ANZ’s future lies in the balance sheet
ANZ is connecting the dots between the asset and liability sides of its balance sheet. It has already transitioned its use-of-proceeds bond issuance to UN Sustainable Development Goals (SDG) format. The bank hopes in future to refinance a much larger pool of sustainability-linked loan (SLL) lending by using these loans to back labelled bond issuance.
Some of the most interesting sustainable-finance work being done by banks globally is around developing a deeper understanding of the whole balance sheet. With a total asset book of nearly A$1 trillion (US$683.1 billion), the scale of a task of this nature is enormous for a bank like ANZ.
The journey is still in its early stages, but ANZ has a clear vision about what it wants to achieve. “It’s all about using a funding target linked to the SDGs and our corporate sustainability agenda to really get into the details of how our balance sheet is formed,” explains Mark Whelan, group executive, institutional at ANZ in Melbourne.
Katharine Tapley, head of sustainable finance at ANZ in Sydney, adds: “We have had the idea of building our understanding of how the balance sheet fits with concepts of sustainability for a few years. But where we want to take it is much clearer now. We now have the tools to assess and measure our balance sheet in this way.”
ANZ has high aspirations when it comes to using the available tools to reshape its balance sheet to match its commitment to sustainability and in particular the SDGs. This includes an expectation of a greatly enhanced link between the bank’s corporate purpose, its sustainability goals and its funding programme.
At the heart of ANZ’s balance-sheet plans is the evolution of sustainable finance towards a greater understanding of institutional strategy and behaviour. Whether or not use-of-proceeds debt-market products are relevant in the longer term, ANZ’s goal is to reflect the work it has done on corporate purpose and the way it measures its performance against those goals through the balance sheet and funding.
For the foreseeable future, ANZ plans to ramp up its use of SDG bonds within a wholesale funding task that is typically around A$20-25 billion annually. In November 2019, the bank issued its second euro-denominated SDG bond – in tier-two format – to add to the domestic green bond it printed in 2015 (see chart). But ANZ’s ambitions are for greatly enhanced issuance volume.
“I want SDG bonds to be a core part of our funding programme in future,” says Adrian Went, group treasurer at ANZ in Melbourne. “The fact that the second SDG bond we did was in tier-two format is also significant because tier two is an important part of our funding focus going forward.”
It is no coincidence that ANZ’s first two SDG bond deals are both euro denominated. Went says European investors have made it clear that this is becoming an increasingly important product not just for SDG funds but also because mainstream funds are moving towards evaluating issuers through an environmental, social and governance (ESG) lens. The SDGs are a commonly used tool for doing so.
ANZ attracted €2.7 billion (US$3 billion) of demand for its latest SDG bond, which printed final volume of €1 billion. The scale of demand was also illustrated by the price revision achieved. Having launched with an indicative margin of 160 basis points over mid-swap the deal priced at 140 basis points over mid-swap. It has also performed well in the secondary market. European investors bought most of the deal but 37 per cent was also sold into Asia.
“Investors are increasingly differentiating between issuers that are strong in the ESG space and those that aren’t,” Went continues. “Issuing in this format is the right thing for the long-term sustainability of our funding programme because it will ultimately provide access to funding pools that others will not have.”
Tapley confirms that investor feedback around the most recent SDG transaction spoke to a much greater degree of sophistication and desire to understand issuers’ sustainability credentials, commitments and performance at corporate level. Using SDG deals and their like to indicate that a borrower has a vision around sustainable lending makes these issuers a better risk in the longer term and beyond the confines of a specific bond deal.
“This represents a shift in the way investors are thinking,” Tapley adds. “When we did the first SDG deal, which was less than two years ago, discussion with investors was very much about the deal and the specific assets. This time it was much more about what ANZ is doing as a business.”
Went adds: “Investors are clearly looking for alignment between the bond itself, the bank’s purpose and the bank’s overall approach. The buy side doesn’t want banks to come to market just because they think it is a good idea to issue this product – they want absolute alignment. The way we have approached this gave us a significant amount of credibility with investors.”
European asset managers told ANZ that impact reporting is also important in this context, Went adds. He says a number of investors commented favourably on ANZ’s disclosure and transparency relative to other issuers, in part due to its detailed impact reporting.
ANZ has yet to test markets outside Europe for SDG bond demand. Went says Asian interest is growing but remains at a relatively early stage. On the other hand, he reveals: “I’d be very surprised if we didn’t do something in SDG format in the domestic market in the near term.”
Although ANZ has significant ambitions to grow its qualifying asset base, the relatively limited volume available to date made Europe the obvious place to print the first two SDG deals, especially given the additional-capital format of the second. But Whelan says: “Our team talks to Australian investors frequently and we know there is demand. When we do client roadshows the question of when ANZ is going to do a domestic sustainability issuance often arises.”
Tapley adds that there has been a marked acceleration in the Australian investor base in the last 18 months. She says Australian ESG practices are already regarded as relatively sophisticated globally on the buy and sell side, thanks to the quality of deals in the local market and the sophistication of thinking among Australian asset owners.
The funding nexus
Plugging in to developments in the global debt market, in and of itself, provides an incentive for ANZ further to overhaul its balance sheet. “The scale of issuance ambitions we have means the institutional team needs to make sure it’s writing the assets we need to be able to issue this product,” Went comments.
This is about much more than just generating qualifying assets to provide an in-demand product, however. The way ANZ is thinking about ESG across its balance sheet makes the treasury function part of a nexus of factors that have mutual and additive benefits for the overall transition.
SLLs are at the front line of growth. ANZ has huge hopes for SLL growth, having written Australia’s first bilateral facility at the end of 2018 and been a sustainability coordinator and joint bookrunner on the first fully syndicated transaction in May 2019. The two deals were a A$50 million loan to Adelaide Airport and a A$1.4 syndication for Sydney Airport.
The market should expect to see a lot more lending in this format. Tapley believes it will comfortably eclipse use-of-proceeds bond issuance, adding that the scale of demand for SLLs from ANZ’s corporate client base is vast.
A bigger SLL book could be a major source of the assets Went wants to fund in the SDG bond space. “One thing I’d like to test with the market is using sustainability bonds to refinance our SLLs,” Tapley says. “At the moment we have A$1 billion of our balance sheet in SLLs but that’s only going to grow – customer appetite for these types of transactions is uncontrollable. We are very well placed to continue to lend in this format right across our networks in Australia, New Zealand and abroad. It makes perfect sense to use our bond programmes, with some tweaking, to recapitalise this portfolio of loans.”
The untested aspect is the linkage of assets that are not explicitly designated for specific projects – a large part of the appeal of SLLs to borrowers is the fact that they can be used for general corporate purposes rather than being tethered to assets – with use-of-proceeds bonds like ANZ’s SDG programme.
This question may resolve itself in time, by one of two methods. The first is the possibility that capital markets will transition to assessing issuers’ ESG credentials entirely separately from the lens of labelled transactions – in effect making green, social and sustainability bonds redundant. The second could be the continued development of a bond that more closely mirrors the SLL, moving away from pure use of proceeds and towards variable cost of funds based on issuer-level sustainability KPIs.
The SDG programme certainly remains relevant at present, however. Tapley says: “There will still be a place in the medium term for use-of-proceeds transactions. But I can foresee deals emerging quite soon where the sustainability element is linked to the performance of the borrower and not so much to specific underlying assets.”
Starting point: ANZ's strategy and purpose
Debt investors globally, and especially in Europe, are increasingly keen to get to grips with borrowers’ environmental, social and governance (ESG) credentials on an institutional basis. ANZ believes it has strong foundations to meet buy-side expectations.
This starts with overall corporate strategy, which is “to promote the financial wellbeing” of the bank’s customers. Feeding into this is ANZ’s purpose, which is “to shape a world where people and communities thrive”. One of the ways ANZ is bringing its purpose to life is through action on complex issues that matter to society and are core to the bank’s business strategy. ANZ is focusing its efforts on financial wellbeing, environmental sustainability and housing.
Deeper in the balance sheet
So far, ANZ’s balance-sheet transition is focused on the institutional sector. This is no surprise: institutional clients tend to have sustainability agendas of their own, while institutional assets are easier to analyse and tag for impact and materiality. But ANZ’s ambition does not end here.
Perhaps most notably, the bank has a mortgage book of more than A$250 billion and Tapley says there is “a lot of potential for innovation on the mortgage product side” across the market – including, though not limited to, ANZ.
Product development would probably require building codes to be addressed in Australia. But Tapley says really good work is being done by the Green Building Council of Australia, the Property Council of Australia and the Infrastructure Sustainability Council of Australia to develop standards in the residential sector that would help create the framework needed to generate green mortgages and, in turn, structure funding off the back of them.
ANZ already offers a brace of green mortgage products in New Zealand. Healthier Homes has a target to provide NZ$100 million (US$65.6 million) of interest-free loans to mortgage holders for home insulation. The other product offers a rate discount if the borrower builds or renovates to a minimum of six stars under Green Building Council of New Zealand standards.
“Anecdotally, we have been told that ever since ANZ announced this target the Homestar assessors around New Zealand have experienced a marked uptick in enquiries about the rating tool,” Tapley reveals.
Elsewhere, ANZ has committed a lot of forward-looking lending to the commercial agriculture sector in Australia and New Zealand. This will be a focus for the bank’s A$50 billion sustainable-lending target as well as providing potential assets for SDG bond issuance.
The scale of actual and potential asset growth is dizzying. Even without considering the mortgage book, the bank’s A$50 billion target for environmental and social lending by 2025 already marks a major step up. The original target set in 2015 was A$15 billion of lending by 2020 but the bank comfortably surpassed this during 2019, reaching A$19.1 billion by 30 September.
“We expected this would happen so we started conversations in the middle of the year around the next iteration of the target,” Whelan says. “We knew we wanted a bigger number and a broader target – it had to cover more than just what the A$15 billion target was covering, which was focused on low carbon and environmental sustainability.”
The enhanced lending target covers all three priority areas and also introduces alignment to the SDGs. “We’re really bringing together the whole story of the momentum behind our corporate policies, our purpose and our business strategy, overlaid with the SDGs as a tool for measurement,” Whelan adds.
Activity in the institutional bank is accelerating even ahead of the expected explosion of transaction flow in the SLL space. Tapley says her business completed eight deals in the financial year ending 30 September 2018, a further 25 in the next 12 months and had already done 12 between 1 October and mid- December 2019.
The strategy goes beyond ANZ’s own balance sheet, too. Another area the bank is studying closely is sustainable supply chains. “We want to think about how we can work with corporate or institutional customers with deep supply chains,” Whelan explains. “For example, in the construction sector there could be opportunities to create vendor-financing products that incentivise prodution of products like lower-carbon cement and lower-carbon steel.”
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