DODDRELL It is clear that disinflation has not materialised and that the RBNZ [Reserve Bank of New Zealand]’s ability to ease monetary policy will not be forthcoming in the foreseeable future. While consumers are looking for rate cuts, we do not expect this to happen until 2025.

Retail sales have fallen consistently for a year and a half, which gives insight into the state of play for consumers. People who saved through COVID-19 have held onto their money and are still waiting for the rainy day. However, it is important to acknowledge that around half of New Zealanders live from one pay check to the next and around the same proportion have less than NZ$5,000 (US$3,036) in savings.

BROWN It is important to overlay this with the fact that population growth is not flat – migration is booming. Net, around 140,000 people have come into New Zealand over the past 12 months – and yet we are still in a recession. 

SUTCLIFFE These impacts are not evenly spread across the country, either. It is going to hit Wellington in particular, as there is fiscal tightening across the public sector as well as private sector agencies that work closely with government.

BOYLE The cash rate today is 2-2.5 per cent higher than what we view as the neutral rate of 3-3.5 per cent. While not as high as it was in the lead up to the financial crisis in 2008 in outright terms, the level of the OCR [official cash rate] is as restrictive on the economy.

LE QUESNE It may be useful to add some comments from the RBNZ February monetary policy statement. The economy has been evolving broadly as we would expect. Inflation expectations are falling, however inflation is still too high and remains outside the target band, meaning we will require restrictive settings for some time.

A range of economic factors feed into this thinking. There are restrictive monetary policy settings and lower global growth expectations in general, so aggregate demand is slowing to match the supply side – which is a positive. Weaker demand growth means capacity constraints are easing somewhat.

This is offset by high population growth, which is supporting aggregate spending generally. This is coming through in areas such as upward pressure on rents. Globally, economic growth remains below trend in most advanced economies and ongoing factors point to restrictive monetary policy settings for some time.

From a financial stability standpoint, the New Zealand banking system remains well placed to handle potential shocks and a downturn in the economy.

BOYLE Housing is still a risk. With strong migration, most new residents opt to rent. House price inflation has come through many different avenues and can also lead to additional spending – for example, someone buying a house might need to furnish it – though this is happening less in the current environment.

LE QUESNE Other risks to inflation include geopolitical risks that can come through in the form of things like higher oil prices and shipping costs. Another long-term factor is climate risks in the form of more frequent and severe weather events. These can be a type of supply shock that adds further risk to the inflationary environment.

BOYLE The capacity of the economy reduced through COVID-19 and the subsequent build-up in cash savings in the household sector was a lot for a smaller economy to handle. This phenomenon has resulted in a protracted period of higher inflation.

LE QUESNE There were certainly different dynamics at play during this period, some of which have been structural. It is therefore right to question whether the economy can function as before.

DODDRELL COVID-19 was such a unique event that historic comparisons don’t exist. There is still a lot to unpack regarding the impact of the health pandemic in New Zealand and globally, all of which adds to the complexity of what we are facing at the moment.

MORRISON Philip Lowe has also recently spoken about the impact of the low inflation psychology that existed pre-COVID-19. The positive supply-side shocks from China and entrance of global retailers in the Australian market helped keep prices low pre-COVID-19. This mindset has shifted since the pandemic and we are in an environment in which businesses have to put up their prices to keep operating as inflation pressure hasn’t dissipated.

DODDRELL The problem lies in the widespread anticipation of inflation. It has become deeply ingrained in people’s minds, leading them to simply anticipate price increases.

MORRISON The question people are most interested in is how much prices are going up by, rather than why they are increasing.

MINHINNICK Earnings season results were mixed, reflecting the challenging economic conditions, sensitivity to interest rates and higher inflation. Expectations were low, with some analysts saying they were the lowest since the global financial crisis. New Zealand companies most exposed to the domestic economy appeared to be the ones most affected.

LE QUESNE As a starting point, the purpose of our work in promoting financial stability is to ensure the economic prosperity and wellbeing of New Zealanders. Therefore, we want to ensure that entities are managing their risks by holding an appropriate level of capital. This will help ensure we have a resilient system.

By way of background, we incorporate risk weights into our capital framework, and this drives how much capital a bank must hold to account for the credit risks in its assets. We were being asked lots of questions about the climate component of these risks.

The risk weights must be driven by data covering the credit risks of the assets to the lending institution and they must be used explicitly for this purpose only – in other words, they can’t be used to drive varying policy agendas such as promoting different types of lending.

We recently circulated a bulletin article that sets out how the RBNZ is thinking about climate-related risks within the capital framework. We set out that within the two approaches for risk weights – internal ratings-based and standardised – we see room for incorporation of climate-related risks, because we want both to reflect credit risk over the life of the asset. 

To do this, we need an evidence-based approach and good data. At the moment, one could say the data is patchy at best. But because climate is an emerging risk and more entities are disclosing climate-related risks, we are confident the data will improve quickly. This will support the evidence base so banks can more fully incorporate climate-related risks into their risk-weighting approaches.

We know that, when left unmanaged, climate-related risks can have an impact on financial stability, and risk weights and the capital framework are a component of a bigger picture. As such, we have a number of other initiatives to help businesses identify climate risks.

For example, we incorporate these within our supervisory conversations, we talk to regulated entities about how they are identifying, managing and monitoring these risks, and we have been consulting on climate guidance for regulated entities. We also run climate stress testing and we bring together thought leaders in the field.

LE QUESNE We have been working on it for a while. Guidance on managing climate-related risks has been the subject of consultations over the past year. Our Climate Changed report, which focuses on our multistrand approach to climate change risks, was published in 2021.

The reason for the recent bulletin is that risk weights and the capital framework are of interest to market participants and are an important driver of behaviour. To this end, we wanted to set out how we think about risk weights with respect to climate change.

BROWN From a prudential asset perspective, bank balance sheets are large investors in the New Zealand fixed income market and any changes to risk weightings potentially have a material impact on how these investors structure their portfolios. Incorporating climate risk into risk weights would not only affect the behaviour and investment decisions of these investors but also has flow-on effects for the wider market via improved liquidity and volumes outstanding.

DODDRELL A couple of years ago we were talking about how to incorporate climate risk into assessing credit ratings. The integration of climate risk into banks’ risk weighting will likely have a number of effects on the market, including increased market awareness and, as Erin highlighted, possible changes in investment behaviour.

LE QUESNE Hand on heart, it is tricky to estimate credit risk as a result of climate-related risk in 20 years’ time. But our frameworks provide some clues about the future – and data availability is increasing over time.

BROWN If we take the recent liquidity policy review (LPR) as an example, there were changes in behaviour across market participants as soon as the RBNZ released the second consultation paper. This demonstrates that actions that influence bank balance sheet behaviour have a knock-on effect on the broader investor base. Incorporating climate risk into risk weights could have the same repercussions, market-wide.

SUTCLIFFE The point about risk weights being only one component is important. One of the aspects identified by the RBNZ in the bulletin was creeping, long-term climate risk that is not necessarily factored into risk weights for shorter-term assets. 

Organisations are currently grappling with a range of measures focused on climate risk: stress testing, risk weights and mandatory climate-related disclosures. These measures do not fit together in a cohesive way. Instead, they are all operating independently, and we need to put more thought into how to integrate them.

MORRISON There will be a raft of data emerging from companies through climate-related disclosures. Whether the data are completely accurate from the outset is less certain, but at least we will get more data points and these will evolve over time.

SUTCLIFFE New Zealand was the first to enshrine mandatory climate reporting, but we do not have a moratorium.

MORRISON Yes, but businesses in New Zealand were provided with quite in-depth information about how regulation would work.

DODDRELL We are observing concerns about potential greenwashing litigation in Australia, and these concerns are influencing discussion with our clients. There is increased scrutiny on environmental claims and on ensuring that sustainable practices are transparent and verifiable.

SUTCLIFFE Our climate disclosure regime is built into the Financial Markets Conduct Act, and the full liability regime applies in the same way it would to financial statements and securities offer documents. This is particularly interesting given the differences in language, content and purpose between climate-related disclosures and financial statements.

There has been some climate litigation in New Zealand, however to date it has been driven by private plaintiffs rather than a regulator like the Australian Securities and Investments Commission. Even so, both the Financial Markets Authority (FMA) and the Commerce Commission are looking at greenwashing issues very closely, not just at banks but across the entire New Zealand market. 

CLARKE We received very positive feedback on our framework and we had several conversations with the AOFM as it was creating its own document. It was important to both the AOFM and NZDM to create high-quality, credible and enduring frameworks. So it is no surprise to us that, side by side, the two frameworks bear some similarities.

NZDM is very supportive of sustainable finance in New Zealand and the benefits it brings. Establishing and maintaining a green-bond framework is a substantial undertaking. It is helpful that the structures supporting the development and issuance of sustainable finance products have evolved significantly over time, providing issuers with confidence and helping them to determine what is an eligible green or sustainable asset.

CLARKE The short answer is no. We looked to international best practice to develop our framework. Given New Zealand is a relatively small issuer and 60 per cent of New Zealand government bonds are held offshore, we are conscious of ensuring our framework incorporates criteria that are easily understood by our global investor base, which invests in a range of different markets.

A proliferation of taxonomies is being developed across the world. Although we are monitoring development of New Zealand’s taxonomy and will assess how it relates to our green-bond programme, we expect international investors will continue to be interested in how our programme relates to other taxonomies, such as the EU taxonomy.

DODDRELL The climate disclosure regime in New Zealand is principle-based and outcome-focused. The External Reporting Board aims to help businesses manage change, rather than simply reporting the  numbers.

It is positive that we are adhering to New Zealand’s standards for reporting, but we need to understand how organisations will handle reporting to and aligning with global standards, and whether they will report to these and local ones.

BOYLE It is pleasing to see innovation, for example through the New Zealand Local Government Funding Agency (LGFA)’s Sustainable Financing Bond. Proceeds from these bonds innovatively fund a  comingled asset pool for use-of-proceeds and sustainability-linked type loans, although the transaction does not claim direct alignment with the Asia Pacific Loan Market Association and International Capital Markets Association sustainable finance market principles.

DODDRELL Volumes for sustainable debt are moving in the right direction, which demonstrates the progress the market has made to date. Obviously NZDM’s green bond was incredibly helpful for the market and for New Zealand Inc, as it provides an excellent and broad framework. One only needs to look at the enormous amount of work NZDM undertook on biodiversity, for example. 

While all of this is positive, we need to keep evolving and innovating, with the LGFA Sustainable Financing Bond a good example. Some organisations globally have taken a voluntary approach to sustainability goals, decisions and strategies, but a real fear of litigation is making some issuers sit on their hands.

One positive sign of market development is the extent to which the conversations have evolved – we are no longer discussing why to issue a green bond or the potential basis points gained. Maybe of greater significance is that these conversations have moved from the sustainability team to the boardroom.

MINHINNICK We’ve seen consistent growth in listed green bonds on the NZDX. Right now, bonds with some kind of ESG [environmental, social and governance] designation – be it a green, sustainable or wellbeing label – comprise around 29 per cent of all listed bonds. This has risen from 23 per cent of listed bonds in 2019 and we know other issuers are considering adding to the mix. 

MORRISON At the moment, New Zealand has seen more development in the SLL market than the sustainability-linked bond (SLB) market. It’s disappointing that the local SLB market hasn’t evolved beyond one transaction – but hopefully this will change over time.

SUTCLIFFE The New Zealand market would benefit greatly from a more accommodating approach to disclosure requirements, enabling existing listed issuers to issue green or sustainable bonds on a same-class basis. It is great to see the FMA taking steps toward providing a class exemption that would tackle this issue.

BOYLE Sustainability continues to be a key theme for issuers. Most sustainable finance issuance has been concentrated toward green use of proceeds, where the proceeds are being directly used to fund green assets or projects. This allocation has been primarily for climate mitigation activities, such as renewable energy or green buildings, which all help climate mitigation and assist in meeting the sustainable goals of the Paris Agreement. Sustainability-linked issuance also helps to drive the achievement of the Paris goals for climate mitigation, as most sustainability-linked issuance is underpinned by an emissions reduction target.

Part of the Paris Agreement, though, is to also adapt to the impacts of climate change. The sustainable finance market hasn’t traditionally focused on climate adaptation, but in the last 12 months the discourse has greatly increased. In 2023, Commonwealth Bank of Australia acted as a joint lead manager on Asian Infrastructure Investment Bank's Climate Adaptation Bond, which was the first bond in Australia solely dedicated to climate adaptation. We have also seen allocation toward climate adaptation with other government issuers such as NZDM and LGFA. 

SUTCLIFFE Around 80 per cent of New Zealand exports by value are to countries with mandatory climate-related disclosures either already in place or due in the future. The next phase will focus on trade measures for higher-intensity industries. Our exporters could potentially be exposed to carbon adjustment charges and other trade measures relating to climate, particularly in respect of the UK, EU and Australia.

MORRISON This is right. Green bonds have a purpose, but they are limited by their use of proceeds and there is only so much that can be financed via this format. For potential issuers, there is a fine balance between signing up to sustainability targets and being seen as an emitter or being associated with greenwashing.

Prior to COVID-19, there was definitely a view that emitters couldn’t take this path. Since then, however, some emitters have looked to raise funds via sustainability-linked formats. This is forging a path for others in the loans space.

LE QUESNE Finance can play a crucial role in the transition to a net zero economy. It is important for this group of leaders to remember that the market can evolve quickly from a focus on labelled bonds to more of a focus on getting under the hood at issuer level, based on climate-related disclosures.

Instruments like SLLs are a positive development as they support traditionally high-emitting companies to finance their transition. Nowadays, investors seem to be looking for more than a label. Transitionary finance mechanisms are very positive for market evolution.

DODDRELL There has been a very interesting reaction to Japan’s climate transition bond. Many industries in New Zealand require transition and when sovereigns issue such bonds it offers guidance for issuers as well as the broader market.

SUTCLIFFE New Zealand’s green-bond market has been dominated by public-sector issuers. However, there is a huge opportunity for the private sector to issue green bonds or other instruments with ESG features to contribute to the funding required to meet New Zealand’s infrastructure deficit.

DODDRELL It is pleasing to see the number of new people joining our industry. People that are passionate about climate change and making a difference are thinking about a career in financial markets because together we are trying to formulate a strategy so New Zealand and the world can be a better place for future generations.

Sustainability has traditionally been dominated by women. As we are all aware, having sustainability and the financial aspects of an organisation at the same table has benefits, including making trading floors more diverse.

MORRISON We are also starting to derive benefits from going into schools and talking to students about financial markets. The sooner we educate young people, particularly girls, in our sector and the options available to them, the more likely we will be to have a more diverse workforce.

MORRISON Our industry has traditionally been used to employees that stay for much of their career. The younger generations have a different approach, moving more frequently between roles and industries.

As new generations come through, the need to focus on retention won’t be as much of a priority – because it is already happening. This said, in New Zealand it remains challenging to retain young staff as they typically want to travel.

BROWN We tend to find that being a small country at the bottom of the world means we hire graduates who then go off to experience living and working offshore or within other industries in New Zealand – and then they might come back. The retention piece is relevant here, as we want and need these employees to return.

Culture plays a big role, so we need to offer an inclusive environment where opinions can be heard and respected, and everyone has a seat at the table.

BROWN It is relatively easy to think that very little has changed but if I stand back to reflect, there has been a positive evolution. While it can feel like small steps, it is steps in the right direction. The evolution lies in having the flexibility to provide diverse opportunities in different environments where women can thrive and end up in senior positions.

Having said this, the sector is still very male-dominated and our focus needs to be not only on the retention challenge but also on attracting female talent. The number of female university students of finance or economics, or even that have an interest in finance or economics, remains limited – which means the pool from which to attract talent into the junior ranks is small.

DODDRELL I have long believed that there hasn’t been sufficient representation of women considering a career in finance. My goal is to reach a stage where half the CVs we receive are from women. In order to achieve this, I started visiting universities and schools. It was interesting to see that on careers days there might be 10 times the number of girls interested in a legal career than one in banking or finance.

BROWN The positive side is that the legal profession has itself undergone a significant change: it has around 50 per cent women in the workforce.

SUTCLIFFE That’s right. We are different from the finance sector because women have dominated law student numbers for many years – and gender diversity in law reflects this.

Promotions to partner level at Chapman Tripp during the last 10 years have been split equally between men and women, which means our total partnership is currently 60 per cent male. We do not use quotas.

DODDRELL It is pleasing to see strong women studying law at university leading to a robust talent pool in that sector, and I am compelled to uncover a solution for financial markets. I have loved my career and I firmly believe women can make significant contribution to this industry.

We are nowhere near 50 per cent women on the trading floor. We need to continue to work collectively on a number of elements: more CVs from women, ensuring we have strong female role models in visible positions and, as Erin mentioned, creating a culture on the floor that women can see themselves being a part of.

LE QUESNE On the point about culture, COVID-19 certainly changed the workforce, and thinking about the employee value proposition in a holistic sense has been important. This largely comes down to organisations understanding that employee needs vary according to the individual. Organisations need to have the wellbeing of individuals at their heart.

Compared with 10 years ago, there is greater focus on respect, inclusion and integrity as well as on what people want. This might be flexibility, career progression or variety through role or geography. Companies need to pay careful attention to how they manage their talent if they want to retain it.

MORRISON The point is there isn’t a one-size-fits-all approach.

DODDRELL To Kate’s point, organisations need to adapt because young people will opt for organisations that align with their desired culture and select industries that are more adept at offering what they seek.

MORRISON This type of data is very valuable information to prospective employees when considering the opportunities available to them.

LE QUESNE Some of the data, particularly data that has come out of Australia, is very sobering. It is probably uncomfortable for some, but this is not a bad thing.

BROWN Australia has clearly had a strong start to the issuance year. Sovereign issuance has been relatively low by global standards, and this has left capacity for other issuers – for example supranational, sovereign and agency (SSA) issuers and others – to be active. For these names, pricing is also attractive relative to government bonds. This means investors are observing a pick-up on a relative basis to government bonds as well as the opportunity to get name diversification into their portfolios.

In New Zealand, government bond issuance has been the focus of investor attention and this has limited the capacity for some other issuers to come to market. The new NZDM 2054 syndication was a very solid transaction with robust volume and a broad investor base. But we would usually expect decent volume of SSA issuance in the first two months of the calendar year, and in 2024 there has been one transaction. Relative value also plays into this decision-making, but the demand piece has been missing.

Global issuers have access to a range of markets. They make it clear that New Zealand remains relevant and important, but they are also aware that periods of higher and lower issuance volume are part of the cycle. At the present time, it feels like we are in the part of the cycle where issuance, outside of the sovereign, is limited.

BOYLE We are observing very robust demand at longer tenors, though. For example, Spark issued at 7.5 years. The inversion in the yield curve is less than it has been for some time, which helped, and the 2031 maturity provided some differentiation for investors. This is a very good development for our capital market as investors have been more focused on mid-curve issuance for a long time.

To Erin’s point about the lack of SSA issuance, part of the reason is the level of the cross-currency basis swap: on an all-in basis, this is currently expensive relative to US dollars.

BOYLE The majors have issued around NZ$4 billion equivalent in offshore markets in 2024. However, the foreign currency offsetting the reserve bank is reportedly doing in US dollars contrasts with this, so the basis swap hasn’t been as favourable as it often is at the start of this year.

CLARKE We were very pleased with the outcome. We wanted to print early in the calendar year as we have more syndicated issues to do before the end of our fiscal year in June. We were also able to print our maximum target volume of NZ$4 billion. This is, notably, NZ$1 billion more than we printed in our last curve-extending syndication – the 2051 sovereign bond introduced in 2021.

We capped the recent syndication, enabling us to balance our objectives of making good headway with our funding task at a reasonable funding cost while at the same time ensuring our investors had a positive experience.

The market was supportive of establishing a new 30-year point on the curve with good, liquid volume. However, to Erin’s point about competing supply, we were conscious of the market’s capacity to digest this volume of risk.

The spread to the 2051 line has widened marginally since pricing, but at the same time yields have fallen so investors are compensated for the transaction.

At more than NZ$19 billion, the book was indeed our largest to date and we were pleasantly surprised by this outcome. The previous records were set during the pandemic and for shorter-dated – 2027 and 2028 – maturities. We were also pleased to see that around 75 per cent of the bonds were placed with offshore investors.

LE QUESNE Regulatory processes take time and although we heard through feedback that there was a lot of uncertainty, which made it challenging for the market during the LPR process, we wanted to ensure we landed on the right outcome.

We have heard subsequently that there is broad comfort with the decisions made and at the very least that there is clarity with the operating environment going forward. It has only been a very short period of time so it is probably too soon to say with any confidence that these decisions have contributed to market volume in 2024, but we have observed a reasonably positive start to the year for issuance.

BOYLE The certainty provided with the 20-25 per cent cap has been useful for issuers. There is also certainty for balance sheets from the perspective of knowing how much, for example, tier-one SSA issuance they might be able to buy over the longer term – so when new issues come to market balance sheets can be comfortable submitting bids for seven-year transactions without the risk of potentially needing to sell them to meet policy requirements in future.

Also suggesting clarity based on the announcement, two SSA issuers came to the Kauri market after the reserve bank’s update.

BROWN The secondary market echoed the response from the primary market. Until market participants received clarity, they had been looking primarily for shorter-dated paper. They were willing to look out to three years, but there was uncertainty about how assets would be treated after this point.

What we are now experiencing is demand from balance sheets returning to previous norms – out to around five years – and more comfort from investors generally out to seven years.

It is hard to know how much of this phenomenon is directly attributable to the LPR and how much to the rates environment, broader economic factors and market conditions. But it all goes hand in hand in supporting the market to resume its regular function.

BROWN Outright yields are a driving force for investors and with an issue yield of more than 5 per cent – it was 5.0925 per cent – the deal met the threshold for a lot of offshore investors. We are observing more investors looking at outright yields, in the government bond space and in credit.

CLARKE To put this into context, when we issued the 2051 by syndication, investors were talking about wanting the yield to be more than 3 per cent.