Labelled issuance trajectory

Sustainability has been a watchword in 2020 but issuance of green, social and sustainability (GSS) bonds has fallen in Australia. Market participants are much more optimistic about the future path of deal flow, though.

CHEN Has the pandemic shifted issuer thinking around sustainability financing?

TRIGONA New South Wales Treasury Corporation (TCorp)’s funding task has increased materially. As an example, we have issued more than A$10 billion (US$7.2 billion) since March as we fund the government’s stimulus response to COVID-19.

As one would expect, these measures also comprise a large portion of funding relating to social outcomes. We have been working closely with the New South Wales (NSW) Sustainability Committee and meeting regularly with our asset-identification group to identify projects that could qualify for our asset pool. TCorp is focused on ensuring assets added to the pool can be accurately reported and will be accepted by our investor base.

GSS issuance remains front of mind for TCorp and we are encouraged by the year-on-year growth in GSS bonds. We closely monitor developments in the sector and have been assessing the International Capital Market Association’s update to its Social Bond Principles (SBP), released in June, to align with our programme.

We are cognisant of putting the right amount of time into this to ensure we get the best asset pool and maintain the integrity of our programme.

CHEN How much green capex, that could help build out the GSS asset pool, does the NSW government’s programme include?

TRIGONA Given the nature of government expenditure there is a considerable quantity of potential assets. But one of the key considerations is the reporting aspect. TCorp has been very strict on qualifying assets given we issue use-of-proceeds bonds for tenors out to 10 years. This characteristic makes reporting the integral piece for us.

We have a debt maturity next year and we are keen to start engaging with investors in what we intend to be a transparent and open dialogue about the appetite for a sustainability-linked or a transition bond.

SOPHIA LI AGL ENERGY

DAVISON The global numbers may be impressive but the reality is we have not seen a lot of GSS bond issuance in Australian dollars over the last few months as most issuers have been focused on immediate liquidity needs. Could we have hoped for more by this point?

MATHEWS It is a good point: the GSS bond space has been quiet in Australia. Our sustainability market is less mature than Europe’s and we have felt COVID-19 impacts more strongly. Additionally, financial institutions typically make up a large portion of GSS issuance in our market, however due to COVID-19 support packages banks have not been raising either vanilla or green funds in the local market.

It is a different story on the loans side. Corporates have been coming to banks for funding and we continue to work with borrowers on transactions, although I note timelines have been pushed out as corporates bed down their own financial situations.

A sustainable-finance transaction is a new concept to almost every market participant in Australia and there have not yet been many repeat local issuers in bond or loan format. Every conversation is about education – and this takes time, perhaps time that has been extended over the COVID-19 period.
It is comforting that we have not seen borrowers deciding sustainable finance is no longer relevant for them.

LI From our perspective, there are definitely concerns with COVID-19 and the added complexity of lack of liquidity and execution certainty. On the other hand, while a GSS transaction might take longer I don’t think there has been any pullback in demand from issuers or investors.

We have a debt maturity next year and we are keen to start engaging with investors in what we intend to be a transparent and open dialogue about the appetite for a sustainability-linked or a transition bond. There has not been much of this type of issuance in the Australian bond space. It is important to get feedback from investors on the structure as well as the appetite for tenor and KPIs.

We are willing to work with investors to come up with the right deal structure. The pandemic may prolong this process as we cannot meet face to face, but technology enables us to engage with any potential domestic and offshore investors.

There may be some nervousness to do it this way because these types of transactions have not been done before in Australia. But we are not pulling back from the idea or deviating from the path we have gone down in sustainability financing.

TRIGONA The unique market circumstances of the past few months required issuers to move quickly, and this timeline naturally lends itself to using benchmark bonds over GSS bonds.

We continue to receive investor feedback for our sustainability and green bonds, but we did not have the capacity to issue a large transaction in this format quickly.

We view our sustainability-bond programme strategically, and there is still more work to be done around investor engagement and building out of the asset pool. We are focused on building a more even mix of green and social assets that we can include as part of the sustainability-bond pool.

CHEN Have recent events led AGL to think more about transition or social finance?

LI AGL has come out with a few different structures and mechanisms to assist customers that need help during COVID-19. These could potentially be bundled into a transition-finance instrument. The difficult part would be scale. Our refinancing will be sizeable and we could have a portion of this linked to social elements of the business. But the majority is likely to be linked to measures around our carbon emissions.

MATHEWS Everyone has agreed transition is important and that we need to be focusing on high emitters to make a real impact in decarbonisation. But there is still a lot of debate around what qualifies as transition finance and not as much consistency across jurisdictions.

Coming to agreement on this would really help issuers like AGL. Without strong guidance from investors and the market more broadly, potential issuers are in limbo. They want to come to market with strong ambitions and be comfortable their offering will be a successful transaction. The market needs to continue focusing on setting clearer standards and guidelines on what qualifies as a transition product.