ESG debt in Australia: progress report

In November 2018, KangaNews brought together experts in sustainable debt from each of Australia’s big-four banks to discuss the state of the local market and its growth prospects in the year ahead. Participants acknowledge that development has not been exponential so far but point to a vast quantity of work going on behind the scenes and the challenges involved with changing attitudes, working without reliable political guidance and establishing market infrastructure.

  • Alex Bischoff Head of Global Funding WESTPAC BANKING CORPORATION
  • Fergus Blackstock Head of Term Funding COMMONWEALTH BANK OF AUSTRALIA
  • Michael Chen Head of Sustainable Finance WESTPAC INSTITUTIONAL BANK
  • Jacqui Fox General Manager, Capital Markets and Advisory NATIONAL AUSTRALIA BANK
  • Rob Kenna Head of DCM Origination COMMONWEALTH BANK OF AUSTRALIA
  • Katharine Tapley Head of Sustainable Finance ANZ
  • Paul White Global Head of Capital Markets ANZ
  • Eva Zileli Head of Group Funding NATIONAL AUSTRALIA BANK
  • Laurence Davison Head of Content and Editor KANGANEWS
  • Samantha Swiss Chief Executive KANGANEWS

Davison It is about four years since green bonds were introduced in Australia. How would you grade the evolution of the market?

ZILELI National Australia Bank (NAB) issued its first green bond in 2014 but this came after a few years of trying to get it off the ground. There was a break between then and issuing our second transaction. However, we have been hard at work in the background. The challenge is obviously finding assets, creating frameworks and ensuring we are putting out a credible product that is not subject to allegations of greenwashing.

We have also sought to bring product innovation. Although we haven’t issued a senior green bond in the domestic market for a while, we have issued in Europe and the US in 2018. The US is not quite as developed as Europe but we want to show leadership and try to help grow markets.

Even though we have not issued a senior green bond in Australia since our inaugural deal we issued a green residential mortgage-backed securities (RMBS) transaction in 2018. We also issued a low-carbon shared portfolio. We have been present in the Australian market, in other words – just not in senior format.

We are focused on areas outside of green as well. In 2017 we issued a social bond focused on gender equality. This sector is developing, perhaps at a slower pace than we would like, but we are trying to do the best we can with limited resources.

The whole area of green and social finance is being driven by corporations and private entities as opposed to being promoted by government policy or regulation.

BLACKSTOCK We have issued a green bond in Australia and it is a product we will issue again. When we think about our funding, though, we don’t just think about the Australian market. We think about our issuance globally and the best format for each market.

Europe has been the leader in this space and it is where the green investors are most highly concentrated. The pace of development also feels fastest in Europe and it is not lost on us that our peers have been issuing into this market.

The other thing I would mention is that when Commonwealth Bank of Australia (CommBank) began looking at this space the focus was on what was required for us to issue a green bond. There has been a lot of foundational work done since we started reporting on sustainability a couple of years ago, including incorporating sustainability and environmental elements into the group’s strategy, developing environment policy, redefining how we lend, invest and procure, and all the way to taking a position on human rights.

Today, sustainable business practice is an integral part of the way we do things, and an essential component of our annual report. It has full sponsorship from our board and executive leadership team. In 2018, we were named Australia’s most sustainable business for the third consecutive year.

We are also thinking about sustainability much more broadly across the group, and our clients and portfolio, rather than just about our emissions. This also aligns with how investors are developing their thinking. As investors screen us across ESG [environmental, social and governance] factors, this influences whether they will invest in our bonds.

“Given a choice, investors will probably choose the labelled product over an unlabelled bond. There will probably always be pockets of dark green but the light-green approach will become more prevalent. It is already becoming more mainstream.”

BISCHOFF We are continually trying to push forward with an agenda that we believe – as individuals and as companies – makes a lot of sense going forward.

We certainly see bigger drivers in some offshore markets compared with the domestic market, and this is likely to see us diversify our issuance internationally. US dollars is certainly on Westpac Banking Corporation (Westpac)’s agenda over the next 12 months as we continue to show our capability in different markets.

Europe has the benefit of a partnership between government and corporations. Europe is pushing forward with legislation that brings tangible and identifiable investment behaviours into force. This drives direct access to the market and encourages dialogue with investors around sustainability. From an issuer’s perspective, this makes it easier to consider the European market and its value.

In Australia, we certainly want to do more but we need to prioritise. Ultimately, there is limited capacity. There are a lot of passionate people in different organisations driving the agenda, but with limited resources. We all need to pick and choose where we want to go and where we allocate resources on an annual basis.

If we could do more of our issuance in UN sustainable development goal (SDG) or green format, we would. But we have a finite pool of assets, and the reporting and governance pieces still need to be up to the appropriate standards. Having more dialogue like we are having today, including with investors, is certainly important to push the agenda forward.

TAPLEY ANZ Banking Group (ANZ)’s most recent issuance was our SDG bond in February 2018. We did this in Europe specifically because of the investor demand in that market. We wanted to test appetite among some very sophisticated investors around a structure that had only been done once before by an issuer outside the multilateral sector.

Going forward, we would like to be in these markets at least once per year. We are driven by demand and we have no reason not to come to the domestic market, but it will depend on where demand is at the time.

I agree with Alex Bischoff on sophistication and the need to move forward with reporting. One of the challenges we face is reporting effectively on impact. Some of the things for bank issuers to overcome include access to information given we are the lender to, not the owner of, the underlying assets, and the nature of meaningful metrics particularly around social issues – given these are still being worked through by issuers and investors.

BLACKSTOCK A massive amount of oversight and care needs to be taken with these asset portfolios. The worst thing we could do is issue a green bond and then fail to meet or maintain the standards required of us.

The level of care and attention required to be absolutely sure we will meet requirements on an ongoing basis is that bit higher than in other forms of funding.

Reputationally, not getting it right can have big consequences. But this is an area where investor requirements are moving at quite a pace. They too have developed significantly from where they were four years ago.

Local and global standards

Green-bond markets in global jurisdictions are moving towards formally established taxonomies or definitional regimes. Australian market participants recognise the value of harmonisation but still have some doubts.

SWISS What do you think about the concept of taxonomy as a tool for further developing the market? Do we need an Australian definition for the various asset classes or should we just tap into what is happening in Europe, for instance?

FOX Our sense is that Australia shouldn’t run off and do its own thing. There should be some harmonisation.

BLACKSTOCK A taxonomy is being provided already by some of the global players that provide certification.

KENNA I think rather than having an Australian taxonomy it would be more beneficial for the market to focus on some channelled initiatives to get scale. One of the problems locally is that we divide our focus when we have a relatively limited amount to work with. This can make it difficult to achieve anything meaningful.

As a group, if we can get behind a few specific initiatives I think we could foster more meaningful evolution and create impact and scale which market participants can get behind.


With the structure that is evolving in Australia in place, layering in a fixed definition of what is green could be a bit limiting. I worry that it could be too restrictive when we already have good standards for how these deals pull together in Australia.


White What are reporting schedules like for the bonds the other banks already have on issue?

ZILELI We report annually and have incorporated impact reporting and greenhouse-gas emissions saved. It is developing and we have aligned with the SDGs in our sustainability reporting NAB-wide, not just specific to a trade. Investors are asking more questions. It is a bit more straightforward with green bonds because these have been in the market for a lot longer than social bonds.

Davison Are the major banks providing sustainability reporting as part of the annual reporting cycle, as an integrated report or a separate sustainability report?

ZILELI NAB publishes a separate sustainability report at group level. We have aligned the bank’s scorecard to the SDGs and incorporated these into our annual sustainability report. We also have separate, specifically aligned reporting for our green and social bonds. When we do debt investor roadshows we incorporate information on socially responsible issuance.

This is an evolution. Although our full-year report, that goes to equity investors, contains a section on ESG it only really became part of our debt roadshows in 2017.

BLACKSTOCK It is similar for CommBank. We report on the portfolio itself annually and this report is certified externally. Our semi-annual report includes a sustainability piece which is now 15 pages long. This covers everything we are doing for our targets as a group. We also now have this as a specific section of debt investor presentations, whereas two years ago we would not have.

BISCHOFF From an organisational perspective, Westpac was the first Australian major bank to produce a sustainability report – back in 2002. It has evolved since then and now encompasses a very comprehensive range of areas.

Integrated reporting is something the group is working towards. From a treasury perspective, ESG disclosure is a key development focus. When we did our euro transaction, the traction and engagement we gained with investors by having a specific and targeted ‘green’ presentation was tangibly different from any experience we’d had before. It was a real eye-opener, though it also took a lot of work.

In a market as developed and mature as Europe, this was a real value add for us. It also triggered a change in behaviour around how we think about the ESG section of our fixed-income presentations going forward. The feedback we get is that investors want to see more of this, as ESG increasingly becomes a part of their overall credit assessment.

When we talk about impact reporting it is true that, as Eva Zileli says, certain areas are better defined – for instance around carbon impact – and so are certain types of products. It is constantly evolving.
The good thing about the industry at the moment is that this feedback isn’t criticism – it is constructive and helps us build on what we are doing.

“Today, sustainable business practice is an integral part of the way we do things, and an essential component of our annual report. It has full sponsorship from our board and executive leadership team.”

Swiss Are the reports that are part of your debt-investor roadshows focused on specific bonds or the broader sustainability of the bank?

CHEN Like others, we have released a sustainability report as well as an impact report. The sustainability report now features what we do in sustainable finance and sustainable funding.

Similarly in the impact report, what investors see is what they want to know: broader climate-change performance and sustainability strategy. They see things like how we fund renewables and how we see this market evolving. We are telling a much broader story.

BISCHOFF Sustainability is of course far more than just thinking about lending to a wind farm. That’s great, but the measure of sustainability goes far deeper – it is about how you conduct every aspect of your business and it is about doing the right thing. We are still learning about how to deliver the right information in the right way to investors. But, so far, the feedback is that we are on the right path.

Swiss All this reporting must take a lot of resources. Are issuers seeing any primary-market ‘reward’ in pricing?

BISCHOFF It is hard to say because pricing is a relative conversation at the time you do the trade. Eva Zileli can probably speak better to this than me, but on NAB’s recent euro deal it certainly looked like the SDG component of the transaction engaged more of the market than if it had been a vanilla deal.

I liken it to the Securities and Exchange Commission (SEC) registration Westpac has in the US. This opens our programme up to a section of the market in the US which cannot buy non-SEC-registered deals.

The value of going to a market like Europe with a green label is that it engages a type of investor that has targets on ESG assets. Final pricing outcome is a tangible output of this engagement. Whether it means tighter pricing by 1 or 2 basis points is hard to tell, because it might not have been the same deal without the green label on it.

TAPLEY Our experience of issuing an SDG bond in Europe was exactly this. The quantity of investors that comes in, their ticket sizes and the granularity of the book drives a pricing outcome.

BISCHOFF It isn’t necessarily new investors, though. These are standard investors that we see in other books but clearly have a mandate to buy more of the labelled product.

TAPLEY We found some brand-new investors, but where I thought there would be a direct correlation between new investors and green investors there actually wasn’t. We had around six new investors and only one or two were specifically green investors.

WHITE Alex Bischoff makes a good point around volume, and we see this in the domestic market too. While we see the usual investors participating, sometimes their volume is far larger in labelled product – and the duration can be longer as well. The make up of books can be quite different.

BLACKSTOCK It is all about execution. The volume piece in euros is interesting because most of these deals have had capped size. It is difficult to compare them with a vanilla senior-unsecured benchmark.

The sustainability aspect certainly helps execution and it probably helps secondary-market performance as well, which helps the curve. There are other ancillary benefits which we might not see so obviously in primary markets.

I think the distinction between ‘dark’ and ‘light’ green investors might be losing momentum because more and more investors are looking at ESG more broadly. As an issuer, it’s important to screen well for ESG regardless of whether you are talking to light or dark green investors.

ZILELI Investors have a lot of choice as to what they buy. While they may not be dark green, if investors have an ESG overlay they will still have a preference for green bonds. We definitely see this in Europe. It isn’t as prevalent in the US or domestically but these markets will catch up.

KENNA I think the discussion around dark and light green has held the market in Australia back a bit. To be fair to investors, our observation is that it is difficult to build a dedicated green-only mandate without any assets to invest in. There needs to be a pool of investment opportunities before the mandates behind it can be developed.

We have observed that investors – whether in CommBank or in other names – value the ability to buy something that has rigour around it and is certifiably green or social in nature. They use this to meet their own corporate objectives and also to engage with the customers they market to.

BISCHOFF This is where Europe’s alignment – between government, corporations and investors – around a common objective to meet a goal is important. There is some alignment between corporates and investors in Australia but government policy is less clear. Having more alignment would create leverage to develop the market further. This doesn’t stop us as an issuer, though.

Social-impact bonds

The Australian Prudential Regulation Authority (APRA) made its first official pronouncement on a potential Australian equivalent of total loss-absorbing capacity (TLAC) rules in November 2018. Local market participants are still assessing the potential consequences.

KENNA An area of sustainable finance that is small but I think is interesting is SIBs. There are a number of these projects in the market at the moment, though they are small in scale – which means this segment does not always get the attention it perhaps deserves. It can also be quite labour intensive.

But, at the same time, SIBs offer genuine impact. SIBs like The Benevolent Society’s are tangible and readily understandable things people can connect to and see that they’ve made a difference.

Investors have skin in the game and there are some that want to be able to say they are investing in something which otherwise would not have occurred and delivers a social outcome – which might be one they can relate to specifically.

DAVISON The problems seem to be scale of project and the fact that investors have to assess social outcome rather than credit risk.

KENNA The reality is that it is a very different investor set. It isn’t the typical institutional investor, although there are many that are actually keen to see more of the product because of their mandates and investment directives. It can resonate more with high-net-worth individuals and family offices, though.

FOX We have done some SIBs including some private deals, and I agree with these points. It is a smaller universe and it is also challenging.

We have done some work in recidivism, but the projects are often small scale. The delivery of outcomes is often a long way off and quite uncertain. But market participants are working on these projects in the background and eventually the sector will become larger in scale.

There is great opportunity in areas like housing affordability where we probably just haven’t cracked it in the right way yet.

KENNA People in the business and the community can really connect to these issues. With issues like affordable housing you are actually solving a genuine community problem that people can relate to.


Davison Corporate green-bond issuance has been very quiet in Australia. Is this picture disappointing or is it not surprising given corporates in Australia have very little capex and thus limited funding tasks?

FOX There have been some corporate green-bond issuers, but it is a bit of a disappointing picture. The reality is that banks and global supranational, sovereign and agency issuers have much larger funding tasks. They are integrating ESG principles into their organisations and are also very mindful of funding diversification. Increasing the depth of their investor books obviously pays dividends in price performance.

Like banks, corporates are very focused on cost and there are a couple of points which relate to the lack of green issuance. One is integrating this into corporate thinking at C-suite level and within the treasury operation. There is additional cost for green issuance – it isn’t massive at the point of issuance but is more about the ongoing cost of reporting and ensuring the integrity of the programme.

This influences a lot of treasurers’ mindsets insofar as they don’t have massive capital-raising tasks and there is still good interest in mainstream corporate deals due to undersupply.

Swiss Is it fair to say there is still some cynicism from corporates on the real value of green-bond issuance?

FOX I think this is a fair observation. Some will also say they consider themselves already to have ESG embedded in their organisations. This is not necessarily wrong, but the integration of corporate sustainability with how they fund themselves is not necessarily playing out in the same way as it is with financial institutions (FIs).

Having said this, I think corporates are very aware and are watching. If there was an identifiable price advantage they would probably react more readily. I use these words specifically because the debate around whether there is price advantage in bond issuance is very hard to resolve. It is a different story in loan format, where there might be an explicit price incentive.

BISCHOFF It is also cyclical for corporates. In 2010, I was working on the origination side in Australia, when A$200 million (US$144.6 million) for a corporate was a phenomenal trade and liquidity was hard to come by. We all have to realise that the differentiation sustainable issuance adds is through the cycle, whereas the liquidity issuers can find now may not necessarily be there over the next year or two as QE unwinds.

WHITE I agree that we should put it in perspective with what is happening in the market locally and globally. The public sector will dominate in Europe, supplemented by FIs. The corporate sector is really centred on utilities in Europe. We haven’t had much issuance locally but there have been positive signs – and it goes back to funding requirements.

FOX Some issuers that would be a natural fit in Australia just haven’t had massive funding needs.

TAPLEY From conversations with clients in the last six months, I think the level of real understanding of the corporate-sustainability agenda among treasurers has moved on. There is noticeable pressure coming from the C-suite into treasury teams.

We speak to treasurers who previously said there would have to be a price advantage for green bonds but are now linking the conversation to a corporate-sustainability agenda which they want to be a part of.

FOX I agree with this. C-Suite objectives and treasury KPIs are becoming more connected. A year ago a lot of the discussions weren’t as integrated. The treasurer tended to be looking for a price advantage because of the additional cost.

KENNA The corporate issuers we work with that have issued in green format have done it as an extension of their corporate policy and identity. Universities and property companies have sustainability ingrained at the forefront of their agendas, for instance. These companies don’t do it for the pricing benefit as much as they do it as an expression of their commitment.

“Issuers effectively say they are pretty green already and they have good corporate strategies, so why would they need to label something as green? This is where ESG-linked loans are an interesting development – because loan pricing is linked to sustainability performance.”

Swiss Is there any obvious distinction between companies that have sustainability officers integrated into treasury and those that don’t?

TAPLEY Yes. The trend is to move away from having sustainability teams as a corporate function towards bringing them into the business. This could be part of strategy or treasury teams, or reporting directly to the CFO or CEO.

FOX The point is that the companies that do it best will make sure it is implemented from the top down through the organisation. This is where we see some of the leaders in the European market.

KENNA It depends a bit on the scale of the organisation, to be fair.

Davison Could green loans have a role here? The point has been made that many corporates are moving on from wanting to see an explicit price advantage from green-bond issuance, but equally a green loan with differential pricing surely couldn’t hurt.

KENNA I think there is a kind of green-loan market already, it just isn’t officially badged and certified because banks don’t necessarily value this to the same extent investors do. Banks conduct their own due diligence around ESG and climate risk as part of a standard credit process.

I would argue that if an asset comes to the market with a green or sustainability flavour, it would definitely attract a more aggressive and deeper pool of capital. As a result, these loans often get better pricing and more competitive terms. Over time, I think we will probably see this move through into capital markets as well.

CHEN What we often come up against is issuers effectively saying they are pretty green already and they have good corporate strategies, so why would they need to label something as green?

This is where ESG-linked loans are an interesting development – because loan pricing is linked to sustainability performance. The lender thus has skin in the game and the borrower also has an incentive to improve. This is definitely happening in Europe and it is beginning in Asia as well.

TAPLEY We have been involved in a transaction of that nature out of Singapore, with the agricultural services firm Olam. I would say it is on the cusp of being part of the Australian market.

FOX I agree. We were also involved in the Olam loan and we have been involved with Pennon in the UK, where we did the first green-finance lease as well as a term loan. We have also been involved in an ESG sustainability-linked loan.

This has gathered pace in the last 12 months with the green-loan principles, and I agree that we will see more of this in Australia. For some corporates, where perhaps green-bond issuance hasn’t been the way for them to go, the green loans or ESG sustainability-linked loans will be a way for them to move into this type of financing.

“While they may not be dark green, if investors have an ESG overlay they will have a preference for green bonds. We definitely see this in Europe. It isn’t as prevalent in the US or domestically but these markets will catch up.”

Davison If Australia developed a green-loan market would it provide more natural assets for bank green bonds?

FOX Absolutely. This would have the indirect consequence of facilitating more bond supply from financiers like the major banks. This would be great for bringing supply to the market and would be a valuable way for corporates also to be able to talk to and demonstrate their own sustainability and ESG credentials.

ESG sustainability-linked future targets also bring motivation to an organisation. The motivation is often already there but having a pricing benefit linked to targets creates extra momentum.

Interestingly, in France they are modelling customer rating systems (eCRS) to give credit to sustainability, which goes to the point of integrating sustainability into organisations.

We are not incentivised in a pure regulatory capital sense in Australia, but Rob Kenna touched on an interesting point about being incentivised through our own eCRS or credit risk assessment on a particular organisation. We could therefore be prepared to lend more or add some other element into a financing decision.

BISCHOFF There are other ways that we have started to look at this. For example, Westpac launched its green-deposit product in the domestic market this week, which provides other avenues for corporates, councils and other investors to access product they wouldn’t otherwise be able to through issuance from banks in the wholesale market.

CHEN This is a certified-green tailored deposit. It is flexible in the sense that investors can choose when they receive returns and whether they receive a fixed or floating rate. Further, they can choose the term and have flexibility around their principal, reducing their deposit over time or adding to it. It is green in the sense that it is certified to meet the Climate Bonds Standard.

This came about because we have been receiving feedback from parts of the market with green mandates or fossil-fuel-exclusion screens – like local government and nonprofits – that want to invest their capital beyond green bonds.

FOX We are doing similar things. It is about trying to demonstrate leadership: showing how things can be done to the customers we serve, whether they are borrowing or investing customers.

This covers a range of different things, for instance PPAs [power purchase agreements]. We were involved in the first IPO for a solar farm, with New Energy Solar, and we are looking at other things like this in the equity capital markets.

The green RMBS deal NAB did was really trying to help the development of the securitisation market, the way its participants think about sustainability and what may be available to them.

The low-carbon shared portfolio was another way to give access to a type of financing which would otherwise be done on our balance sheet. There is also an element here of being able to recycle capital to facilitate more of this lending and therefore further develop the market.

BLACKSTOCK Leadership is a good point. At CommBank we have talked about lending and getting more green assets on board. We have a A$15 billion commitment for low-carbon projects by 2025. Two weeks ago we signed a commitment for 65 per cent of our own energy usage nationally to come from solar and renewable energy.

KENNA Talking about PPAs is interesting. We have signed a PPA with a wind farm which provides electricity the bank sources on a sustainable basis and therefore underpins development and adds a green asset to the marketplace. The positive impact can be quite circular in a positive way.

ZILELI This goes to the point around corporates being connected internally and the strategy for issuing green bonds. All the major banks have ESG targets. Similar to CommBank, NAB has a target for sustainable financing, in our case of A$55 billion by 2025, which includes targets to finance six-star mortgages. We track progress toward this target in our sustainability report.

This also means, as a treasury and in the capital markets area, that we are working to support these goals because our issuance counts toward this target.

We are completely integrated from the very top to treasury, which enables treasury to support the firm’s corporate-responsibility agenda. Nowadays, we are able to connect with the organisation more broadly and the people working on sustainability are very involved. They feel engaged and proud that NAB is working towards supporting a low-carbon economy and social objectives, irrespective of government policy.

The policy element would help accelerate progress, though. We are doing very well as a country despite this, but we won’t get to the targets that have been set – including the achievement of the SDGs by 2030 – without some policy direction and guidance.

BLACKSTOCK We feel the same way. Corporates are moving forward towards ambitious goals and making progress in the right areas, but of course stable and ambitious government regulation would really help move the pace of development.

“Sustainability is of course far more than just thinking about lending to a wind farm. That’s great, but the measure of sustainability goes far deeper – it is about how you conduct every aspect of your business and it is about doing the right thing.”

Davison We have seen some commentary from the Australian Prudential Regulation Authority, going back a couple of years, around the relationship between long-term climate risk and systemic risk, so there is clearly some thinking going on there.

BLACKSTOCK It feels more like a stick than a carrot, though.

FOX Europe has a pilot committee looking at risk-weighted-asset treatment.

BISCHOFF A similar thing is happening in China at the moment.

ZILELI China actually had legislation introduced in 2015 that laid out specific targets around carbon emissions and all sorts of other measures. It is progressing very fast with targets for electric vehicles and discussion about banning internal-combustion engines from selected cities. The global agenda is being driven forward in particular by virtue of China moving quickly and the EU introducing legislative proposals around taxonomy and reporting.

The US is driven on a state-by-state basis and I wonder if Australia will be pushed along because we are major trade partners with China and we issue a significant amount of bonds into Europe. The momentum in these regions could ultimately help Australia.

BLACKSTOCK We are feeling it as issuers and we are certainly doing what we can.

BISCHOFF Pricing is not the right focus for the conversation, though. It is not about getting a pricing advantage and therefore changing your agenda to take advantage of it – it has to be real and embedded within an organisation’s strategy.

BLACKSTOCK This is probably where we started, though – a conversation around the pricing benefit relative to the amount of work. That conversation feels like it was light years ago.

ZILELI I’m not sure we started with that conversation for our green bond. It was very much about the fact that it was the right thing to do and we believed in it. Dedicated individuals put in the extra effort because they believed in it.

FOX There was one issuer we worked with in the securitisation space, and I know CommBank has worked with it as well, that was surprised on the upside by the brand impact of engaging with sustainable finance. This accelerated the issuer’s own thinking in their organisation.

Looking forward

Australian market participants see reasons for optimism about the evolution of local sustainable capital markets. They are looking for a range of developments in 2019.

DAVISON What do you think we will be talking about in this discussion next year that has not been covered in depth today?

CHEN I think some of the things we have touched on will be more developed in 12 months’ time. We have talked about loans, and I think we will have seen the first environmental, social and governance-linked loan in the Australian and New Zealand market by the end of 2019. I don’t think the conversation around taxonomies will go away. There are a lot of different views around the table today and I think the conversation will continue.


It can be easy to feel like nothing is being achieved because day-by-day and week-by-week it is hard to measure. But looking back over a year or two we can see that we have come quite a long way.


Swiss Are you saying even corporates that view sustainable finance as a PR exercise shouldn’t dismiss it just for that reason?

KENNA Definitely. However, there are other lessons that can be taken out of it aside from the sustainability element. When we did a green bond we had a lot of feedback from staff across CommBank about how they were pleased to see the bank do this. It is a statement and a gesture that resonates with people and it is a visible proof point of commitment. We see internally that people are especially engaged with projects that connect with their personal values.

BISCHOFF It is hard for a company to produce a sustainability report without actually walking the walk. Investors see through this pretty quickly. As I said, your sustainability agenda has to be embedded within your organisation’s strategies and values, and it must come from the top.

Swiss Is it fair to say banks are leading the Australian corporate universe on reporting?

KENNA It is but, to Fergus Blackstock’s point, if everyone is being candid this is an evolving space over the last few years even among the banks. It takes time to permeate.

FOX There is also greater direction in the funds space through bodies like Responsible Investment Association Australasia. Its latest report makes clear that there is a lot more focus coming through in the way funds are allocated for impact investment.

WHITE I think progress has been evident in the public sector as well as in FIs. When Queensland Treasury Corporation (QTC) did its green bond it really brought the institution together around what it wanted to achieve.

FOX New South Wales Treasury Corporation (TCorp) and Treasury Corporation of Victoria (TCV) were the same because both these states have massive population-growth and social-infrastructure needs. TCorp is now well set up to have a progressive funding environment for what it is trying to achieve. It’s the same for QTC and TCV.


Davison We’ve alluded to the buy side several times, including how we might think differently about dark and light green. What is the level of engagement from Australian debt investors on ESG and how might it develop?

CHEN As the market evolves, and as we have already alluded to, more investors are integrating ESG. There will always be a segment with dark-green mandates that will buy green bonds but what is more interesting and exciting is the light-green investors that are integrating ESG.

These investors will buy green bonds but they will also buy vanilla on the basis of a look-through to the broader sustainability targets and credentials of the issuer.

BLACKSTOCK The fact that the rating agencies are beginning to integrate this into their analysis tells us that this is the way the market is going.

FOX Given a choice, investors will probably choose the labelled product over an unlabelled bond. There will probably always be pockets of dark green but the light-green approach will become more prevalent. It is already becoming more mainstream.

“When you speak to any investor it is clear that more and more mandates are being won in the ESG space, whether it is in light-green format or otherwise. This is happening domestically as well as offshore.”

Davison Is this preference a bit like with ratings, where fund managers will always do their own credit analysis but also obviously prefer externally rated to unrated issuance?

FOX Broadly speaking, yes. Labelled issuance will meet other objectives and display suitability. It also suggests secondary performance may hold up more strongly. All of this will come into consideration.

ZILELI I think investors are incorporating ESG credit analysis in their work and in this sense it is more about the screening element. I’m not sure there will be a proliferation of dedicated funds. I think it will be more mainstream – incorporation of ESG into credit analysis and perhaps having a weighting toward green issuance. The bigger fund managers and superannuation funds are moving faster in this direction.

But we have to be realistic. I recently met with several domestic debt investors and I didn’t receive a single question on ESG. Investors may be working in the background to integrate ESG into their credit analysis, but when we see them face-to-face the questions don’t come through on the sustainability agenda, green bonds and targets that are included in our full-year investor report for debt investors. I wonder if this demonstrates that we are still a bit behind Europe.

WHITE They could just be very comfortable with NAB as an institution. When you speak to any investor it is clear that more and more mandates are being won in the ESG space, whether it’s in light-green format or otherwise. This is happening domestically as well as offshore.

FOX Our view on this is that some of these issues rank very highly for the younger generation’s value system. There is much more awareness among younger people. They hear a lot more about the negative effects of issues they may face, like climate change.

BLACKSTOCK This is the direction in which the market is travelling and it won’t go backwards from here. It will only gain momentum.

TAPLEY We have actually seen it on RFPs for lending, where borrowers are asking us to demonstrate our position on sustainability from an organisational perspective in addition to what loans can we give them.

FOX We have also experienced this.

BISCHOFF Our wealth business did a deep analysis on its demographics which showed that, to Jacqui Fox’s point, the younger generation has a very strong preference for ESG investments. Interestingly, though, retirees favour this as well – because they want to leave a positive legacy. There is an interesting dynamic at play.

KENNA It is easy to be negative and say that because there hasn’t been a lot of issuance we haven’t achieved much, but there is a lot of cause for optimism. There is a lot of work still to do but many things are happening behind the scenes. Investors are moving forward and there is a positive outlook in this segment of the market. As Fergus Blackstock said, it will only continue getting bigger.