Investa reaps the benefits of being a green frontrunner

Investa Property Group’s green-debt strategy has matured, bringing realised cost benefits, the A$500 million (US$330 million) milestone in green loans and the prospect of all future bank-debt refinancing coming in green format. The company’s Sydney-based general manager, corporate sustainability, Nina James, and head of corporate planning and treasury, Lisa Story, discuss the merits of the strategy and its execution.

Investa is in the fortunate position of having assets suited to use-of-proceeds green debt. The wider market, meanwhile, is evolving to facilitate sustainable-debt financing based on entity-level sustainability scoring. Why does use-of-proceeds still make most sense to Investa?

JAMES There are two ways to access green-debt products. One if you already have a stable of high-performing assets and the other if you are on a journey to having them. We are in the former category.

We have certified high-performing green buildings so we can hit the required targets and access green debt immediately. If an issuer is building a portfolio of assets to be developed, it is creating high-performing buildings and would go for the sustainability-linked product, which provides credit for progress towards the final state.

How much of Investa’s debt could be labelled green and is the company planning to make its whole programme green? If so, how quickly can this happen and how do you fund the assets that do not yet qualify?

STORY About 40 per cent of our debt is labelled green. Going forward, all our loans will be refinanced as green loans. I do not see us having any more discussions about ‘grey’ loans.

It is more wait-and-see in capital markets because of varying levels of investor engagement and education in different markets. The Australian market has good demand for green product, but it can blow hot and cold. There is no guarantee it will be open when we need it.

It is unclear whether we could issue in green format if Australia were cold and we turned to the USPP [US private placement] market. Notwithstanding Sydney Airport’s recent sustainability-linked USPP deal, that market is still evolving in this space.

We are sensitive to price and want to get the best result for the funds we manage so we would need to assess our options. Our intention would be at least to explore a green bond for each transaction.

JAMES Our green-debt framework allows us two years to improve any asset we acquire so that it meets our environmental requirements. The portfolio is assessed as a weighted average. Not every building has to hit the target but the whole portfolio on average does. There is some buffer to allow us to do what we do well, which is to take buildings and improve their energy and environmental performance.

We want our debt not only to allow this but to enable it. This was critical in setting up the framework.

Many borrowers seem to be trying to identify assets that can be used for labelled transactions, whereas it sounds like Investa has the assets but is uncertain whether some capital markets want this kind of debt. Is that right?

STORY We need to act in the best interests of our unit holders, so we are focused on price coming into each transaction. We do not want to go to a market that is less mature in the ESG [environmental, social and governance] space, like USPP, where the bookbuild for a green-bond deal might not be as strong and we, therefore, would not be able to tighten the price.

We see ourselves as a leader in this space and it is incumbent upon us to educate the market so investors can understand the benefits of what we are doing. Then, when we do a transaction, they will have the education and this will help with the build.

The attractiveness of pricing will always come down to how banks assess the risk of our portfolio versus others. Part of my job as treasurer is to test that banks’ risk assessment reflects the fact that all our assets are green certified and we have stickier tenants as a result.

It is difficult to imagine that an issuer would be penalised for a green-bond transaction, even in a market that is less engaged with the asset class. Why would the response be negative rather than, at worst, neutral?

STORY Some investors in the US have such limited knowledge they may steer away from a transaction. If there was a grey product that was identical other than in ‘greenness’, they might, through lack of understanding, gravitate to the grey product. This would affect the bookbuild.

I was at the USPP conference in Miami in January and the level of interest from investors varied. Two or three were very interested in our ESG credentials and we talked about green finance. Their understanding was good but many others were just listening.

Our sense is that USPP investors are starting to increase their ESG awareness. Does this match Investa’s experience?

STORY Yes, it is improving. I think the market will get to the point where issuers have the confidence to go with green-bond transactions, and that these will perform as expected in price and demand once there has been more education and more experience with how the asset class works.

To what extent are debt investors interested in Investa’s corporate sustainability strategy, given all its issuance is tied to specific assets? In theory, if securities are tied to performance, investors might not be concerned about the asset owner.

JAMES I think the asset-based assessment and wider corporate strategy go hand in hand.

STORY I agree. The information investors request from us for unsecured facilities is probably the same as it would be for a borrower with secured facilities. Investors want this information, particularly for green products.

JAMES At corporate level, we provide an annual sustainability report. Within this is the annual green-bond status report, which shows the emissions profile of the portfolio and that we are still achieving the CBI [Climate Bonds Initiative] target our green-debt framework requires.

Sitting alongside this is GRESB [Global Real Estate Sustainability Benchmark] reporting and UN Principles for Responsible Investment reporting. Many investors also send us their own surveys, often related to the TCFD [Task Force on Climate-related Financial Disclosures]. Our intention is that there will be an ongoing annual note on our TCFD progress in our sustainability report.

Investa recently announced that it has surpassed A$500 million in labelled green loans. Is it now broadly accepted among banks that green facilities should be at a discount to vanilla lending?

STORY This is certainly our experience. The attractiveness of pricing will always come down to how banks assess the risk of our portfolio versus others. Part of my job as treasurer is to test that banks’ risk assessment reflects the fact that all our assets are green certified and we have stickier tenants as a result.

It is a safer loan for banks than one to a company with an equivalent number of buildings but fewer green credentials and less-sticky tenants.

We hear that many big businesses now require high environmental standards when they move premises. Is this trend a big part of Investa’s business proposition?

JAMES It is. We see tenants with ambition around values such as health and wellbeing, along with environmental requirements. There are some sophisticated organisations around the country and when they are doing new leasing deals, they look at the buildings they occupy in more detail.

But there are other drivers, too, such as the TCFD. This is yet to hit debt markets but it will come quickly, and it will be at scale when it does.

Equity investors are scrambling to address TCFD reporting requirements this year and they need to run various scenarios against their portfolios to assess the financial risks of climate change. It strikes me as logical that debt investors will soon be doing the same work, in which case there will be a heavy bias towards green debt because it is risk-mitigated. This is a logical evolution.

Would Investa have any interest in evolving its debt programme into sustainability format rather than remaining purely green?

JAMES We opted to use CBI certification in the beginning, as a way of getting third-party verification for the hard work we do in climate-change mitigation. It is a tidy way of saying what we have is verifiable and audited.

We continue to lean towards this, rather than going broader with sustainability bonds, because it is more difficult to articulate the metrics for social targets. You can potentially dilute the message, which is the opposite of what we want to do.

If CBI came up with a verification that allowed us to go broader than our climate-change mitigation work, we would be open to that conversation. But it always comes back to the fact that we can move through the process of certification cleanly and efficiently because we have high-performing assets.

Governments that are doing social infrastructure projects are looking for ways to have a conversation with their investors, which makes a sustainability programme more suitable. Our building portfolio means the CBI certification is the best way.

Equity investors are scrambling to address TCFD reporting requirements this year and they need to run various scenarios against their portfolios to assess the financial risks of climate change. It strikes me as logical that debt investors will soon be doing the same work, in which case there will be a heavy bias towards green debt because it is risk-mitigated.

Investa has four bilateral green loans – with ANZ, Commonwealth Bank of Australia, HSBC and Westpac Banking Corporation. Why have you gone for bilateral rather than syndicated debt?

STORY We have unsecured debt and we prefer bilateral facilities with common terms because we can just plug in and plug out. It gives us maximum flexibility.

We see syndication as a step backwards because we would need to report to the facility agent, and get approvals and consents, to get things done. It is more restrictive.

How have you decided on lenders for green loans?

STORY We have the big four Australian banks and two Asian banks in our lending group. We also have a financial risk-management policy that sets limits on bank weighting and we operate within those parameters.

Aside from this, the decision on which bank comes down to balancing the book. We will look at pricing when we write a new facility and if there is a bank that wants to do a green loan, we will go with that one.

Every time we have an opportunity to borrow money, for example to fund an acquisition, we approach each of the banks. We are sensitive to both price and greenness.

JAMES Banks are setting their own targets for allocating capital to green products. This means the relationship managers we deal with are looking for opportunities to place this type of capital. Australia stands apart from the US and other parts of the world in this regard.

What does Investa gain from being a market leader in this space?

JAMES The fourth pillar of our carbon-reduction strategy – which has a net-zero by 2040 target – is industry engagement. We saw this as an opportunity for leadership and it made sense to get credit for the hard work we have done over 15 years to improve our environmental performance.

It also made sense for us to move this forward into our debt profile. As an early mover we faced risks, but these were negligible – as was the cost of pursuing certification. I often hear organisations raise cost as a reason for not pursuing ESG funding, but I often wonder if this is a result of organisations not doing due diligence to understand what the costs are. They are not a big deal.

There was no pricing differential for green-debt products initially – it was not possible to join the dots and say there was a pricing benefit. But it was worth it for us regardless, and it has now been proven that we were right to take those steps.

STORY The Australian Sustainable Finance Initiative is also making progress, with the second report likely to come in the next couple of months. It is good to see interest in creating a local roadmap.

The government is also interested in the roadmap. We were in Canberra late last year and met with departments working in this space. Progress is being made everywhere.

JAMES It is also exciting to see corporates take responsibility and action. Business is taking this on – and at speed. The massive rise in power-purchasing agreements is evidence that business is willing to set its own targets and make meaningful decisions. When government comes to the party, it will probably be to pick up the laggards.

When might we next see Investa in debt capital markets?

STORY Investa Commercial Property Fund (ICPF) has just cleared its redemptions and is doing a capital raise. It should complete this in the first half of the year. After that, ICPF will be looking to re-evaluate its debt book and debt capital markets could be part of this.

We target WADE [weighted-average debt expiry] and a good way to ensure this is to look at debt capital markets for seven-, 10- and 12-year debt.