III. INVESTOR-DRIVEN IMPACT
The sustainable bond market is evolving in interesting ways. Take the sustainability-linked financing market in Europe, for instance, where the loan margin or bond coupon is linked to specific sustainability-related key performance indicators (KPIs), and the proceeds of which can be used for general corporate purposes rather than for specific green or social asset categories.
In September 2019, ENEL, an Italian energy company, raised $US1.5 billion through a five-year sustainability linked-bond, whose coupon is designed to increase by 25 basis points if ENEL does not achieve a percentage of installed renewable generation capacity equal to or greater than 55 per cent of total consolidated installed capacity by December 2021. The figure stood at 45.9 per cent as of June 2019.
The bond was reported to have been priced 20 basis points tighter than an issuance without a sustainability feature. Such measures help sustainability-linked bonds to build and strengthen the market for outcome-focused instruments.
The sustainability-linked bond market is set to draw reference from the recent rapid bloom of innovative structures in the sustainability linked loan market.
“From an issuer’s perspective, the observable benefits of bonds, based on “use-of-proceeds”, have primarily derived from increased diversification and primary market liquidity which in turn may result in an economic upside. Sustainability-linked bonds offer a new economic proposition linking to sustainability outcomes that are more direct for both issuers and investors,” said KJ Kim, Head of Asia DCM.
This is a sign of how the green and sustainability bond market is pushing into new areas. It also shows how investor interest can help drive banks into a greater stewardship role.
Investors are increasingly keen to engage on sustainability issues, especially in Europe, where there is detailed knowledge of this asset class.
They are also more sophisticated and rigorous in how they evaluate the sustainability of issuances and of the issuer. These investors are exercising much greater scrutiny and paying greater attention to “use-of-proceeds” and traceability, with detailed questions about why an issuer is raising a sustainability bond and what the issuer’s strategy is.
Post-issuance reporting is now compulsory, with more green investors asking how the proceeds are used, while the progress and impact of the projects require external verification.
This has prompted organisations, as the EIU report notes, to create dashboards to help track and make public a company’s record in meeting its sustainability targets and objectives.
INVESTORS SEEKING TO SUPPORT BUSINESS TRANSFORMATION
Issuing green bonds can help firms to better meet their strategic goals as seen in the case of vehicle leasing companies, which are using green bond issuance proceeds to help their existing fleet meet net-zero emissions or purchase green vehicles.
Such developments tie in with our view that increasing numbers of responsible and impact investors want more sustainable issuances that support business transformations that meet, for instance, the below 2°C Paris goal or solve sustainability challenges. Additionally, they want scale, familiarity and consistency, with greater depth in the market.
Innovations are key to broadening opportunities for investors. One exciting area is transition bonds: these types of bonds can serve to encourage companies in sectors such as fossil fuels, palm oil and meat production to begin transitioning from carbon-intensive or ‘brown’ production methods to less brown and, eventually, to ‘green’ over the long-term. At the same time, it’s crucial these bonds be properly structured in order to avoid the possibility of greenwashing.
In a positive development for investors, and society as a whole, companies are now taking a lead role in addressing sustainability goals and including increasing investments in technological innovation as the realisation grows there is a market opportunity in being sustainable.
According to the EIU report, more than a third (39 per cent) of executives surveyed in the financial services industry describe corporate sustainability initiatives as being “very significant”. The proportion of corporate leaders who hold this view is even higher in other industries.
INNOVATIONS ARE KEY TO BROADENING OPPORTUNITIES FOR INVESTORS SEEKING TO SUPPORT BUSINESS TRANSFORMATION AND NET POSITIVE IMPACT.
SIMON IRELAND, MD, Global Head of Financial Institutions Group, ANZ, Simon.Ireland@anz.com
KATHARINE TAPLEY, Head of Sustainable Finance, Katharine.Tapley@anz.com
STELLA SARIS, Head of Sustainable Finance, International, Stella.Saris@anz.com
KANG JAE KIM, Head of Asia DCM, KangJae.Kim@anz.com
BEN WALKER, Head of Sustainable Development, Ben.Walker@anz.com
SHEILA IP, Client Insights and Solutions, Sheila.Ip@anz.com