Will the smoke clear?

Transition is the theme of the day in global sustainable debt, and Australian capital markets are adopting the idea that funding environmental and social evolution across the economy is the next frontier of development. But they are hamstrung by retrograde government behaviour – especially in the environmental space.

Laurence Davison Head of Content and Editor KANGANEWS

If you ask any sustainable-finance professional in Australia about public policy in the context of their area of expertise, the likely response will be a roll of the eyes and a request that whatever they say stay off the record. In short, everyone knows that having a government that refuses to acknowledge the reality of climate change makes everyone’s lives unnecessarily harder. .

This is a shame, because the mood internationally – or at least in Europe and Asia – is that sustainable finance is at a crucial juncture. The deadline for UN Sustainable Development Goals is 2030. The same year also became prominent in 2019 as the tipping point for a raft of potentially catastrophic climate outcomes.

We have barely a decade to make massive social and environmental changes, many of which will require investment on an almost unprecedented scale.

Even in Europe – the acknowledged world leader in sustainable finance – the mood is increasingly concerned. Great strides have been made, but speakers at the International Capital Market Association’s annual Green and Social Bond Conference in Frankfurt in June 2019 freely acknowledged that the pace of capital redirection has to accelerate rapidly to achieve carbon-reduction goals.

It was noted, for instance, that while many companies and bond issuers have adopted sustainable finance, there are still large swaths of the world economy that are not engaged with the conversation. This includes big chunks of the industrial sector – companies that may not be on the front line of carbon transition, like those from the resources or energy sectors, but which are often huge power consumers.

The equity market is making rapid steps towards understanding the materiality of environmental, social and governance (ESG) risks.

Debt is further back on the grid, but product developments point to an improved trajectory. For instance, many bankers believe the sustainability-linked loan (SLL) will be a crucial tool in taking the debt market to a new understanding of ESG on an entity, rather than an asset, basis.

“Ironically, it's the smoke in their eyes that may make Australians see more clearly where national priorities ought to lie. Capital markets must be prepared for even heavier lifting when they do.”

The name of the game is transition. Green bonds have been a useful step towards engagement with sustainability in the debt market and most market participants believe they will continue to have a place. But the next stage is really granular understanding of the nature and scale of ESG risks borrowers face and revising the cost of capital to reflect them. In effect, sustainable finance needs to become, simply, finance.

The loan market is moving, but bonds are still lagging. There have been two sustainability-linked bonds from the same European issuer, issued in 2019, which did not contain a coupon step-down for good sustainability performance. This sector is yet to take off, for sure.

The Australian market actually is progressing quite well considering the limitations placed on it. Green, social and sustainability (GSS) bond issuance is growing, though it remains a fraction of the total and the majority of issuers are not close to bringing deals.

There is a lot of hope for SLLs, which many believe could be a game changer for volume in sustainable debt and as a source of assets off which banks can issue in GSS format.

In the background, though, looms a government that has barely progressed beyond outright climate-change denial.

This policy environment makes some market ambitions impossible. How can lenders plan for energy

transition when an emissions-trading scheme is treated like a disease pandemic – something to be guarded against and kept at bay at all costs?

I write these words as Australia commences what threatens to be a historically devastating bushfire season.

The federal government has cleverly triangulated its response to this natural disaster, walking the tightrope that any specific fire emergency cannot be directly linked to climate change to insist that discussion of Australia’s increasingly volatile environment is somehow inappropriate.

Ironically, it is the smoke in their eyes that may make the Australian electorate see more clearly where national priorities ought to lie. Capital markets must be prepared for even heavier lifting when they do.