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INSIGHT


Sustainability: from buzzword to billions

Tags

  • Asia Pacific
  • Australia
  • Economy
  • Resources, energy and infrastructure
  • Sustainability
  • Trade

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The value of green and social bonds keeps doubling every year. Expect further growth.

 

 

Merely a buzzword just a decade ago, sustainable investing has fast emerged as a multi-billion dollar growth sector as financiers commit real dollars to organisations that can demonstrate their commitment to sound environmental, social and governance (ESG) principles.

The tangible result is the burgeoning market for so-called green or ‘social’ bonds, as well as bespoke loans that offer discounts to companies that can show a measured improvement in areas such as carbon emission reduction, water usage and labour practices.

On ANZ‘s estimates, $US42 billion ($A58 billion) of green and social bonds were issued globally in 2015, doubling to $US87 billion in 2016 and then doubling again to $US160 billion in 2017.

The year 2018 saw a hiatus with $A168 billion in paper issued but in the context of the overall bond market declining 10 to 15 per cent.

“We are forecasting more than $US200bn [in 2019],” ANZ Head of Capital Markets Paul White says.

The growth in green bonds — typically used for renewable energy projects, green buildings or low-carbon transport — may also be matched by the emergence of green loans and ‘sustainability linked’ loans, where borrowers are incentivised to improve their sustainability performance.

“The green-bond evolution is spilling over to loan products and we expect this trend to emerge strongly in the Australian market during 2019,” ANZ Head of Sustainable Finance Katharine Tapley says.

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“The green bond evolution is spilling over to loan products.” 
 – KATHARINE TAPLEY, Head of Sustainable Finance, ANZ

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Defined

A key difference between labelled green bonds and loans and sustainability linked loans is the proceeds of the former are used for specifically defined activities, while the sustainability-linked loans can be used for general corporate purposes.

In these cases the lender is rewarded for improved sustainability performance (as measured by third-party metrics) with keener pricing.

Sustainable finance is in its infancy in Australia but growing rapidly. As of September 2018 $A8.3billion in green bonds had been issued, driven by banks and sub-sovereign issuers.

Australia was the second-largest green-bond market in the Asia Pacific in the first half of calendar 2018 and twelfth globally.

While debate continues over how best to address climate change, companies globally have wasted no time recognising the risks and transitioning to lower carbon and more sustainable operations.

The corporate interest reflects the growing societal pressure on big companies to demonstrate their ‘social licence’ to operate.

“There’s also an economic reality as they realise that investing in measures such as energy efficiency makes economic sense,” Tapley says.

In the meantime institutional investors face pressure from their own clients to ensure their investee companies improve their sustainability practices.

Reflecting their intent, institutional investors accounting for $US63 trillion of funds under management globally have signed up to the United Nations’ Principles for Responsible Investment charter.

“Another driver of the last two to three years has been the interest the resilience of the finance sector, with a focus to date not only on environmental issues like climate risk but also social issues such as gender equality and human rights,” Tapley says.

Disclosure

For example, the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures requires banks to disclose how they are supporting their clients in moving to a low-carbon world, as well as how they are handling the risks around climate change.

“The banks themselves are under pressure over the potential risks that sit in their balance sheet and are being asked by investors for greater disclosure,” Tapley says.

“There is also pressure from the community for banks to disclose not only how they are managing the risks associated with climate change, but also the opportunities.”

The tangible result is banks globally have funding targets for low-carbon and sustainable investments, ranging from the tens of billions to hundreds of billions.

ANZ has a target of extending $A15 billion of low-carbon funding and advisory support by 2020.

“We are quite well progressed to meeting that target with more than $11bn of customer transactions completed as of September 2018,” Tapley says.

In the first loan of its type in Australia, Adelaide Airport in December took out a $A50 million seven-year sustainability linked loan with ANZ.

As the name implies, the loan offers price incentives for performance in a number of areas across environmental, social and governance factors.

In 2019 the bank followed up with a $A170 million green loan to the property trust Investa. One requirement is that new buildings must be within the leading 15 per cent for carbon intensity in the relevant city.

Given the sector’s still nascent state, one emerging issue is how sustainability-friendly activities should be defined and measured.

Recognising the need for tighter definitions as the sector grows, the ASEAN Capital Markets Forum recently introduced the Green Bond Standards, which outline standardised rules for its ten member countries (these include Thailand, Malaysia and the Philippines).

The measure is intended to enhance the transparency of green bond issuers, reduce due diligence costs and guide investors on how their funds are actually being used.

One requirement is that the issuer has a geographic or economic connection to the region. To avoid the risk of ‘greenwashing’, certain carbon-intensive projects are excluded.

Issuers are encouraged to report more frequently than annually. And while external review remains voluntary, any such reviewer must have suitable expertise.

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