Contact SLL highlights New Zealand’s growing sustainable-finance options
Contact Energy (Contact)’s new sustainability-linked loan (SLL) incentivises improvements in areas such as corporate governance, stakeholder engagement and environmental impact. Participants in the deal believe that the SLL product will be applicable for a broad set of borrowers in New Zealand as it is elsewhere.
Contact’s NZ$50 million (US$33 million) four-year SLL is a bilateral facility with Westpac New Zealand (Westpac NZ). It is the second SLL to be executed in New Zealand, following Synlait Milk (Synlait)’s deal with ANZ New Zealand in 2019.
Contact has been a leader in New Zealand sustainable debt. In 2017, Climate Bonds Initiative certified its entire borrowing programme green and, in 2019, it became the country’s first corporate green-bond issuer.
Louise Tong, general manager, financial services at Contact in Wellington, says the SLL comes under the green borrowing programme but has objectives separate from its green bonds. “The green-bond programme highlights to investors the low-carbon nature of our existing generation assets, whereas the SLL provides a dynamic incentive to improve outcomes across a broader set of ESG factors.”
The metric used to measure Contact’s progress towards targets will be RobecoSAM’s corporate sustainability assessment, which benchmarks performance against a company’s peers in areas such as corporate governance and environmental sustainability.
Tong says corporate governance metrics cover areas such as codes of conduct, stakeholder engagement, supply-chain management and privacy. The environmental side covers not just the overall footprint but also transparency in the company’s reporting and systems it has in place. For the social dimension, the framework includes corporate citizenship factors.
Contact will have an overall rating from RobecoSAM, which will need to match or exceed a target to get a lower interest rate on its loan. The margin will step up if it fails to meet the ratings target.
Joanna Silver, Auckland-based head of sustainable finance at Westpac NZ, tells KangaNews part of Westpac’s due diligence was to ensure the RobecoSAM rating and targets were appropriate and ambitious, in line with the Loan Market Association’s SLL principles.
New Zealand has long been touted as a jurisdiction where green finance should have a natural home, given the perceived greenness of its economy and capital-markets-relevant sectors like power generators. However, most of New Zealand’s corporate borrowers have not had incentive to enter the green-bond market, due to restrictions on same-class exclusion and the relatively small dollar value of assets that could be ring-fenced for such a deal.
SLLs could attract greater take-up as they can be tailored to specific company needs. As Synlait’s 2019 SLL demonstrated, the product is also applicable to New Zealand’s emissions-intensive agriculture sector.
New Zealand’s energy already comes primarily from renewable sources but an SLL can be applied across various ESG targets as is the case for Contact. Tong says environmental considerations account for about 40 per cent of Contact’s overall RobecoSAM rating.
Silver says conversations with institutional clients around their sustainability focus have increased over the last 12 months. “Contact was a natural partner for an SLL, given its market leadership in emissions reduction,” she explains. “But we also want to support those businesses that are more emissions intensive. Establishing these facilities depends more on a company’s willingness to transition and set ambitious targets than on how brown or green their balance sheet is now.”
The OECD estimates that US$6.9 trillion of investment every year to 2030 is required to meet climate and development objectives. Silver says the business and investment community have not yet grasped the magnitude of this financing task.
“Public sentiment has been slow to translate into corporate strategy, which is often preoccupied with short-term viability,” she tells KangaNews. “This is changing, though, and it is becoming clear that ESG considerations need to be included in short- and long-term viability strategies. New Zealand is small but can play a big role in leading transition finance – and we expect broad take-up of the SLL concept.”
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