Long-term sustainability vision drives TCorp’s report and market return

As a growing group of borrowers become seasoned issuers in the green, social and sustainability (GSS) bond market, participants’ attention is increasingly turning to ongoing reporting on use of proceeds and sustainable assets. New South Wales Treasury Corporation (TCorp) took a lead position on reporting in October and followed a few weeks later with a second GSS bond.

TCorp released the NSW Sustainability Bond Programme Annual Report on 29 October, ahead of its first transaction in sustainability-bond format (see box). TCorp debuted in the green-bond market in November 2018 and has since broadened its programme.

KangaNews spoke with Fiona Trigona, Sydney-based head of funding and balance sheet at TCorp, about the strategy behind the annual report and the evolving GSS bond space in Australia.

TCorp to provide liquidity for its latest GSS bond

New South Wales Treasury Corporation (TCorp) says it will provide liquidity in its latest green, social and sustainability (GSS) bond and believes growing liquidity in the asset class is its next evolutionary phase. TCorp’s A$1.8 billion (US$1.2billion) sustainability bond is the issuer’s second foray into the GSS bond space, following a A$1.8 billion green bond last year.

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Our coverage of the GSS bond market has tended to focus on issuance, though issuers often say follow-on reporting is equally important. How important is the annual report in the context of an ongoing GSS issuance programme?

The publication of our inaugural annual report was crucial before we launched our next transaction, to provide investors with confidence in our overall GSS issuance programme. It was important that we demonstrate to investors in our last green bond that we were thorough during the asset-identification process and at a later stage were able to fulfil our commitment to measure the sustainability outcomes of these assets.

In recent years, investors have become more sophisticated with their ESG [environmental, social and governance] and SRI [socially responsible investment] mandates and are asking more detailed questions. They expect to see issuers periodically report on the impact of their investments – that is, what outcomes are being delivered by the projects earmarked to the GSS bond.

How did you settle on the format of the report and the specific content? In particular, are investor expectations reasonably uniform when it comes to ongoing reporting or did TCorp find itself trying to respond to investor demand for reporting in various formats and in line with various standards?

TCorp worked closely with NSW Treasury’s Office of Social Impact Investment and other government agencies in producing the annual report. We aligned our report to global standards as much as possible. We wanted to reiterate the overarching vision of our programme in addition to reporting on the assets and what the agencies are doing more broadly.

We also thought it was important to highlight what the NSW government is doing in sustainability, provide context on the rise of green bonds here and overseas, and show our strong governance structure.

The move to sustainability-bond issuance from green bonds involves the inclusion of social as well as climate-related investments. Will any changes to reporting be required to account for the social side of the asset pool?

We don’t expect any material changes in our reporting to account for the social assets in a year’s time, notwithstanding the reported data will mostly focus on social outcomes. Our annual report will continue to evolve as we are guided by investor feedback about implementing a consistent format and as more standards are developed.

How did investors receive the debut sustainability report on your latest deal roadshow?

Our sustainability report was very well received thanks to the quality of content. We reported on tangible sustainability outcomes, in addition to providing an overview of what the state is doing in this space. One key investor also shared that this was best practice in sustainability annual reports.

Specific feedback depended on where investors are sitting on the ESG spectrum. Impact reporting was crucial for most investors, particularly those with specific ESG mandates. The level of detail required by the ESG-focused investors included understanding the state and government agencies’ strategies in incorporating climate-change risk in their decision-making processes.

To what extent did global standards give guidance for TCorp when it was developing its annual report – for instance around reporting of carbon offset and emissions reduction?

We researched a wide range of published standards and sample impact reports completed by other GSS bond issuers. These references were instrumental as a starting point as they illustrated the market’s expectation. We were also pleasantly surprised to discover that NSW government agencies reported on a lot more than ‘standard’ metrics.

Would a specific national reporting or measurement standard be helpful or is Australia better off following emerging global norms?

Our programme is currently aligned to global standards such as the International Capital Markets Association Sustainability Bond Guidelines, Climate Bonds Standard (where applicable) and the UN Sustainable Development Goals.

Given we issue to a global investor base, global norms are more easily understood by a wider range of investors. But this does not preclude us looking at domestic standards as we acknowledge that some of our assets may be unique.

“We don’t expect any material changes in our reporting to account for the social assets in a year’s time, notwithstanding the reported data will mostly focus on social outcomes. Our annual report will continue to evolve as we are guided by investor feedback.”

Producing a detailed annual report is presumably another cost item. Will issuers continue to bear all the associated costs of labelled GSS issuance?

Every issuer has to assess the reasons for their activity in this format. For us, it not only helps diversify our investor base – as seen in our last two deals – it also showcases the NSW government’s ongoing commitment to addressing environmental risks and social issues affecting our state.

This year, our issuance programme is A$13.3 billion [US$9 billion] – much larger than recent years, where it’s been an average of around A$5 billion a year. Having a larger funding task means we need to find other ways to source new money, and we believe the ESG space is a way we can achieve diversity thanks to the growing demand for these bonds.

What is the potential scale of sustainability-bond funding you think you could do as a proportion of your overall funding?

Although this year’s funding programme at A$13.3 billion is significantly larger than last year’s task, for both years we issued A$1.8 billion in GSS bonds. Our benchmark programme will remain our main source of funding and I believe issuing in GSS format will be a small percentage of our overall funding task. This may grow over time, subject to the eligible assets in our pool.

Some issuers believe GSS bonds could reduce liquidity in the mainstream curve. What is TCorp’s view?

It really depends on the size of issuance and the overall funding programme and balance sheet. Issuers with smaller bond lines will not have the liquidity that a bond of A$1.8 billion in size should. Investors tend to buy and hold these lines, however the feedback we’ve received on last year’s green bond was that there is sufficient liquidity.

Have you had any feedback from investors around key state assets being ringfenced for sustainability bonds, leaving vanilla bond investors with the ‘brown’ assets?

When we present to investors, we present the whole story. It’s our role to promote to investors how the NSW government delivers services to the people of NSW.

Currently there are eight green and two social assets earmarked against our two GSS bonds, so I would say that the majority of the state’s key assets are still being funded by our vanilla bonds.

While a large percentage of projects funded by the state could relate to green or social, investors expect impact reporting to be done on projects linked to specific GSS bonds.

Does the shift to issuing sustainability bonds mean there will be no further green-bond issuance by TCorp given the flexibility in eligible assets afforded by the former?

The NSW Sustainability Bond Framework allows us to issue in green, social and sustainability formats, but the type of issuance really hinges on the eligible green and social assets in the pool. This year we have the premier’s new priorities, which largely focus on social projects. We also wanted to ensure our next issuance in sustainability format supported the state’s overarching goals.