounts for half of this. The main National Australia Bank (NAB)’s book – roughly 50 per cent of source of residential emissions is heating and cooling, which the bank’s balance sheet. The average house emits around seven account for 40 per cent, followed by appliances at 25 per cent tonnes of greenhouse gases per year, and if you extrapolate this and water heating at 23 per cent. Green home loans can deliver over our book it is immense. If we can reduce this by a sizeable a multitude of benefits, including reducing households’ energy amount it will have a marked impact. load and demand on Australia’s grid. The technology is already The Clean Energy Finance Corporation (CEFC) and NAB available to address heating and cooling emissions through have been participating in and observing the EU’s energy- building high-quality residential properties. efficient mortgages initiative (EEMI), which has landed on a

38|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 common definition among EU members of what an energy- required certain uplifts from the minimum standard to be efficient mortgage should do and how to go about collecting achieved. We copied this concept and used the government- and measuring data. supported NatHERS [Nationwide House Energy Rating The participants use a number of data points and Scheme] certification, which is available nationally. arguments. The rationale is that a green mortgage will lower n KERN Around 50 per cent of the buildings we will have in energy bills and incentivise more energy-efficient behaviour 2050 have not been built yet, so it will be fantastic if we can by homeowners. It also reduces outgoing costs and therefore influence the way these homes are built now. But the other increases mortgage serviceability. side is that the remaining 50 per cent is homes we already have. From a lender’s perspective, this should theoretically deliver There is also a huge opportunity in getting these upgraded. a better credit-quality mortgage, which in the long term should Establishing a product that is easy for the bank to give credit benefit. At the same time, a growing group of studies implement has been interesting. This means making sure and anecdotal evidence suggests increased home value can be lenders and credit-assessment teams are able to implement the attributed to energy-efficient homes, for the same reasons. It is rules in a way that gives us confidence in what they are doing. a virtuous circle if we can achieve the outcome, but there are We want something our customers can connect with and some challenges to get there. understand, which in turn means we are ultimately generating n KERN Bank Australia is a customer-owned bank and high-quality assets that can go into our sustainability-bond pool residential mortgages are an even larger share of our portfolio. in the future. Our customers are keen to see us take action on climate change, n TAM Australia’s building code has not changed for 10 years. so the green-loan product seems like a logical path. On average, the minimum requirement is to build to six-star We think, with some small tweaks and nudges, that we can NatHERS rating. But the technology available to create more encourage people to make long-term change. Building stock energy-efficient homes has improved a lot in 10 years. lasts for a long time so if we can get people to make changes at The cost to lift the energy-efficiency rating of a new-build the time they build or take out a loan it can have a long-term home by one star is 1-4 per cent of construction cost. When impact. building a new property there is actually a lot that can be done to improve energy efficiency at no cost, for example reorienting AUSTRALIAN DEVELOPMENTS the direction the house faces. There are two sides of the coin for a green home loan. We Davison What was the rationale behind the want to address the thermal fabric and appliances that can make CEFC’s decision to establish a set of green a home operationally efficient. Homeowners can then add solar home-loan criteria with Bank Australia? and battery capability on top and will be well subsidised for n TAM Through working with Bank Australia we realised the future. A lot of people think adding a battery for solar- customers would demand this product not just for building power storage will make a home green, but this is more of a new homes but also for existing homes and renovations. We band-aid solution to the problem. For us, renewable-energy had to find a way to meet demand for all three products. generation is separate. Thermal performance is foremost, We also added the Victorian government-supported whether for renovations or new build. This is why we focus on residential-efficiency scorecard, where a tailored solution can be the NatHERS rating. provided to the end customer on how they can improve their home’s energy efficiency through renovation and within their Davison NAB issued a residential mortgage- budget constraints. backed securities (RMBS) deal with green notes We spent a lot of time putting together a green home-loan in 2018. Back then, the absence of nationwide product that is easily implemented by a bank, easily understood building standards was a challenge. Could the by customers and credible for investors. CEFC standards create a smoother path to In doing this, we got in touch with Fannie Mae to ask market? how it put together its green-loan product. Neatly, it relied n JENKINS The challenge we had when NAB did the work for on industry-credible tools to make this determination. It also its green RMBS was that it was based purely on what could be

“A lot of people think adding a battery for solar-power storage will make a home green, but this is more of a band-aid solution to the problem. For us, renewable-energy generation is separate. Thermal performance is foremost, whether for renovations or new build.”

GRACE TAM CLEAN ENERGY FINANCE CORPORATION

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GETTING BORROWERS ON BOARD The property market is an Australian obsession. As such, preferential pricing for green-mortgage borrowing might be enough to make emissions considerations a key part of the buying process.

DAVISON What kinds of n TAM For a long time, CEFC The product generates a lot that they will all suddenly incentives are offered to worked with large builders more than a discount for apply but to plant a seed and borrowers that qualify and developers to try to build the customer. We hope it get people thinking so that for a green loan? to higher ratings. We have transforms the whole value down the track – if they are also worked with community- chain, from the customer renovating, building or buying n KERN We launched the housing providers to do this. to the lender and the wider – it will be in their mind. product earlier this year industry. Then investors can with investment from the It has been difficult in collect data and understand DAVISON How do you make CEFC [Clean Energy Finance the residential property whether it is a better credit. sure this information is Corporation]. Working sector because there are available and understood together, for homes that qualify so many players. There DAVISON Does the across the distribution we can provide a discount are governments, councils, green-mortgage product channel, whether internal of up to 40 basis points for builders, lenders, brokers, make borrowers behave or through brokers? up to five years. Half of this borrowers, architects and differently at the margin? comes from CEFC and half more. There is no single n KERN At the moment, the from Bank Australia. This is a large player that we can n KERN Absolutely. We have green home loan is structured reasonably large discount and influence, so we decided the been testing, learning and as a discount on our premium- it is becoming relatively larger most effective route would seeing what happens. I think package home-loan product. as rates decrease. We thought be to get the borrower to one of the things that allows All the lenders and brokers when launching the product demand high standards. us to have an impact here that would ordinarily distribute that it would be enough is that the very existence this product have been made to encourage households If we raise borrower awareness of the product encourages aware of the feature. We have to do the extra work and they can ask questions of their people to think and, as Grace also done staff training for it. think about the benefits. counterparties to get homes Tam says, ask questions of built to a certain standard. everyone in the value chain. We are hoping to build the We now have some good case An attractive home-loan capacity of staff over time to studies of customers that product incentivises the A lot of the individual actors have this conversation with have come to Bank Australia customer to make this effort, need to be motivated to act customers proactively. Some for other reasons and then because they understand but also a lot have never even are making decisions at the found out about the product, the benefit it delivers. thought to go and get the point where they construct discovered they can make a information. In supporting a new home, and this is a few changes to their planned It also creates incentives for this product, we have been key point. But there is also home and have qualified for builders, to build to standards creating a lot of content on the opportunity to let people it. We have feedback saying that allow them to tap into a clean-energy home loans we know that this is available it is a good motivator for niche market and potentially share with our customers. This if they are thinking about home owners to take action. achieve better pre-sales. is not with the expectation an upgrade in the future.

“WE HAVE BEEN CREATING A LOT OF CONTENT ON CLEAN-ENERGY HOME LOANS WE SHARE WITH OUR CUSTOMERS. THIS IS NOT WITH THE EXPECTATION THAT THEY WILL ALL SUDDENLY APPLY BUT TO PLANT A SEED AND GET PEOPLE THINKING SO THAT DOWN THE TRACK – IF THEY ARE RENOVATING, BUILDING OR BUYING – IT WILL BE IN THEIR MIND.”

JANE KERN BANK AUSTRALIA

verified and this was only for new builds. A national cabinet When NAB issued its RMBS, states had their own timelines group is now doing work to support an upgrade of the national for when the NatHERS six-star rating would become the new construction code, which will raise the bar for new housing construction requirement. Anecdotal feedback and research also construction. suggested homes built in 1990 would only be equivalent to a This will be consistent with what the CEFC and Bank one-star NatHERS rating. We had no comfort around existing Australia are doing now. It will result in NatHERS becoming housing stock because there was no tagging of when the house a nationwide tool for the whole of houses. Previously it had a was built in its original form and what rating it had when it was thermal-efficiency focus, whereas it will now incorporate internal designed. All this limited what we could do and I think it has fixtures and fittings. for other banks too.

40|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 Even so, the level of interest in this space from nonbanks We also have a select list of upgrades that we have and smaller banks is increasing dramatically. The number of determined are eligible to allow for jurisdictions where the phone calls and discussions we have on a reverse-enquiry basis scorecard is not available. This requires a lot of work from has skyrocketed. the household to provide evidence that the upgrades meet the This is for all the reasons Jane Kern describes. Borrowers standards we need. want to see a green-mortgage product because it makes sense for Bank Australia’s customer base tends to be sustainability them and they want to play a part in the low-carbon transition. oriented and some of them are willing to do this. In return, They know they need to be playing a bigger part and this is one of course, they get a discount on their mortgage. There is of the best ways they can, so it is very timely. opportunity to improve this in future, though, as more tools n GOODHAND The next piece is how it flows to the investment become available – such as the NatHERS existing-homes community. When NAB did its green RMBS in 2018, only rating, which is in the works. New South Wales, Victoria and Tasmania were included in the n JENKINS The Victorian energy-efficiency scorecard is Climate Bonds Initiative (CBI) criteria. voluntary and this is part of the challenge we face. As a This is essentially where we still sit, although the CBI has bank lender, we would really have to insist on home owners rolled out some criteria around rooftop solar excluding Western undertaking scoring before we give them access to a discounted Australia. Not having certification and second-party opinion mortgage – because most lenders do not collect this data by requires the investor to be able to do its own investigation, default. It is not part of the standard loan documentation. which is a skill set that needs to be built over time. Much of the challenge is that we know what is actually built in Australia is not always according to design. I think Davison From a lender’s perspective, is we all have anecdotal evidence of issues such as houses having approving a green loan as easy as verifying no insulation, which beggars belief now but is common for that a home is built or renovated per code houses built even in the 1990s. I think we need carrot-and-stick – especially if the code is more rigorous and measures to get a change in behaviour and in scale. consistent? n GOODHAND This has a knock-on effect, where from a n KERN We have tried to incentivise a bit above code. As Grace securitisation point of view the amount of assets able to be Tam mentioned, for the last 10 years code has required a securitised and referenced is actually quite small. An issuer minimum of six stars. But we wanted to establish a product needs to get to a certain critical mass before a securitisation is with an incentive to do more, so we have set the bar at seven viable and this may be quite difficult for smaller regional banks. stars. We thought this was a reasonable place to set the standard The major banks may be in a position to bring these sorts in a way that would push the market to go further. of transactions. But the pool is naturally quite small unless the As a lender, it has been reasonably straightforward for newer assets are being tagged and referenced. homes that have the NatHERS certificate. If you are building a n JENKINS As one would expect, though, some of the smaller home you need to get a certificate in the planning process and lenders are more nimble and can move faster. The larger banks we receive a lot of documentation around this. If you go one move slowly but we are able to share with all lenders what we full star above code, you are eligible for the discount. started doing years ago as a minimum starting point. For newer homes that are bought off plan, buyers can look Data is an issue, though. In many cases, loan information for an energy-efficient development and get a certificate from does not include dates such as when the house design approval the developer. or construction certificate was granted. It would generally This part of the process has been relatively smooth. The just signal when the house was finished or if there has been renovation part has been more challenging. I mentioned the a renovation. With home renovations, there is typically a Victorian scorecard earlier, but this requires someone physically threshold where a NatHERS rating applies to an extension. to come and look at a home to make an assessment. It is an Most renovations would not have a material impact on the extra layer, but it is also a valuable process if the customer is overall energy efficiency of an entire house and do not warrant keen to do it. getting design approval.

“There is a push for greener product and this could include green bonds or green RMBS. We think there is underlying demand for green RMBS – it is just a matter of how it is structured and brought to the market. This is a complicating factor at the moment.”

GAVIN GOODHAND ALTIUS ASSET MANAGEMENT

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A BETTER CLASS OF HOMEOWNER? There is some evidence to suggest that the type of borrower who is interested in exploring a green home-loan option may be a better credit risk than a generic mortgage holder.

DAVISON Is there any efficiency data protocol in frequently in payment arrears. n KERN It is too early to say difference between the place where it is collecting The studies are growing in definitively. However, we creditworthiness or data among banks and sharing number and we hope the work are tracking this information performance of green- reporting on it, to look at of the EEMI can be replicated and the green loans we mortgage borrowers how energy-efficient home in Australia so we can start to have are performing very versus an equivalent mortgages are performing. gather and share this data. well at the moment. We will vanilla mortgage? certainly keep an eye on it It published a report in 2020 GOODHAND With National and hope it matches what is n TAM From what we have on a study in Italy that sampled Australia Bank’s residential being seen internationally. seen in personal-lending 72,000 residential mortgages mortgage-backed securities portfolios linked to green originated between 2012 and deal, has anyone tracked DAVISON In the long term, borrowers, it is obvious that 2019. The results were that the how the green loans have would investors look they have a higher credit higher-rated homes displayed a compared with the vanilla? for evidence of better score. If we extend this 30 per cent lower default rate. performance in products theory to green home loans, n JENKINS It has not yet been like green loans? it is a home owner investing The Bank of England also carved out as a separate in their own home – which released a study in January exercise. Much of the bank’s n GOODHAND I think it suggests they are very 2020, of 1.8 million residential focus has been on natural would definitely be a positive. conscientious. It attracts a mortgages in the UK, which capital aspects and linking this When we are looking at niche borrower group that discovered something to better performance of loans. underlying pools, if the bank should be better at repaying. similar. This did not talk can demonstrate it is a better about the percentages, but DAVISON Does Bank risk it should in theory lead n JENKINS The EU’s EEMI the conclusion was that Australia have any to a better price. How much [energy-efficient mortgages mortgages against energy- observations on the profile that would be is anyone’s initiative] has put an energy- efficient properties are less of its green-loan borrowers? guess at the moment.

PACE OF UPTAKE spending a lot more time in their homes and perhaps more inclined to think about energy Tam What has been the speed and scale of efficiency as a result? development in Bank Australia’s pool of seven- n KERN It could well be. Bank Australia traditionally has a star minimum loans versus forecast? strong customer base in Victoria, where some things were n KERN We have been originating at twice the speed we forecast slowed down by the second lockdown. It could certainly be that when setting up the programme. This is particularly pleasing the incidence of people having time to do research and organise given how disrupted 2020 has been. We launched and within a relevant areas has not been hindered by the pandemic. couple of months the pandemic hit. Homes’ thermal efficiency has become significantly more We are seeing much more solid demand than we initially important now we are not leaving our houses every day to go to anticipated. There is a big market out there and a lot of a nice heated office. These features probably became a lot more opportunity if we get it right. Hopefully we can see the product apparent over the course of winter. hit scale beyond just Bank Australia’s book. n GOODHAND The cost of energy is quite substantial for homeowners so it makes sense to improve the energy efficiency Davison Is some of the uptake attributable to of homes, whether through improving windows, insulation or the circumstances of 2020 – that people were anything else.

“Data is an issue. In many cases, loan information does not include dates such as when the house design approval or construction certificate was granted. It would generally just signal when the house was finished or if there had been a renovation.”

DAVID JENKINS NATIONAL AUSTRALIA BANK

42|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 n JENKINS Much of the work the EEMI is doing is around more of the proxy-pool style information in the near term. housing values. A number of European studies, one from earlier The reporting at the back end is very important in any green- this year, reveal that houses can sell for a significant amount labelled asset – whether this is to indicate the emissions being more if they have a higher energy rating. saved or energy efficiencies being created. It would be nice to The challenge is to get ratings for existing homes. At the see the individual green loans, but we would always need to moment, the ACT [Australian Capital Territory] is the only assess the pool. Australian jurisdiction where it is mandatory in order to sell. There should be incentives to show home owners the rating is a Davison Why have we not seen more green good marketing tool. RMBS – is it more than just a case of building the asset pool? GREEN FUNDING n JENKINS There are several factors. There needs to be the incentive to tag and identify based on doing some of the pre- Davison How difficult is it to back-fill data in work we did, where we identify what is in the pool and derive this space, and what progress has been made comfort that the homes were built after a certain date. Our in data collection since NAB’s green RMBS in approach was conservative, only looking at new builds rather 2018? than existing homes and renovations. This also limits scale. n JENKINS For that deal, we applied measures across the existing I suspect some issuers are not convinced of the merits of book so we knew and were able to slice and dice when homes green bonds instead of just putting residential mortgages into were built. At any point in time we can run a cut to see how a covered bond that will provide a cheaper source of funding. much of our existing book was built before a certain date. This might be the case for a one-off deal, but we are seeing that From there we can extrapolate which homes are beyond the if issuers use green bonds as a regular part of their funding they minimum six-star rating. can get a benefit – as has become the case offshore of late. In We have started to share this with other banks and a Europe, green bonds accounted for 20 per cent of investment- number of them are beginning to do this, too. Some have been grade issuance during September 2020 and these on average trying different tactics to collect data on things like solar-panel came around 9 basis points inside comparable vanilla secondary installation. There is a challenge around solar panels in that curves. This is a big driver for treasurers. regulators and the keepers of data won’t share it with banks and The issuer needs to have credibility in its underlying assets, allow them to cross-match which houses have solar panels. but the pricing on green assets is now creating enough of a headline for more market participants to take notice. Goodhand Is this why we have not seen a transaction linked to these CBI criteria? Davison If Australia got to the point where n JENKINS I believe so. We need scale of data to underpin a there was a greater stock of green mortgages transaction. The challenge is to get home owners to annotate on on lenders’ books, would investors be their application that they have solar panels, which is difficult indifferent to seeing them funded in securitised unless they are incentivised to do so. versus green-bond format? n TAM A national energy consumers survey of more than 2,000 n GOODHAND We have a dedicated focus on ESG in the households undertaken in 2018 had 48 per cent of respondents products we run so we will lean toward green assets. With any saying they support a mandatory labelling scheme of energy- green bond, whether it is RMBS or another asset, the ultimate efficiency ratings for houses being sold. Meanwhile, 60 per cent liability is to the entire pool rather than to the underlying asset. said energy efficiency is a factor in buying a home. We look at the entire pool holistically. While the funds we Victoria has changed tenancy law to recognise that ongoing are investing are being directed to loans that are considered energy bills are not necessarily transparent for someone looking environmentally superior, ultimately our risk lies with the entire to rent a property, and the tenant ends up paying a lot more. pool structure. The changes relate to landlords having to ensure appliances n KERN We set up our Australian MTN programme in 2018 meet minimum standards. and took the decision to go down the senior-unsecured path. Another thing to note is that, according to CSIRO data, It could be on the cards in the future, but at the moment retail in 2020 around one in 10 properties were built above six-star deposit growth is strong so it would not be soon. rating. We can do more, as we are seeing with Bank Australia. n GOODHAND This is a good point. Given the situation we are in, particularly with the amount of liquidity in the banking Davison Would more loan-level data be system from the Reserve Bank of Australia’s term-funding required for a green RMBS deal relative to a facility, investors know banks are not going to issue. standard pool of mortgages? The RMBS space is just another funding source for banks n GOODHAND I think it would, but I would be surprised to and when there is no natural requirement for funding it is see it any time soon. I think we will be more likely to see difficult to see much coming over the next 12-18 months. •

43 COLUMN

New Zealand Sustainable Finance Forum – the year of action In November 2020, the New Zealand Sustainable Finance Forum unveiled its “roadmap for action” – a pathway to sustainability focused on the contribution that can, and must, be made by the financial system. Thus began the implementation phase. The forum’s new co-chairs, Bridget Coates and Ross Pennington, provide an exclusive update on the progress being made and the road ahead. Tē tōia, tē haumatia Nothing can be achieved without a roadmap, a workforce and a way of doing things

he New Zealand Sustainable that the next phase of the NZSFF project sustainable finance, and to set about Finance Forum (NZSFF) is one of action, rather than talk. The resolving or delivering them. roadmap was two years in roadmap identifies the key priorities – Achieving a transition to sustainable the making, undertaken by what remains is to deliver on them. finance depends on garnering a collective industry volunteers under the The work programme is divided into commitment to deliver on the roadmap’s Tstewardship of the Aotearoa Circle and three waves over a 1-5 year period. It is initiatives, radiating them out across founding co-chairs, Karen Silk and Matt an ambitious agenda that will require all market participants, and providing Whineray. unprecedented coordination across the a centralised clearinghouse to collate, The project brought together the financial ecosystem, drawing on the formulate and distribute data and other resources and ideas of a wide range of leadership and capabilities of central and resources. Its kaupapa (way) will thus public- and private-sector participants. local governments, the private sector, iwi, be built on mutual commitments and What resulted was a framework for NGOs and academia. accountability. transforming the financial system to one This has been the approach taken that supports a sustainable future. The A Centre for Sustainable Finance or recommended in other jurisdictions government’s announcement of a climate In developing the NZSFF roadmap for including the UK, Canada, and Australia. emergency on 2 December 2020, a month action, it became clear that no single The benefits of collaborating with sister after the roadmap’s launch, underscored organisation or entity could simply organisations, particularly the Australian the importance of this work. slot this into its remit. This, and the Sustainable Finance Initiative, have already A key theme is acceleration. need for coordination and acceleration, become evident. Sustainability issues have become more provides the backdrop to NZSFF’s key While the CSF will perform a acute since COVID-19 took hold. initial priority – the establishment of crucial role, advancing the roadmap will Change is required now to enable an independent and funded Centre for continue to rely on the commitment of sufficient runway to hit key targets – Sustainable Finance (CSF) to oversee the organisations and individuals offering their most notably New Zealand’s 2030 Paris implementation of the roadmap. contribution to a range of working groups Agreement commitments. The centre will bring public- and and through engagement. There has been With the groundwork carefully laid, private-sector participants together to no shortage of enthusiasm to continue this the clear message in the handover was identify barriers and preconditions to mahi (work).

“In developing the NZSFF roadmap for action it became clear that no single organisation or entity could simply slot this into its remit. This, and the need for coordination and acceleration, provides the backdrop to NZSFF’s key initial priority – the establishment of an independent and funded Centre for Sustainable Finance to oversee the implementation of the roadmap.”

44|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 45 Achieving alignment with banks and insurance The work programme of the CSF will companies to explore their align with the range of government own internal climate-risk climate change and wellbeing objectives. strategies. Simone Robbers, These include He Pou a Rangi – the a reserve bank assistant Climate Change Commission’s recently governor, is a member of the published advice on an emissions budgets NZSFF leadership group. and reduction plan. The biggest issue is not All this builds on the passing of the in framing these objectives BRIDGET COATES ROSS PENNINGTON Climate Change Response (Zero Carbon) but in landing them. NZSFF Amendment Act 2019 supporting New regards the CSF as having a key role in required to report in accordance with the Zealand’s commitment to the Paris coordinating stakeholders whose collective recommendations of the Task Force on Agreement. In the Infrastructure Funding endowments, resources and ideas must Climate-related Financial Disclosures. and Financing Act 2020, the government be brought together to give effect to these Data also inform the taxonomies – working closely with Auckland Council objectives. and standards that underpin sustainable- and the private sector – has delivered a finance products and investments, and are key tool for financing the sustainability Convergence of data, governance, at the heart of the convergence with the transition. disclosure, and accountability roadmap’s initiatives around disclosure and Related policies include the world- Another recent initiative is the national accountability. first wellbeing budget and the related climate change risk assessment (NCCRA), As noted in our previous update, the development of Treasury’s living-standards itself a product of coordination among global financial system is built on models, norms and rules that do not reflect the full cost of business or respond to changing “The global financial system is built on models, norms and societal expectations. A highly evolved rules that do not reflect the full cost of business or respond data infrastructure is key to reversing to changing societal expectations. A highly-evolved data this feedback loop and generating infrastructure is a key to reversing this feedback loop and transformative investment and innovation.

generating transformative investment and innovation.” What next The financial system brings a broad range framework. These principles are given representatives of central government, of actors together, and – using information statutory expression in 2019 amendments local government, iwi and the private – operates to channel capital and services to the Reserve Bank Act, bringing to sector. This gives the first national picture to people, uses and ideas. In doing so, it monetary and prudential policy the goals of the risks we face from climate change. reflects values and mindsets. The mission of promoting wellbeing and prosperity, The NCCRA lays the foundation for of the NZSFF is to help redirect the and contributing to a sustainable and a national adaptation plan that will outline values and mindsets of participants and productive economy. the government’s response, starting with users to one that focuses on inclusiveness The Reserve Bank of New Zealand priority risks that require urgent action to and intergenerational wellbeing, and that Te Pūtea Matua has been active in leading reduce their impacts in the next six years. preserves, enhances and restores the planet. This is the first part of the transformation of mindsets the roadmap “The mission of the NZSFF is to help redirect the values and calls for. Unlocking the ways, data and mindsets of participants and users to one that focuses on technology to deliver capital efficiently inclusiveness and intergenerational wellbeing, and that – with impact – to more sustainable preserves, enhances and restores the planet.” uses and better ideas is the second key transformation. As the opening whakataukī (proverb) the sustainability charge among financial- This aligns with the roadmap’s focus points out, these transformations require sector agencies in the public sector. In on the place of comprehensive and high- a pathway. This is what the roadmap its climate-change strategy, the reserve quality data in driving awareness among delivers. The remaining requirements bank has committed to considering the key stakeholders – including boards, – a workforce and a way – are now the potential implications of climate change public-sector leaders, lenders, and fund responsibility of those who have been for financial stability and to engaging managers – many of whom will soon be passed the baton of ‘NZSFF 2.0’. •

44|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 45 EVENT REPORT

Taking a lead on New Zealand sustainable finance The KangaNews-Westpac New Zealand Sustainable Finance Summit 2020 took place in Auckland late in the year – its very format as an in-person event testimony to New Zealand’s world-leading performance in the COVID-19 pandemic. Market participants came together to talk about a sector, economy and world in a state of high-velocity flux.

DAVID MCLEAN WESTPAC It is clear there will not be a return to business-as-usual practices after the COVID-19 pandemic. Consumer behaviour has changed, flexible working has accelerated and some sectors will face years of uncertainty. Resilience is one of the key lessons we have learnt: now we need to build this into the economy so it can withstand future unforeseen events.

46|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 NGARIMU BLAIR INDEPENDENT DIRECTOR There is a lot of talk about social procurement, which is great. But there LEAH SCALES CHRISTCHURCH CITY HOLDINGS needs to be investment to get Māori, In the midst of disaster we need to make Pasifika and other groups at the margins decisions for the long term. It is very easy to ‘contract ready’ so they can go through react quickly when markets and liquidity are tender processes and set up businesses. challenged, and making decisions is necessary. Data show that when Māori and Pasifika But they need to be ones that will be of benefit people own businesses they pay better in the long term. wages, give better conditions and do more training.

GRANT WEBSTER TOURISM HOLDINGS SIMON MACKENZIE VECTOR Sustainability in tourism is often thought There is no vaccine for climate change. It is of in terms of value over volume. But if we a problem that will only be solved by action. create a system that is community-driven Our ethos is about collaborating with like- and experiences that are supportive of a minded parties and forming relationships, multi-capital approach, with net benefit, it is globally, with people that have strong depth not about value or volume but about people of technology experience. It is important providing benefits to culture, society, the actually to do things rather than just talk environment and the economy. about them.

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JASON BLIGH KĀINGA ORA – HOMES AND COMMUNITIES If we can build good-quality, warm, dry homes, the quality of outcome for our customers will be higher. This has tangible knock-on effects for mental and physical health. The model of simply building houses and being a landlord is gone. A more inclusive way of delivering social outcomes is now in focus.

KATE ARCHER WESTPAC The market has come to the realisation that, to achieve the goals of the Paris Agreement, the sustainable-bond market cannot just focus on green companies becoming a LUKE FORD CHAPMAN TRIPP darker shade of green. We need to get emissions- There has been a flourishing sustainable-finance intensive companies on the market in Europe for 10-12 years. This has been helped journey, too. A lot are willing by a lack of regulatory barriers, with specific rules to be involved and transition only now being introduced – to aid further growth. In finance has emerged as a New Zealand we have had the opposite, the market tool to get them started. has been built up around regulation. This makes for a slower process.

48|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 PETER MENCE ARGOSY PROPERTY About 10 years ago, there was a strategic shift from having to justify why we were building green buildings to having to justify it if we were not. It has therefore been sensible for us to introduce green bonds, giving solid congruity between the way we run the business and how we fund it.

FIONA DODDRELL WESTPAC Momentum for labelled bonds is growing as the market matures. The revolution sweeping the world of finance and investment is the realisation that ESG factors affect the financial performance of companies.

MATT WHINERAY NZ SUPER FUND MICHAEL MOMDJIAN SYDNEY AIRPORT We need to be able to internalise Our sustainability-linked loan and bond externalities such as CO2 emissions. There are market mechanisms for transactions quickly gathered momentum. doing so, such as pricing and property They were conceived in the treasury team, rights, but current efforts are only went through the sustainability team then partial solutions. We need another up to the C-suite and board. Approval way of incorporating and internalising came through quickly as our board values environmental impact – and this is quite leadership and innovation across capital challenging. markets as well as sustainability.

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JOHN RAE INFRASTRUCTURE NEW ZEALAND JOHN DUNCAN INDEPENDENT DIRECTOR We do not have a vision for what a successful We are at a turning point for New Zealand looks like and we do not have sustainability and building sustainable bilateral or multilateral support for outcomes communities, and we need to do that might define success. Infrastructure is something fundamentally different. of no value unless it has some social benefit This involves a proper fiscal response – that is valued by the community. Without rather than further monetary response this vision it is difficult to make a case for – and would ideally involve a large infrastructure development. infrastructure, education and health investment from the Crown.

MURRAY SHERWIN PRODUCTIVITY COMMISSION Housing affordability has been a growing problem in New Zealand for a long time now. The local-central government relationship is nowhere near where it needs to be if we are going to resolve issues like this.

50|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 TANIA TE RANGINGANGANA SIMPSON RESERVE BANK OF NEW ZEALAND We want infrastructure that takes account of the interests of our communities – those who give us our social and environmental license to operate. The process will become faster as we take this into account more, because it will become a natural part of what we do.

DOMINICK STEPHENS WESTPAC From a sustainability perspective it is a mistake to buy into economic nationalism. Countries will be more environmentally sustainable if they produce things in the most efficient place and then use low-carbon transport mechanisms to get them where they are needed.

ROSS PENNINGTON CHAPMAN TRIPP

MALCOLM JOHNS The New Zealand Sustainable Finance CHRISTCHURCH INTERNATIONAL AIRPORT Forum recorded a near consensus of New If we are going to tackle climate change, Zealanders who think our current financial people will not be the solution. We system is neither sustainable nor inclusive. might all like to think that consumers There is a challenge to turn this around and will change their behaviour, but this will transition to economic, environmental and not address climate change because social sustainability. people will not give up wealth. We need

to change the assets in our economies. SUPPORTING SPONSOR:

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STEFFAN BERRIDGE KIWI INVEST LINDA MASTNY IWIINVESTOR PHILIP HOUGHTON-BROWN BT INVESTMENT MANAGEMENT With the pandemic crisis Some iwi trusts are now The price of companies with came even lower interest reporting on the nonfinancial the highest ESG ratings fell by rates, which means the performance of their assets. a lot less than ESG laggards discount factor looks They have developed in Q1 2020. This is just one even further ahead. metrics and goals for their quarter but it is consistent Sustainability is much environment and their people. with longer-term studies. more important if your These may include how many ESG leaders tend to be more discount factor is looking jobs they created, how many profitable with less volatility 20-30 years into the future of their own people have and are better at mitigating where previously it was 10 gone through their training serious downside risk. years. programmes, or the reduction or replacement of chemicals on farms.

TRACEY WALKER WESTPAC New Zealand is moving to mandatory reporting against the TCFD, which means companies will need to disclose what they are doing to manage climate-change risks. Investors are doing this kind of work themselves and it will be interesting to see whether this move can enhance or standardise the analysis investors already do.

52|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 ROB CAMPBELL INDEPENDENT DIRECTOR Shareholder primacy is a fiction – all capitalism is stakeholder capitalism, and it has been for a long time because it cannot be any other way legally or practically. We need to embrace this and shape decision-making accordingly, by establishing ways of managing and directing business that explicitly recognises the fact and not the fiction. This will be the key to sustainable business and to the sustainable finance that supports it.

JOANNA SILVER WESTPAC We believe businesses need to change their mindsets to think long term about what they are building and how. To create a thriving, resilient, net-zero- emissions economy, we need to shift our focus to productive, sustainable and inclusive systems.

JOHANNA KÖB ZURICH INSURANCE

DENISE ODARO INTERNATIONAL FINANCE CORPORATION We need to deal with multiple crises at the The recent updates to the Social Bond same time, and they are not necessarily Principles provide enhanced guidance mutually exclusive. Climate change is and for issuers to access social bonds to remains the biggest long-term challenge and finance COVID-19 response programmes. we still need to act now. The COVID-19 crisis Consequently, this has been a record year might have derailed progress, but it has not. for social-bond issuance volume and diversity It has actually shown us what happens when from the public and private sectors. we are not prepared for a crisis.

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ALISON ANDREW TRANSPOWER SACHA MCMEEKING UNIVERSITY OF CANTERBURY There is a pressing need to keep the The social component of ESG remains decarbonisation of our economy front undercooked in a number of ways. We are and centre in the decisions we make dealing with patterns that have been in today. We need to get off carbon- place for three generations. What we know intensive fossil fuels and into low-cost, about every crisis is that those who are most renewable electricity. We cannot let the exposed will be more affected by the multiple, decisions of today bake in more carbon cumulative impacts. The social issues we emissions and take us further from our face were already complex and they are only net-zero carbon goal. becoming more layered.

SIMONE ROBBERS RESERVE BANK OF NEW ZEALAND There is a lack of good information and quality data for reporting on sustainability outcomes. This is a good place for companies to start – so we can better understand systemic risk and investors can make informed decisions. We want our financial institutions to take a leadership role.

54|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 ANDREW BASHFORD WESTPAC In sustainable finance there is now a lot of talk about opportunities and possibilities, and the way in which companies are now seeing action on climate change and social issues as a source of competitive advantage.

CRAIG WEISE KAREN SILK WESTPAC NEW ZEALAND GREEN INVESTMENT FINANCE The whole financial system needs to change The headline narrative globally has been – not just financial markets. The challenges around the delta of trillions of dollars we are all talking about are the drivers of required to deal with carbon emissions. risk and value, but they are also creators of The numbers represent opportunities. opportunity. Financial decisions that providers We are lucky to have a wide and flexible of capital undertake will go a long way to mandate so we can use our balance resolving challenges – or making them worse. sheet to fund all sorts of solutions.

FRASER WHINERAY FONTERRA CO-OPERATIVE GROUP We now have 34 per cent of farms with environmental plans and aim to have 100 per cent on board by 2025. These help farmers make the best decisions for their operations. All our farmers receive individual carbon and nitrogen statements each year and, from next year, cooperative difference payments will introduce the ‘carrot’ of differential milk prices based on performance against parameters including the environment, and employee and animal welfare.

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Tying it all together – goals and commitments for 2021 and beyond The closing session at the KangaNews Sustainable Debt Summit 2020 brought together bankers who are leading market evolution in Australia and North America. The discussion covered the pace of change, targets for the future and hopes for measurable progress in sustainable finance.

PANELLISTS n Michael Chen Head of Sustainable Finance WESTPAC INSTITUTIONAL BANK n David Jenkins Global Head of Sustainable Finance NATIONAL AUSTRALIA BANK n Lindsay Patrick Head of Sustainable Finance RBC CAPITAL MARKETS n Katharine Tapley Head of Sustainable Finance ANZ n Amy West Global Head of Sustainable Finance and Corporate Transitions TD SECURITIES

MODERATOR n Laurence Davison Head of Content and Editor KANGANEWS

NATIONAL DIRECTIONS Banks are really good at talking to other banks, superannuation funds are really good at talking to other Davison A big talking point at this event superannuation funds and so on. But the ASFI roadmap has been the Australian Sustainable Finance process has given us a platform to look at the issue collectively. Initiative (ASFI)’s roadmap. How will its delivery What will likely change is the power of the collective influence affect Australia’s sustainable debt market? of the financial-services industry as we look to implement and n JENKINS It will raise the level of awareness among issuers and execute the roadmap. investors and, more broadly, accelerate transition. Many of the n CHEN We will hear a lot more about ASFI in the coming building blocks are there but progress has been frustratingly years. We have seen reporting on it already, particularly on the slow. recommendations for TCFD [Task Force on Climate-related We are seeing a lot of action by state governments but Financial Disclosures] reporting by 2023 and the use of science- this is the first time a roadmap has been put together by a based targets. collaborative group. Until now, the focus has been on watching The point here is that it is not just a glossy report with – I trust the roadmap will be the catalyst for quicker action. some nice recommendations: it is a roadmap that will be n TAPLEY I agree. What excites me most is this has become a implemented over the next decade. I am really bullish on platform for the financial-services community to come together what ASFI will achieve. We have heard a lot about the with other essential parts of the sustainability community, like New Zealand process and the EU taxonomy, and this is the academia and regulators, in a way we have not before. Australian version.

“The ASFI roadmap process has given us a platform to look at the issue collectively. This is what will likely change – the power of the collective influence of the financial-services industry as we look to implement and execute the roadmap.”

KATHARINE TAPLEY ANZ

56|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 Many people are looking for a silver bullet, for one there will be more implementation around alignment with recommendation that will change everything. Some also find the Paris Agreement and that NDCs [nationally determined ASFI difficult to grasp, saying it is too ‘woolly’ – covering contributions] will come back means capital will increasingly broad areas such as strategy, disclosure and taxonomy. My flow in a sustainable direction. Most of the large asset managers reflection on this is that if it were easy the whole issue would based in the US are already following best practice. be fixed already. n PATRICK I agree wholeheartedly. Asset managers around The goal of the roadmap is a system-level change. This is the world are aligned but I am not sure issuers are. American why there are 37 recommendations and, in fact, it started out corporates have not accessed the sustainable-finance markets in at more than 100 recommendations. The task at hand is big the same way Europeans have, partly because there has been no but we will have to chip away at these recommendations with national climate agenda in the US. everyone coming together. All companies are going to need a strategy with a 2050 net-zero emissions goal if they operate in the G7 and beyond. Davison What is the perception of what I think we will see many issuers change their capex plans and Australia is doing internationally? We like strategies to align with this longer-term future – and to back to think our market is leading where our this up with what it means for 2030 and 2035. government is lagging – but has this message While we might not see a big response to the change of US spread globally? administration from the investor community, I think we will see n WEST I think the private sector, in Australia and the rest of a change from the issuer community globally. the world, has led on sustainable finance. We have seen the EU come up with a taxonomy and a green-bond standard, but this CAPITAL FLOWS is something the market had already established. I am actually a little worried that legislation could thwart Davison Capital has been readily available market growth. I am a big believer in free markets and the globally for the past decade and there is no private sector leading. From my perspective, this is how it sign of this status quo ending. What will compel has gone in Australia and I hope it continues – despite the more issuers to engage with sustainable regulatory push. finance if they do not have any problems accessing capital otherwise? Davison There is much excitement about n CHEN You are right – markets are very liquid and there is a lot the US coming to the party on climate-change of capital at the moment. But I do not share the same concern. adaptation and mitigation. How hopeful should I can think of a number of deals in 2020 and 2019 where the we be about the US? ESG [environmental, social and governance] piece was tricky, n WEST It is an exciting time in the US. The election on 3 even in unlabelled debt issuance. November was followed the next day, before the results had The issuers were in coal-related sectors and, in the been certified, by the Fed [US Federal Reserve] applying to join transactions I am thinking of, they had to consider alternative the NGFS [Network for Greening the Financial System]. This markets to generate the most efficient pricing. When it comes is the central bank focusing on the development of climate- to roadshows and other discussions with investors, the ESG change response in sustainable markets. piece was front and centre and the scrutiny of ESG continues to To see the Fed formally applying to join the NGFS the day heighten even around unlabelled issuance. after the election made me chuckle because a country has to Questionable transactions will be called out in the market be a Paris Agreement signatory to join. It shows the path down – as we have seen. I believe there are enough checks and which the US is heading, which is one the individual states have balances in the market to ensure there is sufficient scrutiny of taken for some time. ESG performance. In short, despite markets being liquid at the Do I expect net-zero emissions by 2050 to be legislated, moment, I think the attention to ESG matters for investors and as we have seen in other countries? No. But the fact that continues to heighten.

“All companies are going to need a strategy with a 2050 net-zero emissions goal if they operate in the G7 and beyond. I think we will see many issuers change their capex plans and strategies to align with this longer-term future – and to back this up with what it means for 2030 and 2035.”

LINDSAY PATRICK RBC CAPITAL MARKETS

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Over time, as the metrics would have seen a couple of THE SOCIAL DIMENSION become better understood social KPI-linked issuances in The sustainable-finance market is primarily still and reporting about tracking this market. One would have a green-finance market – focused mainly on develops, we will see more been gender equality and in the social space. But at the other one would have environmental projects and outcomes. Social the moment most focus is been modern slavery – they finance is a relatively small segment but many on emissions reduction. were some big themes from market participants have hopes for growth. 2019, and if it were not for We have seen a huge pivot COVID-19 I think we would DAVISON Is there scope for n JENKINS We already see toward social throughout have seen some more deals more issuance of social- it in the sustainability-linked- the course of the COVID-19 constructed around them. linked products outside loan space, where there is pandemic, though. It is the government sector, clear opportunity, alongside certainly not forgotten. COVID-19 brings those issues where there seems to be environmental KPIs, to Frequent issuers are now, right to the forefront, though. If a more natural alignment focus on social metrics – on the whole, looking more you look at loss-of-employment of purpose between indigenous employment, broadly at the sustainability numbers in Australia, women issuer and instrument? health and safety, improving theme – not just green. are far more greatly affected the diversity of workplaces, than men. Meanwhile, the n PATRICK I disagree that education levels, and so on. DAVISON We have not inequality that is being driven social does not have the seen a lot of social-labelled off the back of the pandemic same economic rationale as It is important to find the deal flow in the Australian includes looming issues green does. There are many material risk issues that domestic market nor any around housing access, which instances where the economic are relevant to the specific COVID-19-linked issuance was already an issue globally rationale is just as prevalent, company, and we will first from Australian-based but is now more pertinent if not more so, in the social see this coming through borrowers. Is it right to be than ever. Watch this space space, and certainly it can be from the loan market. focused on green-labelled heading into 2021 and 2022. easier to measure the impact Over time, it will progress issuance because it is the created. For those investors into the sustainability-linked number one priority? n JENKINS As we start to seeking to align their portfolios bond space. But it is true that emerge from the crisis it with a positive-impact there is only a small amount n TAPLEY I think there is is clear that the impact world, there is a compelling of sustainability-linked bonds plenty of scope. If we did not of COVID-19 will not rationale for social issuance. out in the market so far. have COVID-19, I think we go away in a hurry.

n JENKINS I agree that we have seen ESG translate into a real of a specific deal: it is communicating a narrative to the market. premium on a number of recent unlabelled transactions in From the equity side, our analysis suggests there is a valuation Australia. They could have been done here but at a price well premium in the market from being viewed as an ESG darling. beyond what can be achieved offshore. This is a real case of an The correlation between equity and debt markets is strong for ESG risk premium as opposed to a ‘greenium’ or a saving from ESG leaders. being able to price inside a vanilla bond curve. The pool of willing and liquid investors for poor ESG Davison The need to label debt is perhaps performers will diminish over time. It is already happening in not the same if the market is factoring in ESG our market and perhaps with some of the US- and Asian-based to overall credit risk. In the long term, will we accounts too. The wave of implementing ESG screening, on top continue to see green, social and sustainability of regulatory constraints, will really diminish active investors in (GSS) bonds? this space over the longer term. This is no surprise. n TAPLEY There will be an evolution in the long term but we are We are already seeing research from rating agencies that quite far away from it. Picking up on the previous point, you factors in ESG risk. Some issuers will respond and some will are right – there is plenty of capital. But I think it is becoming not, and this will lead to a bifurcation of pricing for similar more discerning. credits. Expect to see more of the same, I would say. For discerning capital to invest it needs to know what n PATRICK It speaks to the fact that there is a strategic rationale it is investing in, and this is the advantage of the labelled beyond a pricing advantage for accessing the labelled or transactions on the investor side. On the issuer side, it is all sustainability debt market across industry sectors. Issuers about connecting funding to sustainability strategy and keeping continue to receive a pricing advantage even in this low-rate, access to pools of liquidity. highly liquid market. We will continue to see labelled issuance for some time yet. But they are also benefiting from other perspectives. A I do not think we have evolved far enough for ESG to be ‘just labelled bond market really is the proof of the pudding in how a thing that everyone does’ on the buy or sell side, or that it issuers are linking their ESG performance and ambitions back has been factored in enough for market participants to make a to corporate strategy. The benefit goes beyond the basis points discerning decision on where they allocate capital.

58|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 “We are already seeing research from rating agencies that factors in ESG risk. Some issuers will respond and some will not, and this will lead to a bifurcation of pricing for similar credits. Expect to see more of the same, I would say.”

DAVID JENKINS NATIONAL AUSTRALIA BANK

We are all in jobs for the time being, in other words! Davison Do panellists believe sustainability- Maybe the next generation of sustainable finance will be more linked products will develop in this space before embedded into the various parts of business units. longer-term evolution to full sustainability integration? PATHWAY SCORING n JENKINS Sustainability-linked opportunities, especially in the climate-transition space, is an obvious evolution. In the Davison If world economies all, or for the most near term, issuers will struggle to bring credible, labelled green part, end up on a regulatory and legislative path instruments that are clearly backing net-zero emissions projects, to net-zero emissions by 2050 and perhaps or close to it, in all cases. 2040, do we need to score transition within this Hard-to-abate sectors will still have a need for sustainability framework? In other words, should the market funding and I think sustainability-linked products make perfect expect issuers to meet what their policymakers sense here, especially if issuers have a clear and considered and regulators are demanding as part of the strategy that is Paris-aligned. bigger picture? It should be a perfect opportunity to match strategy n WEST Even before we went down this path of legislating net- and funding. Alignment of treasury teams and the offices of zero emissions, the requirement for companies’ sustainability the CFO, CEO and chief sustainability officer is becoming strategies to be aligned with market expectations was already increasingly common. As this continues to happen at pace, in place. expect to see more products in this field. A company with no strategy, targets or KPIs coming to n TAPLEY We want as many players in this market as possible. market with a transaction is a surprise nowadays. I do not know It is a big task to get to net-zero emissions and it is a big task to how well that would go in today’s world. A huge portion of fulfil the UN Sustainable Development Goals. external reviews talk about the company at large. I agree that, in The more instruments we have, the more opportunity there an optimal world, labelled issuance would fall by the wayside. is for different sectors of the market to play into discerning But, as Katharine Tapley says, I do not think this will happen capital. This is what transition and sustainability-linked any time soon. instruments do. It is really important that we promote breadth I also think we need to own what net-zero emissions means. of instruments, on both the buy and sell sides. It does not mean that every single facet of the economy is delivering net-zero emissions. Canada and Australia are both Davison Does this play to the demand piece heavily resource-dependent economies. as much as to the supply side? A comment at On the other hand, environmental transition affects every another event we ran suggested that labelled sector of the economy and we cannot just pick on our carbon- use-of-proceeds bonds might be suitable for, intensive industries and tell them they have to figure it out. for example, retail investors who just want Every sector of the economy must do better. green assets, whereas transition finance and Microsoft is removing historic carbon – this is phenomenal. sustainability-linked products are perhaps a It has laid down the gauntlet for technology companies. Maybe place for the more sophisticated institutional every sector cannot get to net-zero emissions by 2050, but investors. perhaps some sectors improve dramatically and others do even n TAPLEY Possibly. I do not necessarily agree that retail investors better. I think there will be across-the-board improvement but cannot understand a sustainability-linked structure – it is pretty there will still be room for sustainable debt. straightforward. In fact, it is probably easier to understand Everyone is talking about sustainability-linked debt. This than worrying about whether proceeds are going exactly to the is somewhat ironic given there have probably been fewer than specified green assets. But yes, investor demand from retail right a dozen transactions at this point, but it is clear there will be a through to institutional is a big factor. role for it to play. The focus will be on how to do it credibly in n CHEN On the flip side, I think institutional investors still have any market for any issuer. great interest in labelled GSS bonds. Day by day, we are seeing

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“Day by day, we are seeing more asset owners come out with net-zero emissions pledges. Translating this through the system, asset managers will have more mandates investing in green and dark green – and this cuts across all investor types.”

MICHAEL CHEN WESTPAC INSTITUTIONAL BANK

more asset owners come out with net-zero emissions pledges. It is incumbent on us to push our borrowers toward the Translating this through the system, asset managers will have most robust structure they can put in the marketplace and more mandates to invest in green and dark green – and this cuts not to be afraid to challenge borrowers during the process of across all investor types. structuring. n WEST An interesting debate is less about the end investor and It becomes tricky, as I have observed in this market, when more about whether we think sustainability-linked bonds will we may be working with a European or Asian arranger and kill transition finance because it is so hard to define. In a lot of we all have slightly different approaches. But I think this is a instances, our clients in hard-to-abate sectors are saying they manageable risk. will go down the sustainability-linked route. n JENKINS The ‘ticket to play’ is getting higher every time. n JENKINS There will always be a subset of the investor universe Market participants expect more, not less. The days of issuing that wants reporting on specific impacts, and needs to be able to a green bond because there is a funding saving to be had but point to projects and quantify things in easily understood terms never returning to the GSS [green, social and sustainability] for their end investors. bond market – a hit-and-run mission – are long gone. Investors If we consider a transition bond to be a use-of-proceeds expect more. They expect issuers to be committed. There is a instrument, this is much easier to articulate than a corporate- clear focus on the ESG strategy of the issuer – it is not purely on wide instrument where the company is tracking toward a the use of proceeds, irrespective of the nature of the business. couple of broad metrics, particularly if those metrics do not n PATRICK Investors are doing their own due diligence even align with mandate requirements. for straightforward green-labelled issuance. I agree that it is n PATRICK I agree – there is room for both. Investors, whether incumbent upon us as underwriters and arrangers to hold our they are retail or institutional, want to measure impact. This is clients to the highest possible standard so institutional investors much easier to do with a use-of-proceeds bond. can do their due diligence. Equally, transition pathways vary for economies around the But there is no sign that the innovations in the market world. Countries are at different paces with various technologies now, and those to come, will lead to further concerns. and different investments. If countries are keen to accelerate The investors we speak with want to continue to see more diverse capabilities, transition-labelled issuance is a great way to innovation, more participants, more sectors and more do this. geographies access this market. n TAPLEY As well as pushing the borrower community, we also A WIDER MARKET need to push the investor community really to express and be clear, particularly when it comes to disclosure around impact Davison There seems to be consensus that reporting, what is it that they really want measured, what is having all the product options available so the realistic to be provided and whether they are actually going to buy and sell sides can choose what is right use it. For instance, are investors going to ask for reporting if for them is the way to go. But there is also a they realise they have not got it on an anniversary date? minority view that having a myriad of standards We are working in an environment where there are no and trying to run all of these products hard consequences for default. We are starting to see review simultaneously may end up confusing the events and information undertakings in the loan market. market or result in greenwashing in a way that ANZ is pushing down this line, because we need to have would not occur if we kept things simple. How some standards and consequences around this. But it is also do we deal with this view? incumbent on the buy side actively to participate once the deals n TAPLEY This is a risk, but it is incumbent upon arrangers are done, to help the market improve. like us to ensure that we are using, at a base-level, ICMA n WEST This is such an important point and one that we need [International Capital Market Association] principles where we to be talking about more and more. The idea of it being a can and encouraging the market to develop from these to bring collaborative effort is something we should be talking about robust structures to market. more openly as a global sustainable-finance community.

60|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 “Environmental transition affects every sector of the economy and we cannot just pick on our carbon-intensive industries and tell them they have to figure it out. Every sector of the economy must do better.”

AMY WEST TD SECURITIES

Because we do not have an agreed upon standard that it is frustrating to think, ‘would that project not have been methodology – although it is clear we are seeing green shoots done anyway?’ emerging in this area – what we expect to see is consistency and But the truth is, if we can incentivise the right types of transparency. decision-making from the corporate C-suite and strategy, and Sometimes companies go a year without releasing an ESG by doing so accelerate or get more capital to fund projects, report. This would never happen with an annual report or this is a win. This is what sustainable finance is all about. financial analysis. Investors and asset owners are the only ones How do we actually move the needle? We do so by financing who can drive this change. sustainability issues. We are only looking for three audited and published major n CHEN I agree. Additionality is the entire point of sustainable reports each year from a company – an annual report, ESG finance. With sustainability-linked structures, we are achieving report and maybe TCFD at some point. This is not too high a additionality in so far as the targets are ambitious. bar to meet nor too burdensome to encompass. I think this is It is an old debate on use-of-proceeds bonds. Investors absolutely something investors should be asking for. increasingly expect impact reporting on how those activities deliver additionality. And, of course, it is not just about the Audience question We often hear about the projects and activities. It is also about the issuers, and how they massive funding need for sustainable assets are addressing the issues of climate change and ESG beyond the around the world. Could the development assets being financed. of these assets be driven by banks offering preferable terms for the finance they provide? Davison This conference is taking place at Also, do panellists actively talk with their clients the end of an unprecedented year. What are about the risks of inaction? today’s panellists most excited about in the n CHEN The two questions touch on the same point, which sustainable-finance market moving into 2021? is the overall risk profile of the underlying borrower. Various n TAPLEY I am really excited about the emergence of more jurisdictions are talking about changing capital weightings and instruments in the marketplace and the engagement from the the like. buy side around transition and sustainability-linked products. Even if we are not there yet, it is something we are looking This is really helping to broaden the use of discerning capital in at internally because if we have KPIs set on material ESG issues the marketplace. it follows that, as David Jenkins mentioned earlier, it improves n PATRICK I am excited about more and more issuers coming the credit profile of the borrower. to market for the first time, across different sectors and One could argue lower risk means preferential rates and geographies. pricing, and this touches on the flip side. We talk to our n JENKINS I am excited about the mainstreaming effect of customers on the risks of inaction. I mentioned earlier an sustainable finance across large organisations, like banks, to example of the pricing of bond and loan transactions where the investors and issuers and global capital flows. It is no longer customers are emissions-intensive, and what this would mean pockets of capital that is doing it, it is a groundswell. We are for bank as well as investor appetite. heading in the right direction, but we can always be much quicker. Audience question How important is n WEST The evolving role of corporations, and what is expected additionality to investors, given most companies by society, is the most exciting thing for me. We have seen a are already making ESG commitments and lot of this play out during COVID-19 – holding companies to changes? account for their role in society. n WEST Additionality is a reasonable question – it is something n CHEN I would add definitions and taxonomies. I am really we need to focus on. But more and more I personally feel, based excited about tightening definitions around green and social. on what I hear from clients, that we want to be focusing on the This will really help with some of the mainstreaming we are acceleration of capital to the right projects. I appreciate the fact talking about. •

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Sustainable finance in Australia: the bigger picture The KangaNews Sustainable Debt Summit 2020 migrated to an online format but this did not stop it attracting the widest range of speaker perspectives in its history. Delegates heard perspectives from across financial markets and also the whole economy, covering the urgent need for capital flows to shift to support a critical transition.

The banks absolutely have a huge responsibility. We cannot support a low- emission future but be funding the very technologies causing emissions. Banks need to focus on investments that are reducing emissions and they need to be transitioning away from fossil-fuel investments.

ZALI STEGGALL MP FEDERAL MEMBER FOR WARRINGAH The Climate Change (National Framework for Adaption and Mitigation) Bill 2020 will create a framework for businesses and investors to have policy certainty around climate change. It is legislation to lock net- zero emissions by 2050 into law and it will have very specific mechanisms to ensure accountability and transparency.

62|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 SOPHIE DEJONCKHEERE TD SECURITIES Having options gives issuers the flexibility to communicate current and forward-looking sustainability strategies. GSS bonds and loans let them highlight existing sustainability initiatives across a variety of project categories while sustainability-linked products let them demonstrate a forward-looking commitment to improvement on key sustainability metrics.

YO TAKATSUKI AXA INVESTMENT MANAGERS DENISE ODARO INTERNATIONAL FINANCE CORPORATION With the Climate Transition Finance Handbook When we consider what sustainability we are offering issuers in high-emitting actually means, all it is asking is that sectors the building blocks for accessing business decisions are made not to the transition finance in a credible and detriment of others. For far too long, transparent way. To have a chance of meeting commercial and economic models the goals of the Paris Agreement, we have to have prioritised financial return above include these issuers and send a signal to the everything else. We need to revise the market that, done the right way, transition is weight that should be given to natural not the dirty sibling of green. and environmental capital.

Before the update to the Social Bond

Principles in 2020, many interpreted that the SUPPORTING SPONSORS: use of proceeds from a social bond could only go to a select population. The updates emphasise that there are circumstances where beneficiaries could be the general populace. Our argument has always been that sometimes you need to focus on the general population for a target population to benefit from the social good.

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NATHAN FABIAN PRINCIPLES FOR RESPONSIBLE INVESTMENT Harmonisation globally is possible, even if countries have different views on what they are trying to achieve with their economies. We need clear environmental goals, standard industry-classification systems, environmental-performance metrics and criteria that align with environmental goals. If every country had a framework with these four elements, we could harmonise – even if there are differences.

EILA KREIVI EUROPEAN INVESTMENT BANK Transition bonds are not really needed as a separate asset class. If transitionary activities are conducted in a manner that is ambitious enough, it is green enough. It does not matter if issuers select use-of-proceeds or KPI-linked bonds, as they are both suitable for transition financing. It is not about the instrument choice, it is about the activities.

MIKE WILKINS S&P GLOBAL RATINGS The use-of-proceeds market will continue to grow – it is well-established thanks to the GBP SBP. However, there is a growing group of investors that wants to know not just the allocation of proceeds to green or social projects but the sustainability credentials of the bond issuer. This is where the growth of sustainability scoring has come in.

64|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 EUGENE WONG SUSTAINABLE FINANCE INSTITUTE ASIA SIMONE UTERMARCK INTERNATIONAL CAPITAL MARKET ASSOCIATION The cohesive efforts of the ASEAN Capital Markets Forum and the ASEAN working In recent years we have seen a lot of focus committee on capital-market development on renewable energy, such as wind and will catalyse the ecosystem by delivering solar, which are often used as eligible a holistic approach that encompasses all projects for use-of-proceeds bonds. But it is stakeholders. The official sector is bringing becoming increasingly clear that to achieve the market along with it in building demand the ambitions of the Paris Agreement we also and supply, and we will see the financial need businesses in high-carbon sectors to sector and the real economy connected and find a way to make the transition to net-zero mutually reinforcing each other. emissions.

SIMON O’CONNOR CONNIE SOKARIS NATIONAL AUSTRALIA BANK RESPONSIBLE INVESTMENT ASSOCIATION AUSTRALASIA Financial markets have not waited and neither There has never previously been a have our customers. We are increasingly coordinated, cross-sector plan to seeing capital flow to green and clean assets, set out the elements we need to and investors are increasing their activism unlock the potential of the financial around where they will and will not invest. system to deliver against national and The ASFI roadmap will help, but Australia international targets and objectives. The has already been innovative – particularly in ASFI roadmap does this. capital markets.

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PHIL VERNON BEYOND ZERO EMISSIONS The past year has been extraordinary for the commitments to net-zero emissions by corporates and superannuation funds. Having said this, to get to whole-of-system implementation we really need policy. We cannot forget this, and we cannot pretend it is not a requirement.

ROSS GARNAUT UNIVERSITY OF MELBOURNE It is more important to show that we are on a path to reach net-zero emissions by 2050 than to have all the debate about getting to the more ambitious target of 2040. Certainly, 2040 will be important to get anywhere close to the 1.5 degree objective – but it will be much easier to accelerate to 2040 if we are on the path to net-zero already. A decade ago one could see gas having a substantial role in the transition, but we have left it a bit late now. There is some role for gas but it will be a shrinking one going forward. DIDIER VAN NOT WESTPAC INSTITUTIONAL BANK The question is not what we want to achieve, it is how we want to go about it. To get scale, we need the right framework and foundation – and ASFI’s roadmap is a key plank to deliver this. As a banker, it is really important to align lending to a taxonomy that supports the Paris Agreement.

CHRISTINA TONKIN ANZ ESG matters have become the central pillar of discussion with corporates and investors. As a financial institution, the ability to connect our corporate and investor customers together around opportunities is accelerating at pace.

66|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 LOUISE MCCOACH GILBERT + TOBIN Notwithstanding the overall market sentiment that it is a good starting point, there are gaps in the federal government’s technology- investment roadmap. The market is looking for guidance on how it turns the roadmap into actions and pathways.

GEORGE BISHAY PENDAL We started an impact-reporting process 18 months ago and we found that standardisation of impact reporting across issuers and securities is not great. We have spent a lot of time with issuers to ensure their information is standardised – and this has been quite positive for our clients. SEAN KIDNEY CLIMATE BONDS INITIATIVE As a consequence of the COVID-19-related IAN LEARMONTH CLEAN ENERGY FINANCE CORPORATION recession, there is growing awareness in many sectors – notably in Europe and China The grid operators have identified – about the extent to which the recovery has renewable-energy zones that offer the to be ‘build back better’ in nature. We need best renewable-energy resources as well to use this inflection point to address the as the best access to the grid. REZs require critical problems facing our society, notably substantial investment in transmission and climate change. we are using our capital to support them so we can strategically invest in renewable- energy generation in the right places.

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AKAASH SACHDEVA HESTA HEIKE REICHELT WORLD BANK Data harmonisation and technology Originally, thinking around transition risk will be helpful in assessing ESG risks focused on the expectation of a regulatory whether or not there is a unified impost. But as the price of technology pricing model – investors are already changes and market demand moves, this factoring this into their assessment. As a transition risk is no longer regulatory-driven. development organisation, World Bank Modelling transition risk by assuming a recognises the value of having more carbon price does not necessarily work funds channelled toward sustainable anymore. activities. Increasing transparency will help investors direct more of their investments toward this.

KATE TURNER FIRST SENTIER INVESTORS It is exciting to see portfolio-wide net-zero-emission commitments by superannuation funds – they have stepped up the conversation on climate-change opportunities and risks to a new level. We have had strong messaging from our European clients on this for some time, so it is great to see it in Australia too.

68|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 DAVID ATKIN AUSTRALIAN SUSTAINABLE FINANCE INITIATIVE The whole point of ASFI is that it will change the way we think about how we deploy capital in the economy, to move away from a short-term focus and instead deal with long-term value creation, and to set up our community to cope with a range of externalities that are material now and will be increasingly material in the future.

BRENDAN BAKER MSCI Twenty years ago, carbon footprints were the big thing. Five years ago, stranded assets were being talked about all the time. Two years ago, climate scenario analysis started cropping up. Suddenly in 2020 everyone is talking about net zero. It is important to understand what this means in the real world, and also what it means for asset owners.

JACKI JOHNSON AUSTRALIAN SUSTAINABLE FINANCE INITIATIVE One of the call outs in our recommendations is that the vulnerability testing conducted by the prudential regulator should be broadened across the financial sector, not just the larger institutions – because we need a stable system for the future. If a company’s actions and reporting do not align, it can very quickly lose the trust of its employees, resulting in them either reducing discretionary effort or leaving the organisation. We talk about managing stakeholders, but in fact stakeholders will manage us – as we are seeing with customers, employees and investors taking action.

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Beyond labels, corporate engagement marches on If Australian corporate engagement with sustainable finance were measured by labelled green, social and sustainability bond issuance, progress remained underwhelming in 2020. However, issuers, investors and other market participants at the KangaNews Sustainable Debt Summit 2020 spoke of deepening commitments to environmental, social and governance risk mitigation.

BY MATT ZAUNMAYR

n 2020, Australian dollar green, social and sustainability of the apparent interest may never fully flow into labelled debt (GSS) bond issuance lagged the record volume priced in products but those on the market front line are confident 2019. Issuance was dominated by repeat semi-government progress is being made. and supranational, sovereign and agency issuers, as well as a Ilarge transaction from ANZ Banking Group (see chart 1). COVID-19 EFFECT Except for the sovereign, which is not currently actively he COVID-19 pandemic largely defined capital-markets considering labelled issuance despite a much higher funding activity in 2020, including in sustainable finance. For task, corporate borrowers remain the missing link in a Tinstance, the explosion of social-bond issuance – long fully deployed local GSS bond market. Only one local the least developed part of the GSS landscape – has been corporate – Lendlease – issued labelled debt in the domestic widely touted in global markets. By the end of 2020, green and market during 2020. One other, Sydney Airport, issued a sustainability bond issuance had also rebounded to make total sustainability-linked tranche as part of a US private placement global GSS issuance volume in 2020 a record. (USPP) deal in February. This is despite some fears at the beginning of the crisis that The scale and nature of Australia’s corporate landscape may sustainable finance would be parked while issuers dealt with the be a limiting factor for engagement with labelled issuance. immediate issues confronting them, said Katharine Tapley, head The property sector has been the primary source of corporate of sustainable finance at ANZ in Sydney, during the conference. GSS supply, though environmental, social and governance In Australia, the limited issuance of corporate GSS bonds (ESG) commitments and interest in use-of-proceeds bonds during 2020 suggests it was hard to maintain momentum vary from issuer to issuer. Plenty of REIT issuers, for instance, during the pandemic. Anne-Marie Neagle, partner at King & still doubt the value of labelled funding on the basis that their Wood Mallesons in Melbourne, said at the conference that legal sustainability commitments should be self-evident. enquiries typically form a reaction loop during a crisis. At the KangaNews Sustainable Debt Summit on 24 and 25 “Institutional bandwidth needs to be triaged in a time November, the topic of corporate engagement was prominent of crisis,” she explained. “Urgent concerns around liquidity among active issuers and those that are not. The manifestation and shoring up funding against potential triggers can take

“Anecdotally, where GSS finance was on an issuer’s funding radar, maintaining momentum at least at the height of the crisis to an extent depended on the issuer’s maturity and experience in GSS products.”

ANNE MARIE NEAGLE KING & WOOD MALLESONS

70|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 centre stage during a crisis’s early stages. Anecdotally, where AUSTRALIAN DOLLAR GSS ISSUANCE BY SECTOR GSS finance was on an issuer’s funding radar, maintaining momentum at least at the height of the crisis to an extent SSA Semi-government depended on the issuer’s maturity and experience in GSS Financial insitution Corporate products.” 12,000 This could account for the high proportion of the 10,000 Australian market’s 2020 GSS volume that came from repeat 1,450 issuers. Lendlease’s green-bond deal, despite being a debut 8,000 1,155 and the programme being developed during 2020, was the 500 6,000 3,680 2,050 culmination of more than a decade of focus on sustainability in 250 125 4,000 overall corporate strategy, according to Michael Larkin, group VOLUME (A$M) 1,800 450 3,362 treasurer at Lendlease in Sydney. 1,150 2,000 3,925 However, the common message throughout the KangaNews 750 2,755 600 500 975 1,170 Sustainable Debt Summit was that labelled deal flow alone is 0 600 300 55 too narrow a lens through which to judge corporate Australia’s 2015 2016 2017 2018 2019 2020 engagement with the sustainable-debt market. SOURCE: KANGANEWS 21 JANUARY 2021 Marayka Ward, senior credit and ESG manager at QIC in Brisbane, said a lot of time at the height of the crisis was alike when creating and assessing corporate strategy. At the spent with companies in debt-investor updates – in which the KangaNews conference, David Jenkins, global head of sustainable social component was more prominent than ever, despite the finance at National Australia Bank in Sydney, said capital markets near-term uncertainty. This perhaps reflects the fact that while will play a critical role in facilitating transition by providing there has not been issuance of social bonds from Australian finance to issuers looking to adapt their business models and by corporates, the COVID-19 crisis has nonetheless placed social allowing investors to deploy capital in line with ESG goals. concerns more prominently on their radars. “The concept of climate transition does not yet have Investors in Australia frequently say issuers’ overall strategies a uniform, globally recognised definition. But it is rapidly are much more important than individually labelled bond deals. becoming a key focus for companies and countries, In part this is due to the slow growth of mandated, dark-green including in Australia – especially those that are heavy ESG debt investment funds. Chris Newton, executive director, emitters or in hard-to-abate sectors,” Jenkins added. responsible investments at IFM Investors in Melbourne, Australian issuers and investors across sectors are engaging said at the KangaNews event that 80 per cent of Australian with net-zero emissions targets or transition more broadly. superannuation remains in balanced funds. Larkin revealed Lendlease is targeting net-zero emissions by However, superannuation funds themselves are increasingly 2025 and absolute zero by 2040. adopting net-zero emissions by 2050 targets and applying Michael Bradburn, Sydney-based chief financial officer them to investment portfolios. This does not necessarily mean at Ausgrid, which manages electricity distribution for Sydney demand for a deluge of corporate labelled sustainable-finance and other parts of New South Wales, outlined measures the transactions. It will, investors say, entail scrutiny around company is taking to encourage more of its customers to use issuer strategies and therefore corporate engagement with renewable-energy providers. sustainability is likely to come further under the microscope. He added: “Ausgrid is actively adapting to the future of energy use and production, which is likely to be more reliant on TRANSITION FOCUS household production and storage via solar panels and batteries ocial factors may have come into view more prominently with the ability to sell power that is not used back to the grid.” in 2020 but the key long-term risk to corporate viability is Funding credible business transition has become a Sstill climate change. As a result, transition to a low- or zero- prominent topic among sustainability practitioners in capital carbon future is increasingly a focal point for issuers and investors markets, based on a realisation that goals and targets for climate-

“There are broad market trends focusing on transition-risk implications in financial markets. These may be somewhat hidden at the moment but they are accelerating to a point where the mainstreaming of transition risk into all financial decisions is not that far away.”

BRIAN CAHILL MOODY’S INVESTORS SERVICE

71 EVENT REPORT

change mitigation cannot be met without involving the whole Cahill also pointed to the role being played by the Network corporate-borrower landscape – not just those that can readily for Greening the Financial System, a group of central banks find assets suitable for use-of-proceeds instruments. and prudential supervisors looking at how properly to manage Sydney Airport is not a large carbon emitter itself but it is transition risk in the context of their own prudential oversight inextricably linked with the hard-to-abate aviation sector. It responsibilities. continues to be the Australian corporate leader in issuance of Newton agreed that global policy and regulatory settings debt linked to transition measures. Sydney Airport executed are headed in one direction, which could make Australia’s the first-ever Australian syndicated sustainability-linked loan in increasingly isolated position of not committing to a net-zero 2019 and followed this up with a sustainability-linked USPP carbon by 2050 target a problem for investment. “Policy and bond in early 2020. regulation will bring more certainty and better outcomes,” Michael Momdjian, general manager, treasury, tax and Newton said. insurance at Sydney Airport, told the virtual audience in While federal-government signals on sustainable finance November that one of its primary goals in both transactions may remain in relatively short supply for the foreseeable future, was to ensure they were as dark green as possible. “Objectivity Neagle said Australia’s regulatory bodies are beginning to make and transparency were front of mind for us when partnering more noise in the area. with our banks and bond investors. This is why we tied our She pointed to the Reserve Bank of Australia’s messaging sustainability performance to an externally derived rating with that climate change exposes financial institutions and the ambitious stretch targets,” Momdjian explained. financial system to considerable risk, as well as the reserve bank’s endorsement of a warning that, unless significantly more SIGNALS AND NOISE ambitious action is taken, the impact of climate change could eaching net-zero carbon emissions in Australia will take cause global GDP to fall by 25 per cent by 2100. a committed effort from much of the corporate sector. The Australian Prudential Regulation Authority has also RUnless there is a radical change in federal government been vocal in its view that transition risk is a prudential risk. approach, it will need to achieve this without the policy signals In 2020 it announced that it would produce a cross-industry that corporates in other jurisdictions are receiving. prudential-practice guide on climate-change financial risk, Industry groups are attempting to build coalitions large which would set out its views on best practice, governance, risk enough to step in and provide such signals. The Australian metrics and disclosure. Sustainable Finance Initiative (ASFI) released its roadmap for ANZ’s Tapley said it is critical for companies to be aware of sustainable finance in late November 2020 (see p20). Among the developing regulatory environment. She added: “While the its recommendations are for Australia’s largest companies all to prudential regulator only directly regulates the banks, this has be reporting against the Task Force on Climate-related Financial a flow-on effect for clients in where capital can be deployed.” Disclosures (TCFD) by 2025. This, Tapley said, suggests GSS bond issuance may be a good Unlike in other countries – including New Zealand – there place for companies to start gaining an advantage on reporting is no current drive from regulators to make TCFD reporting and mitigating against some of the disclosure risk that could be mandatory. However, it could become effectively mandatory forthcoming. if the trajectory of investors globally to require this kind of disclosure continues its upward trend. THE ROAD AHEAD Brian Cahill, managing director, global environmental, ustralian corporates are operating in an environment social and governance at Moody’s Investors Service in Sydney, where federal policy settings are divergent from said at the KangaNews conference: “There are broad market Ainternational peers and the increasing weight of investor trends focusing on transition-risk implications in financial preferences. This potentially creates some friction, if not for the markets. These may be somewhat hidden at the moment but scale of corporate engagement then at least for its speed. they are accelerating to a point where the mainstreaming of At the same time, there is no shortage of sustainability transition risk into all financial decisions is not that far away.” leaders in the Australian corporate landscape – including some He continued: “There is recognition of a significant issue that issue labelled debt instruments and others that do not. that needs to be understood, and this is beginning to underpin a More companies than ever are incorporating a transition to a lot of investment. Relatively soon, this concept will affect access low-carbon economy to their short-, medium- and long-term to and cost of capital in a far broader way than just transition- strategies. finance instruments.” For some this may be investor-driven, but for others it is Cahill pointed to a growing array of investor alliances, just prudent business strategy. Bradburn said at the KangaNews such as the Principles for Responsible Investment and Climate conference: “We are not doing this because our investors and Action 100+, as examples of the coming degree to which capital financiers want it, we are doing it because our customers want could be mobilised. These have a focus on implementing Paris it and it is good business. Letting investors know what we are Agreement goals into lending decisions. doing, as opposed to being reactive, is also important.” •

72|KANGANEWS INVESTING WITH IMPACT YEARBOOK FEB/MAR 2021 Use KangaNews to facilitate your online investor updates With in-person roadshows limited for the foreseeable future, borrowers are increasingly using the web for investor updates.

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