Australasian sustainable finance reaching the tipping point
Sustainability can no longer be ignored by capital-market practitioners – according to participants at a February roundtable discussion hosted by KangaNews, Commonwealth Bank of Australia and Westpac Institutional Bank. Deal flow is likely to increase as a result, but the consequences are vastly wider and deeper.
PROGRESS SO FAR
Davison If the purpose of sustainable finance is to direct capital flows to where they are needed to support environmental and social change, where are the Australian and New Zealand markets relative to the required run rate?
CHEN It is a pretty big question and there are multiple ways to tackle it. More than 100 countries have committed to net-zero emissions by 2050 and, leading up to the UN climate change conference in Glasgow in November this year, several have tightened up their 2030 targets.
In Australia, a question mark hangs over a 2050 commitment and a tightening of the 2030 target seems unlikely despite it being set several years ago. Some market commentators are even saying Australia’s existing 2030 target may be too difficult to achieve.
By looking at this from the top to start with, the point I am making is that more capital will be required to fund low-carbon projects and technologies even with the current status quo, let alone if there is any tightening of targets for 2030 and beyond.
On sustainable finance, labelled green, social and sustainability (GSS) products have been successful. But they alone will not be sufficient to fund the projects we need. On the other hand, a lot of renewable-energy and green-building projects have been established without labelled products. What has emerged out of the bank capital-weighting discussion is how finance helps in transition – not just sustainable-finance products in and of themselves.
HATTON This is about the whole finance industry transitioning all clients across all industries. The transition is about replacing the machinery we currently have in place to run the economy.
We have to look at this from all angles. The transition is about having conversations with every organisation, one by one, and engaging with each on the opportunities. This is where finance can provide support.
Sustainable finance is a very important part of this, and it is clearly an incentive. But there are many ways in which we need to bring capital solutions to the transition. This requires a lot more than just the specialists within each organisation solving problems. It means a different way of thinking and will require a total rethink of some businesses’ operations.
BYRNE There is a wall of liquidity out there looking to find a home and this can be a supportive factor. But the supply of sustainable finance is yet to be fully realised.
SILVER New Zealand is fortunate in that it has had a relatively stable climate policy and a strong renewable-energy base for some time – which also helps support and create opportunities for green-asset financing.
However, the market is dominated by residential and commercial property, energy, and some green-transport assets. Meridian Energy, Contact Energy and Mercury have all come to market, for example – but they are all from the energy sector. While there has been progress in the New Zealand market, we lack diversity in sectors and structures.
We are working to change this. Two weeks ago, we saw the draft New Zealand Climate Change Commission (CCC) budgets. These signal where certain sectors need to go and how our nationally determined contribution under the Paris Agreement is not sufficient so needs to be tightened. We anticipate these will drive more boardroom conversations on climate risk, the strategic response to it and, therefore, more commitment to sustainable assets.
Davison Picking up on the comment about availability of liquidity, is it, paradoxically, not the best environment for the transition we need because borrowers are not struggling to find funds – regardless of their ESG credentials? Just looking at the Australian credit market, for instance, there is a huge disequilibrium between supply and demand.
WARD It is hard to buy at the moment and we struggle to get our hands on paper all the time. But we need to maintain a longer-term view of what we are buying.
We are doing a lot of work around commitments we have made recently, in conjunction with frameworks that have come out such as the EU taxonomy. We are thinking about what sort of issuers will be around over the medium term and what industries are substitutable.
As such, we are becoming quite concerned about the future for oil – based on the scope of commitments to electric vehicles, particularly from countries that are saying there will be no more sales of petrol-based engines after a set date. We now think oil could potentially be substituted even before coal is phased out.
While we are struggling to buy paper at the moment we are also busily setting parameters for what kinds of investments we need to be involved in, and what we are not going to buy over the next 5-10 years.
GOODHAND Even last year a number of issuers in coal or coal-related industries tried to come to the domestic market and struggled. We know that a couple of them did not continue with transactions and another priced quite a bit wider than anticipated – which was put down to ESG factors.
There are early signs that ESG risks are beginning to be priced by capital markets, and this trend will continue to grow. The emphasis on, and in some cases mandatory implementation of, Task Force on Climate-related Financial Disclosures (TCFD) and government commitments to net zero allow investors to see more detail on climate risk within organisations. Over time, this will allow organisations to price risk in a slightly different way.
There were several important announcements last year. For example, New Zealand announced draft legislation that would mandate TCFD reporting for around 90 per cent of the assets under management in New Zealand by as early as 2023. The UK government announced that large asset managers will have to report against TCFD, which is expected to be in place by 2022 or 2023.
BYRNE This pricing of risk is surprisingly useful for corporates. It is difficult for companies in transition industries to make investment decisions without price signals from investors. The fact that these are coming through now will be welcomed.
GOODHAND Continuing this thought, bank announcements last year around not financing new thermal coal further adds to the issue of where businesses get capital from. It changes pricing dynamics over time even though we have excess liquidity in the system.
HATTON Many chief financial officers are very engaged, including asking what they need to do to to transition their organisations to ensure they maintain the same access to finance. Making public disclosures about transition plans is important.
It is challenging for some ‘browner’ organisations to transition and we, as providers of capital, need to play a role here. The ‘green end’ is where so much of the demand is currently, but it is actually the organisations in between where we are going to get maximum leverage through the transition.
WARD In the last 12 months, one of the things we have seen with cultural change is that we are really living through an era of hyper transparency. Specifically, we have seen a number of organisations driving high-level management changes because of nonfinancial risks.
On the investor side, it would be hard to game the system. One could barbell a portfolio that invested in some of the cheaper deals that come to market with weaker ESG credentials and then have labelled bonds on the other side. But investors, asset consultants and our clients are closely watching and are very engaged with what goes into portfolios. The same hyper transparency will not let anyone get away with this type of thing for too long.
The capability-building piece is another important point to make. We are all talking about responsible investment, sustainability, TCFD reporting and taxonomy frameworks – but we are living and breathing them all day, every day. We have to bring everyone along if we are going to embed these through the financial system.
One of the things we have rolled out this year is an internal training programme for all our investment professionals. A lot of this is about building confidence among traders and portfolio managers, including talking to them about TCFD reporting and carbon emissions.
When cash traders and portfolio managers understand what the climate-change problem is and are not scared about the terminology, they can understand the benefit of perhaps paying up a little bit for a sustainability-linked bond and contributing to a coupon step-up and step-down process.
WOOD As a listed company, we certainly have to be aware of what our equity investors are looking at from an ESG perspective, and the extent to which this drives their investment decisions. ESG is a focus at corporate level but investors certainly drive some of our thinking, too.
We try to be very aware not just of what we are doing but how it is communicated. A lot goes on at the grassroots of our early-learning centres that is effectively all about sustainability, so we are starting from a good foundation.
It would have been hard for us to execute something like a sustainability-linked loan even 3-5 years ago, though. We were not quite as mature in our thinking and we were using a lot of disparate systems. It has taken some time to lay the groundwork for establishing targets and a programme of improvements designed to help us meet them. We have got ourselves ready to issue this type of debt at about the same time as the market has really started asking for it.
Where next for labelled issuance?
A market that fully integrates environmental, social and governance (ESG) aspects in risk management and pricing could have no use for labelled ESG products. The Australasian market is some way from this end point, however.
WARD Hopefully we will not need them, in time at least. Investors will be able to look at a company like Lendlease and understand from the way the company communicates that sustainability and responsibility is part of its DNA. It would be great if a label were not required to highlight this.
BYRNE I tend to think that we are in a transition period and that eventually the focus will shift from instruments to companies’ actual reporting.
This will mean ESG reporting becomes far more embedded in financial reporting, whether it is aligned to the Task Force on Climate-related Financial Disclosures (TCFD), TNFD [the Task Force on Nature-related Financial Disclosures] or anything else. I could see this in time deciding the appetite of debt investors rather than a label or bespoke instrument.
Davison Are investors, equity and debt, pushing change or are we reliant on individual actors and companies ‘doing the right thing’?
CARROLL ESG is compelling for us because it is 100 per cent aligned with our overall strategy delivery. Our business delivers education to children, which is all about connection to communities, trust and being thought leaders in understanding what children will need in future. I struggle to think of any aspect that is not completely intertwined with ESG.
WOOD We are certainly seeing an acceleration of ESG as a key investment driver on the equity side. In the last 12 months we have experienced a couple of instances of shareholders moving us from one fund into another – in both cases the new one being highly ESG-focused. I think this shows an increasing recognition of the social function.
ROAN I would also come back to the theme of being in the midst of an economic transformation, driven by a desire for us and our children to be able to continue living where we are. As this plays out, there must be a change in capital allocation. The capital to support this transformation must flow to those that are able to, and capable of, investing in solutions.
It is more of a change-of-pace question than anything else, by which I mean financial flows moving from maintaining existing quality of life to the transition. This balance between quality of life in Australia and New Zealand now and making sure we maintain it moving forward means we will become even more interested in companies that are able to provide solutions, and we will require an increasing volume of capital to provide these solutions to all of us. There are political, regulatory, investment and personal angles to this theme.
We see the pace of change increasing. In the grander sea of international capital flows we are a relatively small company from New Zealand, but equity markets are moving to invest in companies that provide solutions to the transformation more directly. We were picked up by BlackRock as part of its clean-energy fund, for instance – which shows that investors are out there and are looking.
Our biggest issue in finance is not that green-financing frameworks and products do not exist. It is the demand for our service on the path to a cleaner economy. Picking up what Joanna Silver said earlier, the initiatives presented by the CCC will start to drive the pace of change locally.
Davison What are the key findings of the CCC report and will they be implemented?
ROAN It sets up carbon budgets over future-year increments and says New Zealand needs to transition away from fossil-fuel vehicles and industrial-heat processing as it heads for a zero-carbon-emissions future. We are still in a consultation period, but this is the key CCC proposal for the next 15 years.
From an economic perspective, these two transitions are massive for New Zealand. The expected growth in electricity consumption over the next 15 years is somewhere around 75-100 per cent of current consumption – and it all has to come from renewable sources.
I could not tell you if there will be a massive transition in industrial-heat processes in the next two or five years, but I do know that to get to the goal of net-zero carbon emissions we must eliminate our fossil-fuel vehicle fleet and transition away from our current industrial-heat processing.
Davison We have seen some property-sector issuers taking the lead on ESG in Australia. But it would still be possible to operate – and access capital – without these commitments. What is the driver for these businesses?
LARKIN I think the answer to the question in relation to financing is the same as it is across the board – we all need to be more ambitious. This is not to say where we are at in financial markets is a bad thing. We just all need to be a lot more ambitious still.
Nonetheless, today we are talking about oil substitution or issuance being challenged for coal-adjacent companies and I think this is a measure of how much our mindset has changed already. We can also see clear benefits from ESG issuance, whether it is stickier demand, better secondary performance or even pricing benefits at issuance.
In a world where we are talking about access and cost of funding being more challenged for issuers with climate risk, I think it is not hard to imagine the discussion moving away from what the benefit is from being a ‘green’ issuer to focusing on the additional cost and impact on market access if one is not.
So yes, we are seeing momentum but there is a way to go yet and, like everything around trying to address climate change, we need to push harder.
As to whether we do things because they are right or because we are being pushed, I think in our case it is both the right thing and good business sense. We are fortunate in having a company founder who 50 years ago was talking about the “triple-bottom line”, and about companies’ social licence and our impact on communities. It has always been an important part of who we are.
We think our sustainability capabilities provide competitive advantage. It is a point of differentiation and a key driver of demand across our businesses. From a treasury perspective, it makes it relatively easy to go down the path of green financing because we are following where the business is already heading.
Overall, I think we are getting traction and we will see a lot more change in the not-too-distant future. But we still need to do more.
MILNE ISPT is at the start of its sustainability journey. I approached our banks about 12 months ago on the subject of applying a sustainability framework across all our debt financing. I’d like to think we will have something in place with our lenders in the coming months. We have also set some very robust ESG targets across our funds and at corporate level, under which are further internal stretch targets.
Our board and CEO want to know what the advantage of the sustainability framework will be – what is in it for us, given we already have these targets in place.
As treasurers, we are also often benchmarked on basis points of funding cost and the success of execution, and the reality is our banks are not incentivised to offer us a discount for sustainability-linked loans. The banks themselves get no capital discount from APRA [the Australian Prudential Regulatory Authority] for this type of lending.
Our reason for doing it is based on a view that banks will focus more on ESG metrics in their credit processes in future. I do not believe banks’ decisions to lend will be purely dictated by ESG, but it will form part of the decision. I’ve always assumed this was a long way off, but I’m starting to wonder if it might be closer than I think.
Davison Does this suggest that, at this point in time, it is more about ‘future proofing’ for ISPT than responding to current market pressure?
MILNE Yes – it is about getting ahead of the curve in some ways. But it is also about walking the talk. If we say we are taking certain measures at corporate level, we should tie our funding platform into that ESG strategy.
Davison How does an issuer like G8 Education – which is more closely aligned with social than environmental outcomes – develop measurable targets?
WOOD Our sustainability report maps out the areas that our investors and other stakeholders find important. The quality of our centres is measured against a national framework and standards, and of course the assessment of our centres forms one of our quality measures and targets.
We actually have five or six quantifiable targets, around things like child safety, staff training and centre-manager turnover – the latter has a real impact on centre quality. The targets are quality- and safety-based rather than environmental, which is consistent with a materiality assessment.
“We know use of proceeds will only target a particular part of the economy, and that is industries that are already well on the way to net-zero emissions. The finance sector needs to focus on sectors that are not easy to transition. It is here where we should be applying sustainable financing structures.”
Lingering impact of the pandemic
COVID-19 was a traumatic global experience that will undoubtedly have profound and long-lasting consequences. If anything, it has heightened focus on environmental, social and governance (ESG) factors.
CARROLL From a business perspective, we felt a very significant impact from COVID-19. The major lockdown that came into effect nationally last March saw attendance halved across our sector – G8 Education included. The sector was not viable at that level of attendance, so the government stepped in to provide a survival package specifically for our sector.
Together with JobKeeper, this kept the sector viable and enabled us to maintain our employment level. It was helpful, of course – but it also demonstrated our social commitments and the critical role we play in the economy.
Davison The reality is that most credit borrowers are choosing not to issue their debt in any kind of labelled format. Are the advantages of labelled sustainability debt not yet perceived as significant enough?
SILVER There has been an impressive amount of engagement in the past 12 months. In the next few years we will see a tipping point and an adoption of sustainable debt akin to what we have seen globally – driven by a confluence of factors we have already discussed.
Primarily I think it will boil down to competitive and investor pressure. To get to that point, we need more leaders like Meridian engaging in sustainable structures and we need greater awareness of the benefits. Banks have a key responsibility here, which is why it is a vital focus for us.
Another consideration is the maturity of debt instruments and structures. Use-of-proceeds green bonds have historically dominated the market, but in the last 12 months we have seen greater use of social bonds and in the last three years an increase in sustainability-linked structures, which are more flexible and open the door to more companies. The market-awareness and engagement opportunities are broadening and deepening.
It is also worth saying that, while there have only been a few sustainable debt transactions in New Zealand, the majority have chosen to return – including Contact, Argosy Property and Auckland Council. This matches global developments, like Total’s announcement that it wants to make all its debt sustainable.
This trend of consistent return and commitment to the sustainable-debt marketplace highlights the advantages of this market. We just need to tell the story widely. Companies in Europe are going from dipping their toes to mainstreaming sustainable finance and I think New Zealand will follow – in the next 18 months.
Finally, we have to remember the pricing advantages are not yet clear in the New Zealand market. Climate Bond Initiative’s issuer and investor survey tells us issuers do not execute green bonds because of pricing advantages. In the survey, 91 per cent of issuers said their green bond drove deeper engagement with investors and 98 per cent said it attracted new investors. Around 70 per cent said demand for their green bond was higher than demand for their vanilla issuance.
There is a confluence of drivers overlaid by deeper bank engagement with climate policy. There is a political, regulatory and individual awakening to these issues that is only going to grow further.
WARD We look at the whole issuer rather than the transaction. Total’s announcement that it will only fund via the labelled market is great, but if it brought a labelled bond to the Australian dollar market tomorrow we probably would not buy it.
We have been working our way through the draft IIGCC [Institutional Investors Group on Climate Change] framework for how to get to net-zero emissions and how to categorise the companies we invest in. Total’s forward capex plans do not correlate with what we would expect of it from a responsible-investment perspective. We cannot see in the capex plans where it is funding renewable energy.
GOODHAND The key thing is the overall group strategy and how an issuer is moving toward meeting objectives like the Paris Agreement. This is the key when issuers come with these products.
ROAN We are all aware there are two angles to issuing any form of GSS product: the issuer’s own green credentials and investor education. A lot of investors probably do not know about the underlying credentials – and this is the education piece.
I would not underestimate the importance of the underlying green credentials, though. Companies have to make changes to their organisations and firm commitments, and there will be some that do not have these in place.
As an organisation, we are just a manifestation of belief in a future where we have to control the amount of carbon we put into the atmosphere. The GSS products companies are offering are not a ‘nice to have’ in this context – they must have them if they want others to understand that their business has a future.
This is moving faster in financial markets than a lot of people might appreciate. In particular, in the last year or so investors actually backing companies that have these credentials has become much more prevalent. If your credentials as a business – the products you are selling and their relation to the effect on the climate – are questionable, you may find your business left behind quite quickly as investors become concerned about your longevity.
LARKIN Trying to say definitively that there are pricing benefits from sustainable issuance is still difficult. I have read a lot of research covering various markets and I think the picture is becoming clearer that there is. But we did not do a green bond because we thought we would get an additional 5 basis points at issuance.
As Mike Roan says, sustainability is fundamental to how we do business. In our industry, we are seeing increased demand from governments, investors, communities and customers for better environmental performance.
I mentioned earlier the range of non-price benefits. Another thing I would highlight is employee engagement. The response we received internally through doing our green bond was unlike anything we have done in treasury in the eight years I have been at Lendlease. It captured the enthusiasm of the employee base and helped us tell our story from a different perspective, both internally and externally.
Looking ahead, across the board – in bank or bond markets and whether it is from our own balance sheet or for the funds or projects we manage – the lens we apply to all our funding activity is to consider whether there is a pathway to doing something in green or ESG format. It will not work for everything, but it comes back to who we are and where our business is going. This is how the treasury team can support the group’s sustainability strategy.
MILNE On the loan side, the reality is the SLL kicker is not huge – which goes back to my point about APRA not offering banks capital relief for sustainable lending.
Margins are already very competitive in the lending market and, as a borrower, I actually do not like the idea of banks lending to me at a loss. It makes for tough conversations later on if a bank has an unprofitable relationship with an issuer.
Davison Will the corporate issuance landscape in Australia change toward more sustainability issuance?
HATTON I think there is momentum. As Michael Larkin says, employee engagement is a big factor. People connect with the topic once they understand the benefits. We have seen this with Commonwealth Bank of Australia’s own bond issuance – that the engagement made a big difference.
When it comes to corporates, my opinion from speaking with clients is that there is an enormous groundswell of support. I think we are still only at the tip of many companies even understanding that they may have the credentials for issuance. There is a lot of work to do to get these credentials sharpened so issuers can put frameworks in place, but awareness is growing.
Green-bond issuance or sustainability-linked financing actually helps with all the other things corporates are doing – like TCFD commitments and other regulatory disclosure.
There is an enormous amount of work involved in identifying the necessary credentials. Large organisations typically have a lot going on so one of the key considerations is making the necessary connections. There are pockets of passion within organisations and if they can see a connection between what they are doing in one part of the business and another, the benefits begin to double and triple.
Often, an issuer will begin with direct use of proceeds and evolve from there, once they realise it is not that hard and that they could do more. They will then piece together everything else that is happening in the organisation. When issuers pull these pieces of the puzzle together they can create a narrative where everything fits in.
SILVER I agree – though in New Zealand we have found the reverse, that customers want to use a sustainability-linked structure as a first stepping stone before they go to use of proceeds. But it is the same principle.
When I spoke earlier about issuers dipping their toes in the water I didn’t mean to imply lack of commitment. I am getting at the fact that starting small but aligning to global principles is a good thing. Investors we have spoken to indicate that they invest in issuers rather than issuance, so it is critical that issuers align with principles and demonstrate full organisational alignment and commitment to outcomes.
GOODHAND It is certainly not just about green and social bonds – it is the whole of the financing structure. We know use of proceeds will only target a particular part of the economy, in other words industries that are already well on the way to net-zero emissions.
The financial sector needs to focus on sectors that are not easy to transition. It is here where we should be applying sustainable-financing structures.
In offshore markets, green and social bonds had record issuance in 2020 – so we know there is growing demand for the product and other sustainable-style structures.
CHEN This is an important question. The crux of it is whether the reason we are not seeing more issuance is the cost-benefit analysis not stacking up.
I’d like to give an analogy. For quite a while, my wife has been trying to convince me to go to pilates classes with her –and I had been saying ‘no thanks’. I understood why she goes but I thought it was not for me. Finally, in January I took the plunge and took a fortnight of classes because I found out a friend was doing them and he said it helped with his cycling. Immediately I saw the benefit in my tennis game – and now I am telling everyone to do pilates classes.
I tell the story because the way in which Michael Larkin and Mike Roan talk about their respective companies’ journeys comes from a place of lived experience and confidence.
We need to get the story out because, in my conversations with treasurers and others, there is often still a perception issue around the time and cost components of sustainable finance, and whether there is enough incentive to do it. Or they will say they are already green enough so see no reason to do it.
It is not until an issuer has gone through the sustainable-finance journey that they understand all the nonfinancial benefits. It is possible to understand conceptually but I do not think anyone really gets it until they have gone through it.
BYRNE The perception of missing targets and reputational damage around sustainable finance is also important. This again goes to the importance of education – we can explain that this is not how it is viewed by the banks.
WARD If a green bond comes we look at the structure and what it is financing. Then we may or may not buy it. I really like sustainability-linked structures for the reasons Michael Larkin talks about: it gets the whole business to buy in. If we are going to achieve targets like net-zero emissions in investment portfolios, we need a wider transition to happen.
Investors need to be brave and to consider whether having a coupon adjustment of 20 basis points is really going to matter in the scheme of things. I think market participants get a bit caught up around the pricing aspect of the structure. It is our job as fiduciaries to manage two-way pricing and how we deal with missed targets is an issue, but I think these have been used as excuses to an extent.
Davison GSS issuance in Australia and New Zealand took a while to return after the crisis period in 2020. At the same time, there has been a lot of talk about increased ESG focus in the pandemic era. How did 2020 affect market development?
CHEN We saw acute financial-markets dislocation in the first half of 2020. This meant borrowers and investors had a period of getting their heads around what was happening while the markets were effectively shut.
Another dynamic has also dampened the market here. The banks are typically among the biggest issuers of GSS bonds. But the Australian banks have had liquidity from the Reserve Bank of Australia so have not had a funding need.
Nonetheless, social bonds had a good year in Australia, with overall issuance nine times larger than in 2019. After June, the tune changed. Once issuers had their houses in order there was a lot of interest in sustainable finance. If anything, interest was heightened by the pandemic.
Transactions take some time to come to market, though, so we saw a busy Q4 and we have a number of transactions closing in the near future. I expect 2021 will be a strong year.
SILVER In New Zealand, we saw Meridian green its entire debt programme in August – which was a very challenging time. The company maintained a solid focus on sustainability despite the constrained and unique operating environment.
Other than this, the New Zealand market followed the global market to an extent. From March to September, we only saw sustainability bonds from Kāinga Ora – Homes and Communities, which reflected the market’s pause on green for a greater focus on social factors.
I think social bonds will be a big piece of the market for a long time. It is my understanding that, because of the pandemic, we have regressed by around two decades on all the UN Sustainable Development Goals relating to poverty.
At the same time, there is also a lot of green financing to be done. Green issuance in New Zealand shot up from September, with deals from Argosy, Mercury and Auckland Council. This was when global COVID-19 cases appeared to be stabilising around the world, allowing total green-bond issuance in Q4 to make 2020 a record year.
New Zealand trails Europe and, to a lesser extent, Australia in sustainable finance. But I do not think this is a reflection of New Zealand companies’ focus on sustainability. I think it is more about the extra work required to satisfy regulators and then be able to access the retail market in New Zealand. This adds complexity.
“We are in the midst of an economic transformation, driven by a desire for us and our children to be able to continue living where we are. As this plays out, there must be a change in capital allocation. The capital to support this transformation must flow to those that are able to, and capable of, investing in solutions.”
LARKIN Our issuance is driven by a number of company-specific factors, which is not unusual for corporates that are not frequent issuers. This means there is danger in looking for patterns of activity from half-year to half-year. Certainly there was a sense in the second half of 2020 that collectively we had all stepped back from the brink, which opened market options for issuers.
We have had a lot of discussions over the years on the development of the Australian dollar bond market. My perspective is that the shift in interest toward ESG is happening much faster that than a lot of other changes we have seen in this market. I think we will look back in a couple of years’ time and be surprised at how quickly things changed.
ROAN We were in a bit of a ‘hurry up and wait’ mode last year. We greened our financing programme but we also had an aluminium smelter that was deciding on whether to continue consuming in New Zealand. This meant we were unable to invest confidently in new assets to support underlying growth in electricity as the transition plays out.
That decision has been made now and we have already seen interest in investing in growth from interim statements by energy companies in New Zealand. I cannot comment for Meridian yet but I expect broadly that this will continue throughout 2021 given the decision by the smelter to stay, and due to the statements from the CCC and its certification by politicians.
I agree that we will be stunned by the pace of change if we look back in two years’ time. Sustainability is becoming a central theme for every company and it ultimately comes back to business sustainability. Everyone needs to be paid at some point, and debt and equity investors need to have confidence that companies can sustain cash flows. Everyone in business is aware that we are only as good as the products we are selling, and if the product does not have a future no-one is going to lend us any money. The explosion of sustainable and green products will be a fascinating phenomenon to look back on.
HATTON I completely agree that the pace of change has accelerated. At the beginning of COVID-19, liquidity issues were paramount – but once this abated everyone began to think about recovery and growth. We are still early in this stage, at least for some sectors.
ESG then became a greater focus for a lot of companies. It moved up the list of priorities, thanks to a range of contributing factors. We know about all the net-zero commitments, the election of Joe Biden in the US, the fact that TNFD [Task Force on Nature-related Disclosures] is coming and the increase in shareholder resolutions. I also think COVID-19 has been an example of how a systemic risk can play out, and we know climate change will be a much larger and longer-lived risk. Companies want to transition and become more resilient to these shocks.
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