Irrefutable evidence of the transformative nature of sustainable financing is the increasingly close alignment between governments, the private sector and communities towards a greener future.
In the debt capital markets, this is being reflected by continued innovation, plus soaring issuance volume of GSS instruments and increasingly diverse investor appetite, as highlighted by the findings from the 110 respondents to the 4th annual ANZ / FinanceAsia survey.
“There have been many interesting developments this year [in the sustainable finance market], such as the emergence of sustainability-linked bonds,” said Christina Tonkin, managing director, corporate finance, ANZ.
Yet maintaining this momentum relies on market participants overcoming several hurdles. These include, for example, gathering enough of the right data, borrowers providing clear and relevant corporate objectives and more technically-competent investors.
This was according to various issuers and investors from Australia and New Zealand at the roundtable. Along with their counterparts across the region, they want to see changes in issuance practices that will also re-define investor expectations.
Their ultimate goal is for sustainable financing to become the mainstream way to access capital.
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GENUINELY GREEN
For the time being, issuers need to ensure they can deliver the kind of GSS exposure that investors want as they look for required comfort with the overall sustainability journey.
This starts with the motivation of the individual borrower. A lot of them need to demonstrate to stakeholders that their corporate purpose is reflected in their sustainability strategy, explained Dean Spicer, head of sustainable finance for ANZ in New Zealand. “Investors are under increasing pressure from end-clients to understand how their money is being managed in an ethical and responsible way.”
This is top-of-mind for Alan Ng, senior credit analyst, First Sentier. “We don’t want to see an issuer choosing a green format just because GSS instruments might be more marketable.”
Added Marayka Ward, senior credit and ESG manager, QIC: “Thematic demand has driven momentum in this space, which has been enticing for issuers.”
In short, a lot more borrowers need to demonstrate that their corporate purpose is reflected in their GSS instrument, and in a consistent way.
Taking this a step further, issuers must be able to clearly map the application of their green bond, for instance, to green projects.
There are incentives to do this. “We are seeing some evidence of a pricing benefit, or ‘greenium’, appearing in GSS transactions, though it’s not widespread or guaranteed,” added Tessa Dann, director, sustainable finance, ANZ. “As an issuer, pricing isn’t the driver for ANZ to issue GSS instruments; it’s incredibly important that the drive to participate in this market comes from core sustainability strategy.”
At Altius Asset Management, for example, Yen Wong, head of credit research, said the firm is finding that clients are increasingly willing to pay to invest in this space. “They want to access investments that will have a meaningful, real-world outcome.”
As a result, reporting is a key concern for investors. “This is a developing area, so we need to work with issuers to get better reporting and disclosure, and greater transparency,” she added.
Among the various challenges for issuers, data is another big one. From availability to accuracy to traceability, establishing a baseline is difficult task. Yet it is an essential objective.
The various barriers have delayed some issuers coming to market with a GSS instrument – with such hesitation in part stemming from their desire to avoid being tarred with the ‘greenwashing’ brush.
For Jason Bligh, treasurer, Kāinga Ora, sustainability processes are a key component in doing things in the right way. “It is not good enough just to build green; it is about how we get there,” he explained. “So, a big part of what we are looking at is the sustainability of the supply chain.”
BUILDING ON MOMENTUM
Borrowers at the roundtable with GSS experience said they have generally had positive interactions with investors, which is encouraging them to pursue more of the same going forward.
“We want to do most of our issuance going forward in a green format, including expanding into offshore currencies,” said John Bishop, Treasurer, Auckland Council.
“We are in the process of transitioning our funding and are looking to do new financings wherever we can in green formats,” added Michael Larkin, group treasurer, Lendlease. “We see sustainability as a source of competitive advantage in our business.”
More activity of this type will also accelerate the development of the market in a way that can help overcome certain barriers.
“The [sustainable finance market] market in New Zealand is still quite niche. Addressing some of the perceived challenges and barriers that exist will be key to bringing more issuers to market,” added Geoff Smits, senior treasury dealer, Mercury NZ.
UPSKILLING
There is no doubt about demand; most GSS-related transactions are oversubscribed, plus are outperforming regardless of the underlying investment credentials. As a result, investors are playing their part in the process of driving a sustainability mind-set.
At the same time, this is making more investors mindful of the need for greater GSS-related knowledge. At QIC, for example, the aim is to make the firm’s investment professionals confident in incorporating sustainability-focused trades within investment portfolios, explained Ward.
Regardless of efforts to integrate ESG into investment processes to date, the multiple legislations and taxonomies make it increasingly challenging for investors to keep up and measure transactions in a consistent way, added Patricia Gacis, credit analyst, First Sentier.
Filling the capability, resources and technical knowledge gaps to achieve this is easier said than done. As a result, investors are looking to further train existing staff and add more resources with a specific sustainability background.
ANZ Investments has similar objectives. “Our focus is to develop more internal capability,” said Mia Prkusic, fund manager fixed interest. “ESG is a fast-growing and complex area, so we are finding that there is a need to upskill.”
Added Peter Jones, senior manager, responsible investment, ANZ Investments: “As we look at more deals and new GSS products from a bottom-up perspective, we will require more resources, both in terms of third-party research and analysts on the desk.”
Investors are also looking at how to measure the impact of their sustainability investments, in turn demanding better reporting from issuers, especially with some of the “use of proceeds” bonds.
Perhaps the overriding goal for investors is to maintain market credibility in the GSS space.
Echoing this, Jones at ANZ Investments said he doesn’t want any dilution in the types of deals being launched. “Investors need to be satisfied that they are getting good quality products.”
In line with this, investors want to be able to fully assess individual issuers and get comfortable in relation to potential greenwashing concerns.
BREAKING DOWN BARRIERS
To further fuel maturity and encourage wider GSS issuance, organisational buy-in is key.
This is certainly the strategy at NSW Treasury Corporation. “Being a semi-government issuer we work very closely with NSW Government agencies and continue to promote awareness across the board, but what we’ve learnt over the years is the importance of a top-down approach to continue to drive the sustainability agenda and initiatives of the state,” said Stephanie Tiah, senior analyst, funding and balance sheet.
To help with this, issuance strategies need to identify the key ‘E’, ‘S’ or ‘G’ aspiration they are looking to fulfil – rather than risk being seen as an attempt to greenwash and, therefore, deterring investors, explained Ward at QIC.
It certainly helps that sustainability is increasingly perceived as a competitive advantage. Further, the widening political and corporate commitments to net zero targets create a goal to evolve industry practice.
At Argosy Property, for example, the spotlight on ESG and sustainability has meant that compared with five years ago, there is no need to justify why there is a sustainable finance focus. “Today, investors, tenants and staff now want us to justify if we aren’t following this approach,” said Peter Mence , the firm’s chief executive officer.
In combination, this is leading to a more pronounced integration of strategies – sustainability, corporate and financing – than ever before.
Legislative efforts will help continue to support this. “Regulation within sustainable finance should be about creating consistent understanding of the products to avoid greenwashing, to make sure transactions meet investor expectations,” added Dann at ANZ.
Larkin at Lendlease said the focus by all market participants needs to be on taking sustainable finance from being a segment of the market to become the mainstream way to get funding.
“It is realistic to see a world – in a fairly short space of time – where the question is not so much the benefit of issuing in green format but the premium for borrowers who are not, and whether non-green issuers even get access to capital,” he explained.
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