NAB makes hard commitment to ESG strategy

National Australia Bank (NAB) has transformed the way it confronts environmental, social and governance (ESG) issues across the bank. At heart, this is a move beyond the concept of corporate responsibility as the basis of a sustainability strategy. The bank is now taking a more proactive approach, through a focus on social impact that drives assessment of tangible factors and concrete action.

Perhaps the most critical discussion in sustainable finance today is how financial markets can adapt capital flows to support the transition to a truly sustainable global economy. This means changing the way we view traditional financial capital, a concept that has remained static for decades.

The evolution of NAB’s strategy is about understanding the materiality of the transition to a sustainable future economy. It is an active recognition of the challenges involved for such an important aspect of the financial system, but also the opportunities this offers a bank through the transition to a shared-value mindset.

At the heart of this strategy lies a collective understanding of the action needed now to promote a vibrant and sustainable economy in the future. It’s not a ‘nice to have’ or a set of vague aspirational statements. NAB is serious about setting real-world goals and targets, and taking action.

Establishing a vision

NAB has taken a leadership position to inform its own strategy. A key piece of work within this context is the Australian National Outlook 2019 (ANO), which combines integrated modelling and research from the Commonwealth Scientific and Industrial Research Organisation (CSIRO) with input from ANO participants, a group comprising more than 50 leaders across 22 Australian organisations from industry and the not-for-profit and education sectors.

NAB and CSIRO partnered to deliver this project. The goal is to provide a compelling view of Australia’s future, based on new scientific data CSIRO provided that models the future of Australia’s natural resources and energy, productivity and services, and cities and infrastructure.

The move to initiate such a wide-ranging piece of work was informed in part by the global discussion on redirecting capital. “Our work on the ANO to identify the key shifts that need to happen in Australia was very much driven by global trends,” explains David Jenkins, NAB’s Sydney-based head of sustainable finance. “Our strategy is tailored to our core markets but it has not been developed in isolation.”

The offshore developments NAB leveraged include the evolution of the sustainable debt-financing market – such as sustainability-linked lending and transition-financing products. Jenkins confirms that Europe is still leading the market development but there is increasing take-up and engagement in Australia.

The ANO identifies two scenarios for the Australian economy in 2060 – the horizon date for the report. One is a “slow decline”, which largely maps the expected trajectory of the economy without clear leadership. The other is an “outlook vision”, under which the country takes decisive action and a long-term view, and thus achieves much more positive outcomes. The factors identified as contrasts between the two scenarios demonstrate the key role finance can and should play in trying to map the national trajectory to the more positive outcome (see table 1).

Table 1. Australian National Outlook 2019 scenario outcomes by 2020

Economic factor"Slow decline" outcome"Outlook vision" outcome
GDP growth 2.1% a year 2.75-2.8% a year
Increase in urban density Little change 60-88%
Real wages growth 40% 90%
Fall in urban vehicle kms driven per capita <25% 33-45%
Net emissions -11% Net zero by 2050
Growth in total energy use 61% 6-28%
Growth in real returns to landholders A$18 billion (US$12.4 billion) A$42-84 billion
Fall in average household spend on electricity 38% 58-64%
Environmental plantings in 2060 Minimal 11-20 mega hectares

Source: Commonwealth Scientific and Industrial Research Organisation, National Australia Bank April 2019

The ANO also identifies five key areas where its authors believe shifts will be necessary to achieve the positive outcome. The areas are industry, urban, energy, land and culture – and they inform NAB’s strategy for the short, medium and long term.

The relevance to a major financial institution of the shifts the report identifies is readily apparent. For instance, the change in technology refers to increasing uptake to boost productivity, investment in skills to ensure a globally competitive workforce in a technology-enabled future and the development of export-facing growth industries.

Even the culture-based changes the ANO recommends would have a direct impact on the financial-services sector. These shifts include rebuilding trust and respect in political, business and social institutions, encouraging a healthy culture of risk taking, curiosity and acceptance of fear of failure, and recognising and including social and environmental outcomes in decision-making.

“We wanted to focus on the issues where we can make a real difference by leveraging our assets and expertise to contribute to a more healthy and prosperous future for Australia in the long term.”

Developing a strategy

What the ANO provides is something more than a vision but not quite a roadmap. NAB’s social impact strategy and other commitments – including tangible, dollar-value financing commitments – attempt to bridge the distance to the target with a concrete plan of action.

NAB refreshed its social impact strategy in September 2019. The new strategy is a product of the work the bank has done to understand, in a material and meaningful sense, the path to a sustainable and vibrant future economy and its own role in ensuring this path is followed.

“We heavily leveraged the work we had recently completed in partnership with CSIRO on the Australian national outlook,” confirms Sasha Courville, general manager, social impact at NAB in Melbourne. “CSIRO’s modelling, expertise and the science behind it, together with participation from NAB and 20 other organisations involved in the process, underpinned the conversation about our strategy.”

The ANO is just one example of the way NAB used real-world analysis to maximise the relevance of its social impact strategy. Courville continues: “We took a step back and looked at everything that is going on in a wider context. We leant heavily on our materiality analysis, which is the product of a very comprehensive process over the past year.”

NAB’s plan is to use all the tools at its disposal to achieve positive results. Courville explains that this means leveraging strategic giving and corporate responsibility as well as the shared-value lens as a means of meeting societal needs into the future.

What the bank has produced is an enterprise-wide strategy and not just a product of the sustainability or social impact teams. Different teams within NAB will lead parts of the plan, after the board approved the whole in September. Courville says NAB is putting in place mechanisms to track progress and develop governance structures that will help deliver on the strategy across the organisation.

The social impact strategy aligns with the UN Sustainable Development Goals (SDGs), in particular the five goals NAB has identified as its priorities (see table 2). Once again, this alignment is about focusing NAB’s resources where they can have the biggest impact by linking the social impact strategy to the bank’s broader ambitions and responsibilities.

“We wanted to work out the areas where we can have a transformative impact and make a contribution to significant change,” Courville says. “This doesn’t mean we aren’t making efforts in other areas. But we wanted to focus on the issues where we can make a real difference by leveraging our assets and expertise to contribute to a more healthy and prosperous future for Australia in the long term.”

Table 2. Alignment of NAB's social impact strategy with UN sustainable development goals

Social-impact strategy goalDefinitionAligned UN SDG(s)
Financial health Helping people reduce financial stress and feel more in control of their money. 8. Decent work and economic growth.
Stronger communities Creating more sustainable, accessible and inclusive communities across Australia. 11. Sustainable cities and communities.
Banking on nature Driving investment in natural assets to improve community wellbeing. 15. Life on land.
Climate action Working with communities to ensure they are more resilient to climate change and supporting low-carbon economy. 7. Affordable and clean energy.
13. Climate action.

Source: National Australia Bank 2 December 2019

Making a material difference

The endgame of NAB’s approach is delivering measurable outcomes via quantifiable commitments to a raft of sustainability projects in the social and environmental realms. There are multiple examples from the social impact strategy. The goals of “financial health” and “stronger communities” are just two of these.

One of the measurables in the financial-health sphere is NAB’s commitment to provide A$130 million (US$89 million) and NZ$60 million (US$39 million) in capital for microfinance loans to people living on low incomes in Australia and New Zealand. The plan is to continue to build on support for people who are excluded from mainstream finance.

Courville says NAB has also established a framework to support customers who are experiencing vulnerability, an area she describes as “absolutely critical for the Australian banking sector at this moment in time”.

This is an area where having an approach based on sustainability and social impact that is deeply embedded across the business is vital. Courville explains: “Vulnerability is situational and it’s not something you can tag onto a customer. We have set up a dedicated team to support our people and customers, that provides the special attention and care needed to address how people experiencing vulnerability can interact with their banking and finances.”

The financial-health goal also incorporates NAB’s work to support older customers and their access to financial services. “We know older customers are much more likely to be the victims of scams and frauds. Proactive engagement and training on our side go a long way to providing a better experience for these customers,” Courville says.

“We need to engage with our customers about how they can put in place material, long-term steps to transition. It’s a two-way partnership. It’s not just a matter of offering financing, even with a cheap cost of funds. It’s more holistic and material than this.”

In the stronger-communities segment, NAB is building on the ANO work to make a commitment of A$2 billion – over three years and across balance-sheet lending, capital markets and partnerships – to help increase the supply of affordable and specialist housing in Australia. Categories include crisis accommodation, disability housing, community housing, sustainable developments and build-to-rent properties.

“We really need to understand the issue of affordable housing from an ecosystem perspective, to ensure all the different pieces of the spectrum are working well and needs are being met,” Courville comments. “If one isn’t working, the challenges shift into other parts of the spectrum – in particular crisis accommodation. Our plan is about having appropriate housing for people at the right time and, therefore, focusing on creating longer-term, healthy outcomes for people.”

Jenkins explains that because NAB’s Australian focus is on different parts of the affordable-housing spectrum, the work brings together expertise from right across the bank. “This focus is bank-wide, extending across divisions – it’s not just a corporate and institutional focus area,” he says. “We have established an enterprise-wide council to coordinate our efforts and ensure we’re tackling the challenge as effectively as possible.”

While the focus is on NAB’s home markets of Australia and New Zealand, the bank has also established a presence in UK affordable and social housing. It has provided commitments of more than £500 million (US$658 million) to entities including Sovereign Housing, L&Q Housing and A2Dominion Group as well as bringing Places for People to the Australian and US private placement bond markets and being a joint lead manager on Sovereign Housing’s recent sterling bond deal.

NAB’s commitments also extend to the environmental sector. The bank has committed to providing A$70 billion of environmental financing over 10 years to 2025. Since 2015, NAB has cumulatively provided nearly A$34 billion of this commitment. NAB will halve financing to thermal coal mining by 2028 and intends to be effectively at zero by 2035. NAB will cap its exposure to thermal coal mining at curent levels and will not take on new-to-bank termal coal mining customers. With legacy assets, the focus will be on supporting existing customers across the mining and energy sectors to facilitate an orderly transition to a low-carbon economy.

Timing the run: we must know how far, and how quickly, to move on climate

The clear scientific consensus is that time is running out to arrest a global environmental disaster. When it comes to decisions like exiting the coal sector, an institution such as National Australia Bank (NAB) needs to know not only what to do but also how quickly to move.

“Time horizons are an interesting challenge,” admits Sasha Courville, NAB’s general manager, social impact. “We have to push ourselves to think in the longer term.”

The bank also keeps getting new information. This means a sustainability strategy has to be an iterative, reflexive process that enables NAB to start putting numbers out in the knowledge that it will have to review them as further data emerges, insights are made and policy changes. It has to respond at the same speed at which the understanding of key factors evolves.

Courville adds: “The bank’s climate-related announcements in September 2019 include our coal transition pathway, which has an effective exit date. This – as well as our broader strategy – has been informed by modelling. But it is also subject to an annual review.”

The Australian National Outlook 2019 report, on which NAB partnered with the Commonwealth Scientific and Industrial Research Organisation, was extremely helpful in developing the bank’s strategy on timing, Courville explains, precisely because it took a very long-term view – out to 2060.

The horizon for the NAB social-impact strategy is shorter. It is a 10-year project. This time frame matches the timeline for the UN Sustainable Development Goals, to which the strategy’s four targets have been matched.

Courville explains: “Having an explicit, 10-year time horizon for the social impact strategy is critical, because we have to be able to think, plan and execute in the long term – while of course also having shorter-term goals and milestones. These issues cannot be addressed in a one-year cycle.”

Working with customers

The subject of the coal exit poses another question to which NAB has paid significant attention. This concerns an appropriate timeline for moves in the environmental sector, considering the narrowing window available for serious action. As with the ANO work, NAB will review targets each year against the latest global climate scenarios and relevant technology developments (see box).

The other issue around environmental transition relates once more to the idea of redirecting capital. This is the extent to which NAB can act not only to reimagine its own business and balance sheet but also its role in assisting customers to evolve to more sustainable business models. “Our own carbon transition is important but by far the biggest role we will play is in supporting our customers in their transitions,” Courville says. “There is a lot of opportunity here, because this work cuts across our entire customer base – around the risks involved with climate change and how they can manage them.”

In the debt market, Jenkins says: “Some companies have been on international roadshows and have been caught unawares by the level of focus on ESG. We have been providing a roadmap of how we have integrated ESG into our internal risk frameworks and sustainability strategy.”

This inevitably leads to a conversation about funding opportunities. After starting this process, Jenkins adds, NAB’s role is to keep working closely with its customers. Communication is key, as is the sharing of knowledge. He says: “We might see resources companies or heavy industrial companies that may not typically be issuers of green or sustainability bonds but are looking to move to more sustainable business models.”

There is risk and opportunity for clients just as much as there is for NAB itself. Jenkins points to increasing investor expectation for greater disclosure on the impacts of climate change and the action to address these. Bond issuers must confront the reality of ESG risk. “This is the tip of the iceberg,” Jenkins says. “This type of action will happen at a far quicker rate, so we need to engage with our customers about why it is happening and how they can put in place material, long-term steps to transition. It’s a two-way partnership. It is not just a matter of offering financing, even with a cheap cost of funds. It is more holistic and material than this.”