Sustainable finance heads to the mainstream

Australia has come a long way in the evolution of sustainable finance. Participants at the annual roundtable for the KangaNews Investing with Impact Yearbook agree that the conversation is moving towards a holistic assessment of environmental, social and governance (ESG) performance as opposed to a narrow focus on use-of-proceeds products. There is also bigger emphasis on transition in the sustainable-finance sector – a highly salient topic for the Australian economy. This could help further broaden the universe of entities that will work on integrating sustainability into their business practices.

  • Michael Chen Head of Sustainability WESTPAC BANKING CORPORATION
  • Aziz Dean Global Head of Debt Products WESTPAC BANKING CORPORATION
  • David Jenkins Head of Sustainable Finance NATIONAL AUSTRALIA BANK
  • Scott Mitchell Head of Funding NATIONAL AUSTRALIA BANK
  • Katharine Tapley Head of Sustainable Finance ANZ
  • Paul White Global Head of Capital Markets ANZ
  • Samantha Swiss Chief Executive KANGANEWS
  • Matt Zaunmayr Senior Staff Writer KANGANEWS

Zaunmayr With recent deals, total green, social and sustainability (GSS) bond issuance for 2019 has surpassed A$10 billion (US$6.8Êbillion). But is take-up as wide as it could be among issuers and investors?

DEAN We are seeing more and more of our clients - borrowers and investors - showing interest. Even some Asian investors, whether they are banks or funds, are showing interest in sustainable finance.

In the traditional market, we often see companies borrowing from their banks and then doing a bond. What I think we will see develop is issuers doing a sustainability-linked loan (SLL) and then refinancing via a GSS bond. Borrowers can get a bespoke loan that suits their profile and industry, and which they could structure to meet the targets required.

I don't see further market development being about issuers either doing SLLs or GSS bonds. I think it will be both.

CHEN I like to look at this in terms of segments of issuers, like corporates, semi-governments and banks. The banks were the first movers in Australia and all are actively looking at the market. The only constraint is the availability of assets.

Semi-governments have all talked publicly about the states' major infrastructure task. Some are even bringing this capex forward and are looking to refinance through the GSS bond market, which is pleasing. A lot of the physical and social infrastructure spending by the states, like public transport and eductation, lends itself well to the green and social categories. We should continue to see large-volume deals.

It's a different story for corporates. There is always interest, but whether this translates into deals is a separate matter. Clients are getting closer, though - and there is much interest.

A couple of years ago, the sense was that transaction costs for GSS bonds would be too high and the process too resource intensive. This has changed: now there is a sense that corporates want to be involved and it is a case of looking at how they can.

Cost is no longer the barrier. It is more about internal resources and having sufficient assets for GSS bonds. Also, as we get more sector definitions - beyond renewable energy, buildings and low-carbon transport - there will be more eligible green and social assets. This will open up the market to more potential issuers.

JENKINS November 2019 was the outlier for issuance. There were 10 transactions for almost A$4 billion, which alone is more than half the total issued in the GSS market in 2018.

Through the early part of 2019, there was possibly some trepidation from new issuers around coming to the GSS market. But there have now been some good examples of new issuers in the market, including international banks like MUFG [Mitsubishi UFJ Financial Group] and OCBC [Oversea-Chinese Banking Corporation] through its Sydney branch. NextEra Energy has also come to the Australian dollar market in Kangaroo format, as well as National Housing Finance and Investment Corporation (NHFIC) and flexigroup, which brought two green securitisation deals in 2019.

It took a while to establish comfort about the depth of demand in Australia. But the deals done so far have been well supported. It is disappointing that the corporate sector has been slow to issue, but engagement from issuers and investors has increased dramatically – domestically and offshore.

From National Australia Bank (NAB)’s perspective as an issuer of GSS debt, 2018 was a breakout year. We raised more than A$2.5 billion across four green bonds we brought to market in a range of currencies and formats. We then followed up with the uBank retail green term deposit, launched in early 2019.

Swiss Why has corporate issuance lagged?

JENKINS One limiting factor has been resources. The issuers that have come to market have usually been those that are already well down the path of integrating sustainability across their businesses. Issuing a GSS bond aligns with their strategies and makes sense for these issuers.

Corporates that are focused on issuance costs in isolation from their broader sustainability strategies will face challenges. We find that things start happening when treasury teams, C-suite and sustainability teams are integrated and working together.

TAPLEY I agree with Michael Chen that the cost piece is disappearing from the marketplace. We know C-suites have shifted their mindset around climate change and sustainable development. On the other hand, use-of-proceeds borrowing is quite challenging for most corporates because they need to have a substantial asset base. Particular sectors – such as property, low-carbon transport, renewable energy and certain other types of infrastructure – will always lend themselves to use-of-proceeds transactions.

It is morphing, though, more into a greater focus on sustainability. This will propel these markets forward, through the growth of products like SLLs, which we have seen emerge in the Australian market in 2019.

The investor market is becoming more sophisticated. It is no longer just about the transaction and how funds are being used. It is more about what the borrower stands for and how the transaction matches with the company’s overall sustainability strategy.

DEAN When it comes to loan product and sustainable finance, we are often asked why there is not a secondary loan market in Australia. The reason is we never really needed one – there has never been a real driver for it.

However, I think sustainable finance could be the trigger for a real secondary loan market in Australia because demand for sustainability-linked loans is not just price-driven. There is a whole different complexion because it is also driven by behaviour and shareholders.

WHITE The level of borrower interest really depends on the sector and the client. But we often have meetings where our sustainable finance team joins the debt-capital-markets team.

In the more liquid part of the market, 2019 has been a very positive year with a lot of issuance from supranational, sovereign and agency (SSA) issuers and semi-government borrowers. As David Jenkins mentions, there has also been issuance from offshore corporates and financial institutions, which is good for the expansion and liquidity of the market.

Another positive theme on the corporate side is that the domestic market is the option of choice at the moment. This has not always been the case but I don’t see it changing in the immediate future. Then it is a case of whether or not the issuer has the bandwidth to look at a green or sustainability deal.

TAPLEY What is also pleasing is that there has been repeat issuance. New South Wales Treasury Corporation (TCorp) and Bank Australia have come back while NHFIC is the first issuer to do two social bond deals in one calendar year. In New Zealand, Kainga Ora – Homes and Communities, Argosy Property and Auckland Council have all returned to the GSS bond market, while Contact Energy also issued its first green bond during 2019. This speaks to confidence from borrowers that they have their frameworks and their asset bases in place. It also speaks to confidence and appetite from investors.

“I think sustainable finance could be the trigger for a real secondary loan market in Australia because demand for sustainability-linked loans is not just price-driven. There is a whole different complexion because it is also driven by behaviour and shareholders.”

Swiss Why have there not been as many Australian bank issuers in the domestic GSS market in 2019?

MITCHELL We have issued GSS bonds in Australian dollars, US dollars and euros. GSS bonds are sought after in our local market and there is certainly appetite but it is not necessarily accretive to our total investor universe. This is probably why there hasn’t been the volume or breadth of issuance from financial institutions in Australian dollars – compared with euros, where there are far more specific and granular mandates in the GSS space.

We want to have as many avenues available for diversification as possible. In this sense, Europe has led the way for issuance in GSS format, as it is accretive to our total universe and expands our investor base.

Australia is very much on the journey towards this being the case, but it is behind Europe. It will probably evolve in time and we will potentially see some bifurcation in demand for GSS products and traditional vanilla bonds.

Asset constraints

Australian banks say the biggest limitation on their ability to issue green, social and sustainability (GSS) bonds is the scale of suitable assets on their balance sheets. In this context, deploying assets in the most productive areas is key.

SWISS How limited are banks by the volume of assets they have to support GSS issuance?

MITCHELL We have finite capacity. If we could issue A$2 billion (US$1.4 billion) of GSS bonds every year, we would. Bond issuance is a great demonstration of what the bank is doing in the GSS space and also demonstrates our credentials to investors globally. It is becoming an increasingly relevant topic.

Given we have been so active in the space over the last two years it comes down to being able continually to generate the collateral. Our product offering regarding green and social overlays is evolving on the liability side, for example through the uBank green term deposit. We are deploying our collateral into products to suit different investors and customers, which broadens the appeal and reach of what we can do. And to the extent we continue to innovate on the liability side, it will need to be supported on the asset side.


If we could issue A$2 billion of GSS bonds every year, we would. Bond issuance is a great demonstration of what the bank is doing in the GSS space and also demonstrates our credentials to investors globally.


Zaunmayr We have heard from banks in Europe that an emphasis on sustainable lending helps incentivise and focus the minds of people within a bank on ESG lending, and thus helps drive the bank’s own sustainability strategy. Do you agree there is a virtuous circle here?

MITCHELL To be able to issue thematic GSS bonds, issuers need to have a strategy directed towards green lending and socially responsible objectives. In our case these align with the UN Sustainable Development Goals. This comes first and foremost.

The benefit of having a strategy and appetite for this type of lending is that, as funders, we can apply this collateral to the issuance function and feed the appetite for GSS product in debt capital markets.

Another benefit of a clear sustainability strategy for organisations relates to the way investors that are allocating capital to us view and score us as an issuer. Having clear and articulated sustainability strategies and providing a demonstration of how we are addressing climate change are becoming increasingly important. This is about issuance not only in GSS formats but across the whole spectrum of products.

CHEN I agree that there is now better integration of ESG from investors. Increasingly, they are looking through the asset pool and are interested in the broader ESG strategy and performance of borrowers because they can affect the underlying credit.

Swiss Are investors asking more questions on ESG even outside the context of GSS bond marketing?

MITCHELL Certainly. We see insurance companies, fund managers, pension funds and others on roadshows and they all have stakeholders that are demanding a better appreciation of what impact is being made from where they are investing their money.

Increasingly, investors want a better understanding of what their capital is going towards and whether it fits with their own sustainability principles. It is more important than ever to have a well-formulated and understood policy on sustainability.

“As we get more sector definitions – beyond renewable energy, buildings and low-carbon transport – there will be more definitions of green and social. This will open up the market to more potential issuers.”

Zaunmayr To what extent do the future prospects of the use-of-proceeds market in Australia rest on the growth of ‘dark-green’ investment funds – on the basis that without significant incremental liquidity there isn’t really much purpose for issuers to engage with the product?

JENKINS I think we often get caught up in definitions of dark-  and light-green investors. This is a challenge because the market has evolved so rapidly in recent times. In the early days, the main rationale for doing a GSS deal was investor diversity and targeting specifically dark-green investors. For example, World Bank will issue in GSS format only if there are incremental dark-green investors it can access.

We have moved beyond this, though – certainly for bank and semi-government issuers. The Australian market is following what has evolved in Europe, where there are familiar investors that buy GSS debt and manage large pools of capital, either across multiple strategies or in bespoke sustainable funds for customers.

Some familiar names – like Altius, AMP, Pendal, Pimco and UBS Global Asset Management – are arguably dark green because they have dedicated sustainable funds. It is still possible to classify these and many other large investors as both light and dark green – either or both.

If they are managing funds that integrate ESG screens first but don’t run specific sustainability strategies or funds, we consider them light green. Investors that are signatories to the UN Principles for Responsible Investment (PRI) manage funds that need to be deployed in this way but don’t have dedicated standalone green funds would also fit into this light-green category.

Whenever deal statistics come out, the breakdown of dark versus light green is often contentious. Members of the same syndicate often have different categorisations. Unless you tease out specifically which mandate an investment is going to, you are reliant on judgement calls to assess the dark-  and light-green split for each deal. Often there is just categorisation as either green or nongreen. Green being those that are considered light or dark green, are signatories to the PRI, have ESG integration in place and manage funds across either or both standard and sustainable mandates. Nongreen would be those that buy purely for liquidity or because they like the credit, irrespective of the nature of the deal and issuer.

Greening tier-two

In September 2019, ANZ Banking Group (ANZ) returned to its issuance of UN Sustainable Development Goals (SDG)-linked bonds with a euro tier-two deal. There is also a bid for subordinated labelled deals in Australian dollars, as evidenced by Mitsubishi UFJ Financial Group (MUFG)’s green tier-two bond priced the same month.

ZAUNMAYR ANZ chose the euro market for its return to SDG bond issuance. As this jurisdiction is the most developed global market for GSS bonds, might we see the banks focus their issuance efforts in Europe in future?

TAPLEY The main consideration for the euro transaction from a sustainability perspective is the sophistication of the investor base. European investors understand our framework. We are speaking to assets that fit a selection of the SDGs and Europe is where we understand there to be the most sophistication around understanding what this means.

WHITE It is clearly the broadest market for diversification. We had two teams in Europe for a week and touched more than 100 investors during the roadshow. The deal was the first tier-two SDG bond from a major bank, which added to its appeal.


The domestic market is untested for a tier-two green bond but the trend has been that these products do increase investor diversity in the Australian dollar market.


Swiss Is a move away from strict definitions an example of ESG becoming more mainstream?

TAPLEY Definitely. The corporate world is understanding, from C-suite down, that sustainability needs to be core to strategy. It needs to be high on lists of key material risks to be assessed and addressed. It is the same for investors. If they do not understand that ESG is a core part of their strategy as a portfolio manager, in time they will be out of business.

WHITE I agree with Katharine Tapley. Every investor we speak with has its own ESG screening and scoring. It doesn’t matter whether it is a specific green investor.

CHEN I agree. Our discussions with investors when they assess GSS bond issuance include the overall ESG performance of the borrower. Some borrowers want to come to market with a GSS transaction straight away and we advise them that they need to have a broader sustainability strategy across the business, because investors care about this. They look at ESG as part of the broader credit profile.

Some European investors have even begun to divest names because of their exposure to carbon-intensive industries. It is front and centre – and not just with dark-green investors.

Swiss What are the main initiatives underway to push forward in sustainable debt markets?

TAPLEY A few things are propelling the market forward, such as the Australian Sustainable Finance Initiative (ASFI). This is a cross-sectoral initiative aimed at making recommendations on how the financial system needs to change.

Regulators have also been vocal and clear on where they believe the financial-services sector needs to be. This sends a clear signal to anyone who borrows or needs insurance. The Task Force on Climate Related Disclosures (TCFD) is another example – it is a tool to enact the Australian Prudential Regulation Authority (APRA)’s messaging, which is that climate-change risk is a financial risk.

JENKINS APRA has reiterated its position a number of times. The Australian Securities and Investments Commission has also made statements relating to ESG and climate risk disclosure under TCFD reporting. And, at the end of 2018, the Australian Accounting Standards Board provided guidance around climate-related and other emerging risk disclosures which should be considered and included within financial statements.

The push for increased transparency and disclosure is continuing as a theme. Investors expect it. When we take issuers on GSS deal roadshows, they are expected to disclose what specific impact reporting will be provided for each deal. This is different even from a couple of years ago.

Swiss A lot of the guidance from regulators has been suggestive rather than prescriptive. Would more concrete regulation help drive the market forward?

JENKINS It may provide the market with more certainty. In New Zealand, for instance, the government is consulting on a proposal to make TCFD reporting mandatory.

Most large, listed corporates and financial institutions already report under TCFD or are working towards doing so. This reporting is voluntary, but if you are not doing it investors may ask why. It is all part of being more transparent and assessing risks.

In Australia, we have transition risk because of the nature of our energy, industries, resources and manufacturing sectors, which all tend to be emissions intensive. However, detailed transition plans are in place for many companies.

For example, BHP Billiton has a plan to exit fossil fuels and is looking at a range of other transition measures. Transition financing through loans linked to this transition, or use-of-proceeds bonds that fund transition investments, would make sense for a company like this.

This is where we get back to a definitional challenge, though. If a transition bond is structured as a use-of-proceeds transaction, it will be different from some of the structures we see for general corporate proceeds or for sustainability-linked products. Transition is a broadly defined and evolving term.

Zaunmayr How far away might the Australian market be from seeing the issuance of a transition bond or a sustainability-linked bond?

TAPLEY I think we will see sustainability-linked bonds in the Australian market within the next 12 months.

JENKINS The question is how big, how liquid and how frequent sustainability-linked bonds will be. We would not want them to become very niche and done only once. There are challenges to creating large, liquid transactions of this sort because by their very nature the deals are bespoke and having transparent pricing and providing secondary markets is challenging for such structured products.

In much the same way that the GSS market started with simple use-of-proceeds structures and has taken several years to get where it is now, there is considerable development to come in this space.

Swiss How do you encourage investors to change the way they view these products in order to push the market forward?

TAPLEY Ongoing dialogue is the key. It can help if you find a transaction where you can use a couple of investors to cornerstone.

JENKINS Investors want to see measurable impact with financial outcomes. In all honesty, I think a use-of-proceeds transaction makes more sense initially. A coupon linked to sustainability outcomes is quite niche and it will take time to find sufficient issuers and investors willing to participate and create a liquid market for these types of bonds.

The market has evolved from sustainability bonds placed within use-of-proceeds transactions to behavioural-based SLLs. But it took a while to get from one point to the other. It will also take time to get to a sustainability-linked bond market with coupons that step up or down. We have had structured instruments linked to ESG outcomes, but not yet with significant scale.

Swiss Why is it important to encourage investors to look at transition products?

TAPLEY Because they would be meaningfully accelerating transition if they did so.

DEAN I think developing transition bonds is very important for the GSS bond market because it would broaden the scope, especially in Australia.

It may kick off in the loan market, and one of the things we have talked about is a green loan linked to asset financing. This could provide a starting point. It would be a light-green loan, for example to a company that collects waste and wants to convert its truck fleet to the use of gas fuel.

CHEN Transition products have a lot of potential in Australia, given the make-up of the industries here. Until recently, many investors and stakeholders were only comfortable with assets that were dark green. But this could hurt the broader economic transition that is required and may also limit the efficacy of the sustainable-finance market. My view is that we need to be less purist and develop different shades of green.

The transition story is pertinent to Australia, and other markets such as New Zealand and Canada, where there are large, emissions-intensive industries. Definitions relating to transition are being debated at the moment but nothing has been set or agreed upon. There will be a lot of discussion on this over the next 24 months, which I think is needed.

JENKINS By their nature, the sectors where transition bonds would be relevant are the hardest to abate so the question is where investors can have the most impact. These companies might not be making significant green investments with the underlying assets they are financing, but they may well be making more material impact if they have committed to transition towards more sustainable and low-carbon businesses.

Several airlines, for example, have made commitments to transition to carbon neutrality, which has big implications for their businesses. How they finance this transition is important. AGL Energy (AGL) is another good example. It could earmark some of its renewable assets and issue a green bond or, alternatively, the company could do a corporate-level transition bond linked to its sustainability ambitions, including alignment with the Paris Agreement goals.

TAPLEY AGL’s SLL was linked to increasing renewables capacity and reducing emissions intensity. This was in line with the sustainability targets it already had in place, which sit within the tenor of the loan. There was also a two-way pricing grid so there will be consequences if progress doesn’t happen within the life of the loan.

JENKINS The unique thing about what AGL has done is disclose these metrics. It is an annual step up or down and the company has been transparent. It is all in the public domain.


Zaunmayr In the absence of favourable capital treatment, how easy is it to create internal incentives for products such as SLLs?

CHEN First and foremost, the main incentive for us is to partner with our customers to become more sustainable. Then, as it relates to capital treatment – whether regulated or via internal adjustments – the response needs to be measured. We are having a lot of internal and external conversations around this. My personal view is that capital weighting should be entirely risk-based. No-one should want to rush something through and be left with a question of who pays at the end. Therefore, we need to get much better at quantifying ESG factors. This will help with allocating capital weightings in the right way.

MITCHELL The European taxonomy is where the rubber hits the road with economics for a lot of this. Capital incentives or a taxonomy would likely push into the next phase of maturity for the format. If we really want to continue to see the breadth of sustainable finance evolve and expand, eventually economics will play a part. This would provide incentives for the allocation of finite resources and capital to this type of lending and the pricing transmission mechanism would also become clearer.

Ultimately, there is appetite that stems from the top of the business and then there is the economics, which is the transmission mechanism through things like capital benefits and charges to incentivise growth. This could really propel things forward on a sharper trajectory. What form this takes and under what timeframe remain unclear.

TAPLEY For ANZ, it is more about overall strategy. It starts and ends with our purpose. Our chief executive, Shayne Elliott, made a statement around the time of our annual review, published in November 2019, which reiterated that ESG is now part of everything we do.

Because sustainability is business-as-usual, the need to create specific incentives to create specific types of deals does not really exist – it is just how we operate. Frankly, customer demand is so great that if as a bank you are facing a customer and do not have the capability or willingness to engage in the sustainability conversation, customers will go next door. This is incentive enough.

JENKINS It is similar for NAB. Five or six years ago, working on green bonds often felt like a slower process.

We have similar conversations with issuers. What TCorp is doing internally regarding sustainability is helping shape what the broader market is doing. At NAB, the sustainable-finance team plays a key role in informing and shaping strategy, which is extremely interlinked with what we are doing across the broader bank.

We are increasing our commitments to deploy capital towards environmental-  and sustainability-themed financing. We have recently announced our coal-financing strategy, with targets in place to get there.

However, we don’t just leave these customers behind: we support their transition. For customers looking to transition, sustainable financing is the perfect opportunity. Customer discussions are now more around what can we do and how can we do it rather than just describing sustainable finance.

Much of what we do is education. We bring customers along for the journey. We have had the benefit of being at the front line for a while now, facing investors’ expectations and being at the forefront of market development. We often hear from issuers that have done roadshows offshore that they have been asked ESG-related questions for which they were unprepared. It is a collaborative approach whereby we can show our clients how we are approaching ESG and sustainability as an issuer, as a corporate and as a bank financier – and why it is important to us.

“The corporate world is understanding, from C-suite down, that sustainability needs to be core to strategy. It needs to be high on lists of key material risks to be assessed and addressed. It is the same for investors.”

Zaunmayr Natixis recently visited Australia to spread the word on work it has done to understand the climate-related impact of its whole balance sheet. Would such an approach be conceivable in Australia – and would it have value?

TAPLEY I admire what Natixis has done. It is phenomenal and market-leading. This move will be a huge competitive advantage for Natixis, at least with regard to what is expected from the regulators in Europe. It would be a competitive advantage for the Australian domestic banks to be looking at this, too.

We have met with Natixis and also started conversations internally around what we could be doing to assess the risk in our balance sheet beyond what we do on a qualitative basis as part of our usual credit assessment of customers. This is about taking it to quantitative from qualitative.

JENKINS Natixis presented to a broad segment of the team at NAB while in Australia, from risk partners to the balance-sheet, treasury and sustainability teams.

The best thing is that Natixis is happy to share its experience. There is intellectual property involved but collaboration is at the forefront. We each have bespoke systems and challenges around technology as well as resource constraints. We would love to be able to push this to the front of the priority queue but other challenges also demand financial and technology resources.

DEAN The key question with what Natixis has done is where its cost of capital goes as it transitions to a greener balance sheet. This is an interesting question for banks to consider.

We are looking internally at potentially putting in place a similar mechanism. It would not be as detailed as what Natixis has done, as this would be difficult for an Australian bank.

Our strategy would involve adjusting the internal capital charge for deals that meet certain criteria, to encourage more of it. This could be done formally through internal structures or informally through pricing matrices.

The big question is whether governments will come to the party with capital relief. We understand there have been discussions with the Chinese regulator and there have certainly been conversations with the European regulator. It would be a game changer if major economies had this kind of regulatory capital adjustment for green lending. But we are not waiting for it.

JENKINS For NAB, ESG is part of the credit-risk assessment process in every transaction we do. For Natixis, it is a net-zero game where some win and some lose.

The conversation is changing. For example, a few years ago, when asset-backed securities featuring solar photovoltaic technology were a new asset class, the focus may have been track record for the asset class. This is still relatively pioneering but there are now data sets that show outperformance of entities that have good ESG ratings.

Swiss Australia doesn’t seem to have much political impetus to support sustainable finance. Despite this, the local market is quite developed compared with parts of the world like the US and Asia. Is it enough for the market to drive development or would you like to see more political support?

DEAN It is our clients that drive it. In renewable energy, if we had waited for government regulation the market would not have developed as much as it has. Given the influence of Westpac Banking Corporation (Westpac) and the other major banks in financing greenfield development, waiting for regulation would have held this back.

Now, the scale of development in renewable energy is helping the Australian government meet its targets.

Who gains from bad performance?

One of the more interesting anomalies of sustainability-linked securities is that investors can benefit, in the form of margin step-ups, from a borrower’s poor sustainability performance. The market is still discussing the most appropriate response.

SWISS There is a moral issue around what investors should do with the gain made from an issuer missing its targets in a sustainability-linked loan (SLL) or sustainability-linked bond. How is this being addressed?

JENKINS I know investors that are already thinking this through in the context of sustainability-linked bonds and how to manage this should it occur. Some European borrowers have already entered into SLLs where they have stated that if they were to get a coupon step-down they would want to reinvest it into other sustainability-linked measures.


We advocate that SLLs have both margin incentives and penalties to encourage ambitious and material environmental, social and governance (ESG) risk and sustainability improvements from borrowers. This should improve ESG risk and, in the longer term, credit risk.


Zaunmayr What do participants believe will be the biggest developments in the sustainable-debt market, globally and in Australia, in 2020?

MITCHELL It will become incumbent on issuers of significant volume into debt capital markets to have pathways and strategies on their sustainability agendas that are better articulated and understood.

Global investors now generally expect us not just to have a programme for issuing in GSS format but a top-down, overarching strategy, over the whole bank, to get investors engaged with NAB rather than just with specific products. It is becoming more about integrated assessment.

JENKINS We will see more sectors and more formats, but also more synthetic and capital-release transactions. The French banks have led the charge with capital-release transactions, which free up capital to be deployed towards positive impact and sustainable finance. This aims to free capital from legacy transactions for lending that delivers more positive, sustainable and impactful outcomes across industries.

We will also see securitisation in different formats, given the scale of issuance. There will also be finance linked to sustainability and transition in a range of formats and catering to different customer segments.

TAPLEY Away specifically from product, I think disclosure and TCFD will pick up momentum in 2020. We are moving towards this becoming compulsory and certainly there are not many customers we are talking to that are not looking at disclosure and how TCFD fits in to provide more transparency.

WHITE We will see more sustainability-linked bonds, particularly in Europe. We have also seen product innovation in derivatives and I am sure this will continue. There are a lot more private placements for longer-tenor deals happening in Asia. Given where rates and yields are, we expect this to continue. There could also be more targeted, investor-led themed transactions over time.

CHEN A few interesting things have developed over the last 12 months that could set the stage for future development. Labelled product can trickle to other instruments. Towards the end of 2018, Westpac launched the world’s first certified wholesale green deposit product. For any product now, there is the question of whether a sustainability lens can be applied to it. This could be for trade finance, for example.

We said at this discussion at the end of 2018 that SLLs were the main expectation for development in 2019 and we have been proved right. I think there will be exponential growth in this product over the next 12 months.

Earlier in this discussion we also touched on the transition issue. I think this will come to the fore over the next 12 months. I don’t think we will land on a set of agreed-upon definitions as yet, but Australia is in the driver’s seat for what transition looks like.

DEAN I agree. I think this is the evolution we will start to see. It’s not that there will be one product fully developed and mature before something else comes from it. The evolution into transition financing will get going over the next year.

It is also not just loans and bonds. I think we will continue to see sustainability raised in other areas, like asset finance. This expansion will make sustainability much more mainstream than just having loans and bonds. The SLL area is the logical place for borrowers to start but it is not necessarily what we are targeting.

For Westpac, I would like to see the whole product suite develop so it becomes mainstream and borrowers think about financing in a sustainable way.

If you think about corporate structures, treasury teams look at loans and bonds, someone else looks at trade finance and someone else does asset finance. Mainstreaming sustainable finance means different people in our client set start to think about their requirements from financiers in a way that broadens the sustainability financing platform.

JENKINS There should be more growth in the retail sector, with products targeted specifically at these investors. There is a focus globally on green mortgages, which is a particularly large growth opportunity for Australia given the nature of our housing stock. Exchange-traded funds are another area that is easy to access for retail investors and is growing quickly.

We would like to raise more green deposits. We need to look at what is the better outcome for our customers and the community.

TAPLEY Away from capital markets, the lending market should continue to flourish. It is interesting to observe what has been happening with SLLs in Australia, in that they have tended to facilitate the return to the syndicated market of borrowers that had otherwise been doing bilateral deals.

They have been bringing their bilateral facilities together into a sustainability-linked format, which is then taken to the syndicated market. This is interesting from a structural perspective.

JENKINS The loan market is seeing more participants interested in deploying capital to support sustainability so it is likely that it won’t continue to be just the banks in this space. The banks have taken the lead but long-term investors that want to invest in loans and have an ESG focus will be keen.

There will also be opportunity for the banks to recycle some of the lending they do internally as it gets to scale. There could be bonds or asset-backed transactions linked to this lending.