Acceptance of green, sustainable and social bonds as offering investment opportunities is continuing to grow in importance across a broad spectrum of the community.
A local government agency from New Zealand, a leading Australian educational institution and banks were among those who shared their experiences with others attending the recent roundtable. Their reasons for supporting sustainable financing options, a relatively new asset class, included positive aspects relating to community and investor relations, and those helping to build investor reputation as good citizens concerned about climate change and carbon emissions targets.
Participants in the ANZ and FinanceAsia's recently roundtable discussion about Australia's green bond market included:
- Pablo Berrutti, head of responsible investment Asia-Pacific Colonial First State GAM
- Blathnaid Byrne, group treasurer, AGL
- Darren Dawson, Treasurer, Bank Australia
- Jeff Grow, senior portfolio manager, UBS Asset Management
- Dave Lovelace, director planning and performance, finance, Macquarie University
- Eliza Mathews, associate director sustainable finance, ANZ
- Pete Robinson, head of investment strategy fixed income, Challenger Investment Partners
- Catalina Secreteanu, managing director Asia-Pacific, Sustainalytics
- Katharine Tapley, head of sustainable finance, ANZ
- Aaditya Thakur, portfolio manager, Pimco
- Fiona Trigona, head of funding and balance sheet, TCorp
- Matthew Walker, group chief financial officer, Auckland Council
- Marayka Ward, senior credit manager, QIC
- Paul White, head of capital markets, ANZ
- Yen Wong, Head of credit research, Altius Asset Management
Moderator: Cherie Marriott, Australian correspondent, FinanceAsia.
KATHARINE TAPLEY: At ANZ we are very committed to increasing our sustainable finance capacity given the linkage to our purpose, which is helping to shape a world where people and communities thrive. At the beginning of this year we lifted our sustainable and low carbon solutions target from A$10 billion ($7.25 billion) to A$15 billion. We believe that green, sustainable and social bonds and loans are a key mechanism for achieving targets set out in the Paris Agreement on climate change, and outlined in the United Nations’ sustainable development goals agenda. As you know, ANZ is a green bond issuer in its own right and we see this as an important market development role.
FINANCEASIA: Can we start by hearing from the recent issuers at the table – Auckland Council, Bank Australia and Macquarie University. What motivated you to issue in sustainable format?
DARREN DAWSON: This was our first ever bond and the board and management at Bank Australia were keen to ensure that fixed-income investors were hearing a story that reflected our business. The internal conversations we had regarding the value of issuing in sustainable format were more about why we wouldn’t do it that way, rather than why we would do it. It was an easy decision in the end, and in August we issued a A$125 million debut three-year sustainability bond.
FA: How could you be sure the deal would be well received by the market?
DAWSON: In the initial stages we got feedback from our lead arrangers at ANZ and from Sustainalytics which provided a second opinion. This gave us the confidence that the bond would be a good fit for investors.
MATTHEW WALKER: Auckland Council is the largest local council in New Zealand covering the city of Auckland where one third of the country’s people reside. As an organisation, we have key objectives around trust and confidence with the Auckland community. Our stakeholders are aware of the impact of climate on the city and as such, we play a natural leadership role in signing up to carbon emission reduction targets. Our final decision to issue in this format came down to weighing up the positive elements of reputation and community engagement with wanting to be confident about execution.
FA: Can you tell us about your experience with executing the bond?
WALKER: We issued NZ$200 million ($133.48 million) in June and our pricing came in slightly tighter than our vanilla bonds. I enjoyed being involved in the roadshows which attracted a surprising level of engagement with investors. A deal like this puts treasury in a different light and I liked how it generated conversations within the organisation between the finance professionals and the sustainability team. We were able to focus on something practical together.
FA: What future plans do you have for returning to the market?
WALKER: We have just signed off on a 10-year budget with NZ$26 billion earmarked for infrastructure capital investment of which half is for transport. We think much of our public transport investment could be backed with green bonds. One of our future goals is to attract more retail investors to the bonds. The deal we did in June was sold predominately to institutional investors because of the level of interest and the tight pricing. We would like to work out a way to carve off a segment of each bond for retail buyers.
FA: Can you tell us about Macquarie University’s dual-tranche A$250 million sustainability bond in late August?
DAVE LOVELACE: For us, it was a no brainer to issue in this format because it was aligned with our values as an organisation. Sustainability is important to our staff and students. We have had a director of sustainability at the university for about a decade and most of the buildings we have constructed in the past few years have been consistent with green principles. We worked with Sustainalytics through the process which helped to make it clear to our property team what they needed to do to meet the requirements of the bond. We held a roadshow in Australia and Asia and we found the interest from Asian investors to be particularly high.
FA: Where did you roadshow in Asia?
LOVELACE: In Tokyo and Hong Kong, with the main interest coming from Japanese investors in Tokyo. The questions were very in-depth and investors wanted to make sure this wasn’t just a public relations exercise. They wanted assurances that the funds would be going towards sustainable buildings and that we would provide ongoing reporting.
FA: I hear that investors value having access to third-party opinions. What is Sustainalytics experience of this?
CATALINA SECRETEANU: We provide an independent review as to the positive environmental and social benefits of the assets that are financed. We also look at the underlying issuer to determine the extent to which the deal is aligned with broader organisational attitudes towards sustainability. Our role in the market has grown significantly over the past two years and we now have a team of 12 people who are able to provide these independent opinions. At the same time, the number of participating markets is growing. Around the globe there is a lot of regulatory change that is making green financing more attractive to issuers.
FA: Do you tailor your opinions to each market, and are your opinions dictated by what the regulations require or by what investors want
to see?
SECRETEANU:It is a combination of regulatory requirements and investor needs but for every deal we are guided by what is considered global best practice in sustainable finance. Sometimes local regulators allow for the financing of assets which we don’t consider to be aligned to achieving a low carbon economy; so in that sense, we acknowledge the local market practices but we don’t always follow them to the letter. Investors themselves like the fact that we apply some exclusionary screens to the underlying projects.
FA: A question for the investors, is it becoming easier to assess the green credentials of issuers as the market matures?
JEFF GROW: We value second opinions from external parties like Sustainalytics or the Climate Bonds Initiative, but at UBS we are an active investor so it is important for us to do our own due diligence and score each deal ourselves. We have a portfolio of A$1.4 billion in green and sustainable bonds at the moment. Certainly the market is moving towards more standardisation and transparency. This means we are not starting afresh with every new issuer, and we are talking a common language.
FA: How do you score issuers?
GROW: We have a proprietary ESG score which we have been using for some time. More recently, we have been conducting peer and industry analysis to see how individual issuers stack up against others on their ESG credentials, and using this as one of the factors influencing our credit ratings. We are not a dark green investor which means we will look at assets that might be transitioning to a low emissions future.
BLATHNAID BYRNE: Can you share your thoughts on investing in issuers that are claiming to have an impact on the environment – in that they are actively trying to shift the dial on their footprint?
GROW: Impact investing is still a nascent activity in the fixed income markets. Our equities teams are very familiar with this type of approach, but on the bond side we are not there yet. That said, fixed income has evolved from applying simple negative screens to a point where we want to support companies in their transition to sustainability.
MARAYKA WARD: Many of QICs clients don’t allocate a mandate to invest specifically in green bonds so we have to justify why we are holding green labelled bonds. This is usually an easy conversation to have because in most cases our analysis shows we are not giving up returns to hold labelled bonds; in fact they are more likely to slightly outperform. At the same time, we take extra care during our due diligence process to look at reporting and impacts. We want to raise the level of reporting we see on deals to make sure there are clear impacts that can be shown and measured. We would like to see trustees and asset consultants allocate ESG-focused mandates rather than favouring vanilla bonds as a default.
PABLO BERRUTTI: At Colonial First State GAM we have an explicit ESG rating that we apply to all bonds we cover. Over the past three years we have been monitoring how our own internal ratings compare with the external credit rating agencies and we have found there is a clear relationship including lower default experience linked to our ESG rating. Historically we have struggled with the size of green bond deals as the lines are smaller, but recently we have explicitly offset the ESG benefits against lower expected liquidity, and this has allowed us to invest in more deals. ESG factors make a difference to investment outcomes and are having a positive financial impact on our portfolios.
FA: What about Pimco, have you seen your appetite for sustainable bonds change over time?
AADITYA THAKUR: Most of our clients are surprised at how much we are integrating the ESG process within our broader investment philosophy. All of our credit analysts now have to assign ESG scores for every credit they cover, regardless of whether the securities are going into a dedicated ESG fund. We apply scores to corporates but also to sovereigns, semi-sovereigns and mortgage markets. We are investing a lot in technology and analytics to make our investment process as robust as possible, and to extend our lens beyond simple metrics around carbon emissions.
FA: Can you disclose some of these additional metrics?
THAKUR: We believe the UN’s sustainable development goals (SDG) give us the framework to broaden our analysis beyond green bonds to a broader range of sustainability issues. We are looking to distil the SDGs into a smaller set of risk factors that we can monitor and track impact. We believe engagement is the key because we want to ensure that our constituent companies are actually doing what they claim to be doing, and having an impact.
FA: Turning to another recent trend in the sustainable markets, what activity are you seeing in the establishment of a green loans markets?
PETE ROBINSON: Direct lending is a growing area that Challenger has a particular niche in. The advantage of direct lending is that lenders can engage directly with borrowers to structure loans which incentivise more sustainable outcomes from their borrowers. In this space we don’t only look at opportunities that are already considered green, we believe we can be more impactful working with all our borrowers, to be more sustainable. For example, this might include lending against pools of auto loans that include loans to electric cars, thus diversifying our risk against the underlying receivables.
TAPLEY: The labelled green loan market has a lot of potential particularly for companies that can’t access the bond markets. This will also be beneficial to banks which are increasingly under pressure to disclose the climate change impacts of their balance sheets. Green loan principles have already been written and we expect it won’t be long before there is a set of social loan principles to work from as well. We are also now seeing the emergence of loans linked to ESG performance, where the borrower is incentivised through pricing to transition to an improved ESG position over time.
FA: Is this an opportunity that Altius Asset Management has looked at?
YEN WONG: Yes we have assessed green asset-backed pools but for the main part we are restricted to investing in only rated and liquid issues. Over time I expect regulations will change and bank balance sheets will evolve to a point where we will see these pools grow, and investors will be more inclined to participate. On the bond side, our sustainable bond fund is our fastest growing fund. Investors want their portfolios to be aligned with their values.
PAUL WHITE: Can we take a closer look at another trend in the market which is the increase in sustainable bond issuance compared to straight green bond issuance. We understand TCorp in New South Wales is building a sustainability bond programme. What are the motivating factors behind this?
FIONA TRIGONA: We have watched the market evolve from a simple green focus to something that incorporates other sustainable and social factors. The role of the NSW state government is to provide services to people in a mindful and responsible way, so for TCorp it made enormous sense for us to set up a sustainability bond programme. We have almost completed the process and we hope to do an issue by the end of the year.
GROW: If I can speak for investors, I think the asset universe is broadening and we are moving away from the need to label bonds as either green, or sustainable, or social. Really it is about determining whether the proceeds will be used to build a better future and if we can get comfortable with this – through our own internal analysis and with the help of external verifiers – then we don’t need to get caught up in how we label deals.
WARD: Being able to invest in other sectors helps to diversify the risk in our portfolios because we aren’t only holding green buildings or transport projects. We liked IFC’s bond which had a gender flavour to it through its focus on micro-finance loans extended to women in third world countries.
WHITE: ANZ’s most recent sustainability bond which was linked to the UN’s 17 sustainable development goals included healthcare, aged care, transport, green buildings, renewable energy and some of our ongoing expenditure related to our financial inclusion programmes.
BERRUTTI: The bigger aim has to be to invest in bonds that have positive real-world impacts. Drawing on impact investment principles, we need to have an intentional and measurable impact on how our investments are addressing social and environmental ills and shaping our future, while also making a financial return. This is high on the minds of large fiduciary investors around the world like pension and insurance funds. These investments will be successful when they drive changes in the cost of capital for positive activities versus harmful ones.
FA: How do we adequately measure impact?
ROBINSON: To us the best measure of impact is found in the businesses we don’t lend to. By avoiding businesses that are behaving in ways that don’t take ESG factors into consideration, we avoid unsustainable business models and ultimately avoid defaults; for a credit investor this is the best impact we can have for our clients.
ELIZA MATHEWS: Measuring impact must be an ongoing ambition for issuers in this market, and that includes ourselves at ANZ. We recognise though that it can be challenging to capture meaningful data to quantify impacts. We think this will evolve over time.
GROW: I am looking forward to seeing what happens when some of the first green and sustainable bonds – such as the World Bank’s 2014 deal – reach maturity and come up for refinancing. At this point we will be able to look back at what the issuers said they wanted to achieve and ask whether they actually did so. Then we can make a decision about whether to support a refinancing or not. We can also have a conversation with issuers about future plans to see if our visions remain aligned. In this way, fixed-income investors are becoming more qualitative in their approach – more equity like.
BYRNE: This shift towards impact investing is a pleasing development for an issuer like AGL which is a utility company and therefore not typically considered a green player. However, AGL is the country’s largest private investor in renewables and we have initiatives and projects that talk to our intentions of becoming greener, such as what we will do with the site of the Liddell power station when it is closed in 2022. Separately, we have been looking at sustainability improvement loans as an option for AGL as I think it is important to have lenders aligned on corporate values, including sustainability. AGL is the creator of the Powering Australian Renewables Fund, an innovative financing initiative, and there is a distinct possibility that this entity could issue a green bond. It is a discussion we will be having with our equity partners, QIC and the Future Fund, when our current lines of credit come around for refinancing.
FA: How would you like to see the market develop over the coming years?
WALKER: We have some very interesting niche projects on the go at Auckland Council and I would like to know whether investors would be prepared to pay more for a really high quality project with a niche story, if we were to package it into a security.
WARD: Our clients are always going to look at returns first. Yes, there might be room to pay a bit more for a deal that tells a unique story but we have to assess a deal on fair value and where it falls on comparable curves. If a deal were to price well inside these curves we would have to ask whether the offering would result in the issuer’s entire cost of funding being reduced.
BERRUTTI: If the niche story you are telling has the potential to generate long-term sustainable revenues or reduce costs for the issuer then, yes, there is a chance that investors might be prepared to pay more. For example, for some years we have been talking to banks about packaging together mortgages to homeowners with solar panels. These borrowers are living sustainably but they are also a better credit risk because the money they save on power bills can be used to service their mortgages and the value of their houses is greater due to the solar assets. This is not how investors traditionally think about risk. Given the more concentrated nature of the market in Australia, we are effectively perpetual holders of some semi-government’s bonds, and we need to start thinking about risk long-term. This requires a shift in mindset.
