Debt capital market developments and trends in the SRI space

KangaNews speaks to a range of representatives from Australia’s big-four banks about the role of capital markets in financing global sustainability initiatives, developments in the fixed-income socially responsible investment (SRI) space, the challenges to growth of the impact bond market, and what tops their wish list of things to happen to promote further market growth.

PARTICIPANTS
  • Michael Chen Head of Sustainability WESTPAC INSTITUTIONAL BANK
  • Mark Goddard Head of DCM and Syndicate WESTPAC INSTITUTIONAL BANK
  • David Jenkins Director, Sustainable Capital Markets NATIONAL AUSTRALIA BANK
  • Simon Ling General Manager and Global Head of Debt Markets COMMONWEALTH BANK OF AUSTRALIA
  • Kylie Macfarlane General Manager, Corporate Responsibility COMMONWEALTH BANK OF AUSTRALIA
  • Katharine Tapley Head of Sustainable Finance ANZ
  • Paul White Co-Head of Capital Markets ANZ
  • Eva Zileli Head of Funding NATIONAL AUSTRALIA BANK
MODERATOR
  • Samantha Swiss Chief Executive KANGANEWS
CAPITAL MARKETS' ROLE

Swiss Can capital markets step up and play a direct role in the development of the SRI market globally, for example by funding projects that help meet the United Nations (UN)’s Sustainable Development Goals (SDGs)? Is this role one of the reasons Australia’s banks have made such a strong commitment to sustainable finance?

TAPLEY We have been a signatory to the UN Global Compact for the SDGs since 2010 – and our chief executive, Shayne Elliott, signed the CEO statement of support for the SDGs at the beginning of 2016. This was an initiative of the UN Global Compact Network of Australia to spur further action on the SDGs here, and saw us map our corporate sustainability targets to the SDGs by the end of 2016.

These are definitely among the drivers behind our commitment to sustainable finance. Now that the SDGs are emerging as a potential financing platform, much like the Paris Agreement, we are actively engaging in conversation in this regard. For example, we participated in SDG financing forums during UN General Assembly week in New York in September this year.

Second, resulting from a conversation with PIMCO – one of our key fixed-income investors – we have recently mapped our project-finance book to the SDGs. This shows we have a few billion dollars-worth of assets that match to climate action, clean water, liveable communities, affordable energy, and so on.

ZILELI I think the role of capital markets in developing the SRI market was really evident with National Australia Bank (NAB)’s social bond. This was the first time I’ve been able to bring together a social issue that I recently started to drive internally with another thing I’m passionate about, which is funding and capital markets. What other opportunity has there been for these two topics to come together? For me, capital markets have a leadership role to play.

JENKINS I agree. The capital markets are a means to mobilise capital in scale. Sean Kidney from the Climate Bonds Initiative (CBI) has been singing from the hilltops about this for a long while but it has taken some time to gain traction in Australia. We are a bit behind the evolution of the market offshore. The flip side is we are picking up at great pace with some good ideas and very innovative transactions coming out of Australia.

GODDARD There is an opportunity for capital markets to play a direct role in the development of SRI, and it is a leadership role the capital markets can play. Look at how the green-bond market developed offshore – green bonds were being issued before we saw any of the large policy changes come through at a governmental level.

Ultimately, however, the capital-markets piece is driven by supply and demand. If there is demand, supply will follow. We can’t create and force SRI product in a vacuum. Having said this, we are seeing growing demand for SRI products. This reflects that investors are being pushed by their clients and shareholders to invest in SRI product.

Westpac Institutional Bank (WIB)’s strategy, from a capital-markets perspective, is that when we see a need and demand growing we want to address it by providing the products that will be a catalyst to that need.

“If we can get to a point where an issuer can achieve a more attractive cost of funds, albeit a small one, this will lead to more development of the sector.”

CHEN One way to look at this is in terms of supply and demand, another is to look at it in terms of risk and return. If you look at certain renewables, for example, with technology costs rapidly coming down renewables are already winning the war for investor dollars for new-build assets without any need for subsidies.

It’s the same when you look at social-benefit bonds (SBBs). With SBBs, the capital markets have found a way to structure deals that offer investors good returns for the risks they are taking on but that are also delivering positive social outcomes. Governments only pay according to the social impact generated. It’s a real win-win-win.

MACFARLANE I agree that the capital markets have a real opportunity to participate in the development of the SRI market both here and abroad. For Commonwealth Bank of Australia (CommBank), awareness of the SDGs is still building. However, there is no doubt the work we and others are doing supports and reflects the SDGs’ areas of focus. This said, I’m sure Simon Ling and his team also think this is very interesting and important, and it demonstrates a level of purpose to their roles even if it may not be core to the role.

LING There’s no doubt that people are inspired by this and there is a lot of innovation around the area. What a lot of us have done is taken something that started way out on the edge, and as a community we’ve brought green and social-impact financing towards the centre.

MACFARLANE Our institutional bank has played an important role in demonstrating to clients and future customers that the bank is doing innovative things to support the sustainability agenda of the organisation. To have a sustainable organisation we need both sustainable profits and purpose.

Deal highlights: Westpac Institutional Bank

Although Westpac Institutional Bank has worked on big transactions in the socially responsible investment (SRI) arena, the deal the team is most proud of is the social-benefit bond (SBB) for The Benevolent Society of New South Wales (BenSoc).

SWISS What deals are you most proud of bringing to market?

GODDARD Of course I’m very proud of Westpac Banking Corporation’s own green-bond deal. Also, World Bank’s green-bond deal in the Australian market. The deal helped develop the green-bond space – as the first deal of its kind in the domestic market, the World Bank trade provided a benchmark for green product. Prior to this all green product had been issued offshore.

Bringing the World Bank deal allowed investors to see how the World Bank green bond was positioned relative to the existing World Bank Kangaroo curve in Australia as well as relative to World Bank’s green bonds issued offshore.

But I’m probably most proud about what our structured-finance team and other colleagues did to bring the SBB to market for BenSoc. This is the hardest type of transaction to bring due to the education required for investors. It’s not as vanilla a product as a green bond, and this makes the process more challenging. However, the reason it also resonates is that it has a much more direct social impact. Seeing a capital-markets instrument have a direct positive impact on foster care is a great outcome.

CHEN I agree – especially if you look at what BenSoc has achieved over the past four years. Since its inception, the programme has an 89 per cent preservation rate for families referred to it. This makes the programme among the strongest-performing intensive family-preservation services in the world. By meeting the performance KPIs, it also generates financial returns for investors – 7 per cent for capital-protected class investors and 15 per cent for capital-exposed class investors.

STRATEGIC PURPOSE

Swiss Do you see the development of the SRI market as a strategic goal for your team, and how does it fit with other priorities?

GODDARD If you look at market responses on a supply-and-demand only basis, you might view the response as tactical rather than strategic. However, if you look at the strategy of the bank and the clear agenda the Westpac Banking Corporation (Westpac) group has in terms of overall sustainability you will see how delivering SRI product fits into a broader strategy.

Westpac has set clear goals to ensure its own sustainability and to maximise the sustainable contribution the bank makes to local and global economies. Capital markets have a role to play in all this, but the capital markets are not informing the group’s strategy – it is much bigger and broader.

Having said this, the fact that we have a head of sustainability in WIB shows we are doing a lot in this space across our institutional-banking platform. It’s not limited to what we are doing in capital markets – there is an SRI overlay on everything we do.

TAPLEY Our sustainable-finance business has been built to leverage off the success we have had in project financing renewable energy and to put strategic priority on building capability to capture the opportunities arising out of the transition to a lower-carbon economy beyond just project financing. The fact is our customers are talking about this transition and wanting expertise and financing solutions – we are seeing this right across our franchise, both in our home markets of Australia and New Zealand and also through Asia and Europe.

Green and sustainability bonds specifically are emerging as one of the key financing tools, hence the strategic focus we are putting on this within sustainable finance and jointly with our capital-markets team.

WHITE From our side this asset class has become more relevant for our issuer clients and, even more so, our investor clients – not only domestically but globally. So it is an important development for the markets globally to continue to be more relevant in this sector, and we are expecting more growth going forward.

One of the key strategies for ANZ is around the capital flows across the Asia-Pacific region as a whole. If you look at what has happened around sustainable finance in the last 18 months, particularly in China, this has clearly been the big driver of growth.

Of course we see the Australian market as important but we have also been actively involved in the development of the New Zealand market. We joint-led the first green Kauri bond from International Finance Corporation (IFC) earlier this year and we also worked with Contact Energy when it converted its entire MTN programme into a green one. In Asia, too, we have done a number of transactions for the likes of Castle Peak Power in Hong Kong and Rural Electrification Corporation in India.

“If the inflow of dollars into the responsible-investment space continues, there’s no reason this market won’t continue to grow. The SDGs are helping with this – it’s becoming a default language in the bigger end of the investor universe globally.”

LING It’s one of our long-term priorities to develop these markets towards their potential, which we believe is much bigger than now. For example, green issuance in Australia has already gone from A$300 million (US$238.3 million) in 2013 to A$1.7 billion issued this year to the end of September. It’s still early days in Australia and we are not generating significant revenue from it, but we see it as a part of the capital market that will expand considerably over time.

We are involved in the SRI space because our clients are, and our business is client-led. The demand side of the equation is increasingly green and our issuing clients and investors are increasingly interested in social impact. It also makes sense for us to be involved in developing this market due to our experience and capability, and not just in Australia.

One of the things I enjoy most about social impact as well as green markets is that the cross-discipline aspect brings people with different skills and backgrounds together across the bank. Whether it’s securitisation, bonds or loan syndication, you need a variety of skills to execute these deals.

CommBank is well positioned to innovate in this space due to the depth of our product expertise and the resources and capabilities across the bank including in customer advocacy, sustainability and community engagement. Another reason it’s part of our strategy and a priority is that working on these deals is inspiring. Our people put their hands up to work on a social-impact bond, for example, even if it’s on top of their day job or takes more effort, because they feel more connected to the bigger picture and can see directly how they’re giving something to society in a way that is relevant to their roles and skills.

MACFARLANE Sustainability is core to what an organisation does, as opposed to something that is overlaid on an organisation’s day-to-day activities. If you can apply a commercial impetus and industrial scale to sustainability, and embed it in your policies and processes, it becomes part of who you are as a company and what you do every day.

When working on deals, our teams work together to think collectively about how green or social-impact investing aligns with the organisation’s overall vision, our corporate-responsibility strategy, and how it might provide us with a point of differentiation or commercial capability longer term.

The other part of this is how we measure and report on the work we’re doing through social-impact investing. Our annual corporate-responsibility report shows the work we are doing above and beyond the numbers, and institutional investors see nonfinancial metrics as an essential measure of the overall health of an organisation.

ZILELI This is absolutely a strategic area for NAB’s team – it’s a fundamental part of the strategic approach. In treasury we want to embrace the shared-value concept, which is part of core business for NAB. Shared value is a competitive business strategy to create business value while also creating societal value, and one way our teams do this is by using capital markets to address pressing social issues.

To show that it is really part of NAB’s values and direction, in September 2015 we announced a commitment to undertake lending and financing of at least A$18 billion to support the transition to a lower-carbon economy by September 2022. In two years we are very well on track with this target – which is a reflection of NAB’s commitment to this strategy.

Another example is gender equality. This is one of the social issues facing society, hence our leadership and creation of the social bond around gender equality – to show NAB supports this issue.

JENKINS Our chief executive has made comments around our support of the SDGs, we are a member of the UN Global Compact, and we are looking at ways to collaborate and drive progress towards the adoption of the SDGs through our existing businesses, and also with our clients – both investors and borrowers. We see sustainable capital markets as a great way to mobilise this, and do it with scale.

For us it’s about how we can develop products that deliver both a financial and a social return. The wealth of money that is seeking opportunities to deliver a positive social or environmental impact, as well as a financial return, is overwhelming and it’s continuing to grow.

Throughout the organisation at NAB we all understand we have a social purpose in the community and this aligns perfectly with the bank’s vision to become Australia’s most respected bank. Our purpose is to ‘back the bold’ to move Australia forward.

Deal highlights: Commonwealth Bank of Australia

For Commonwealth Bank of Australia, its role in developing the social-benefit bond (SBB) market is a highlight. The bank is also proud of being an arranger on the first green bond, globally, done by a university in the US private placement (USPP) market.

SWISS What deals are you most proud of bringing to market?

LING If I have to pick one, it would be the SBB we helped structure for The Benevolent Society of New South Wales. While the deal was relatively small financially at A$10 million (US$7.9 million), it is a unique product and the first in this particular suite – and I am most proud of the tangible and very real difference it has made.

As a banker, I’m not used to thinking about or dealing with foster care or at-risk children. It was extremely ‘real’ to sit at a table with police, the Department of Community Services and foster carers, to talk about a confronting issue and come up with a solution that has really made a difference. It has helped more than 400 families in just a few years.

If I could pick a second deal, it would have to be the Monash University USPP transaction as it was the first university globally to do a green USPP, and also highlights our international expertise.

MARKET DEVELOPMENT

Swiss What has been your bank’s role in developing the domestic capital market for green and other impact bonds?

LING We’re looking at all the various areas and how we can bring innovation. We were there for the first securitisation green bond, the FlexiGroup deal. We printed the first university deal in the US private placement (USPP) market. We issued the biggest Australian dollar green bond out of all the big-four banks. We executed the SBB for The Benevolent Society of New South Wales. And we were a lead manager on the Investa Commercial Property Fund deal which was the second green bond from an Australian REIT.

TAPLEY ANZ Banking Group has issued and then taken that experience to act as an intermediary in the Australian, New Zealand and Asian markets for a range of issuer types. We are regularly host investor and issuer roundtables to exchange ideas, and also participate in global forums on driving financial innovation through these markets.

So education is a big part of what we’re doing to develop the market. This includes education around the process of issuing these types of bonds, and dispelling myths about how hard it is. A lot of this comes down to connecting treasury teams with sustainability teams. Where we get the most traction and the most interest is where sustainability teams are core to strategy or very closely aligned to treasury teams.

There are different levels of knowledge and awareness of how the market works in the corporate world. I think there’s general acceptance that you get access to a broader range of investors with a green bond. But we are still dealing with concern around the lack of a pricing benefit, and there is scepticism about it being ‘just marketing’ or greenwashing.

WHITE I agree that most issuers have tended to approach the concept of sustainable finance with a degree of scepticism. But this quickly changes once they have stood back and had investor engagement. We have had a number of discussions with issuers and investors in the last few months and the message is getting through that this is becoming more and more relevant for fund managers globally, so I think the market will continue to develop. It has been a slow start, but as with other asset classes once it gets momentum it will only increase.

“If you can apply a commercial impetus and industrial scale to sustainability, and embed it in your policies and processes, it becomes part of who you are as a company and what you do every day.”

ZILELI NAB was the first of the Australian majors to issue a green bond, in December 2014. When working on this bond, we were very conscious of not creating a superficial, gimmick climate bond. We took our time about it – it was important for our first issue to be gold-plated and set a standard.

We followed this deal with our euro climate bond earlier in 2017. It was an interesting transaction because we were marketing to European investors as opposed to domestic accounts. This involved a whole new dimension of scrutiny. The calls David Jenkins and I did with investors offshore were very, very rigorous. It was at that point that I felt great relief that the team had insisted on a framework that was robust, top of its game on a global-standard basis, compliant with the Climate Bond Standards and the Green Bond Principles, and we had addressed all the issues European investors wanted us to in the framework.

Although we had already done one climate bond, the rigour around building on the framework we had developed made the euro deal quite satisfying. Especially as we received a very positive reception from investors.

Taking these learnings on board, we then started working on the social-bond framework, which we built to the standard European investors were looking for. The gender-equality bond NAB issued this year was the first of its kind globally.

JENKINS Our team has worked on the three transactions for NAB’s balance sheet, and we’ve brought 11 public deals in total across a range of different markets from AMTN and EMTN to USPP. We were a joint arranger on the first Kauri green bond for IFC, we arranged the first euro benchmark climate bond for NAB, and we also worked on our first US dollar green bond, for TD Bank, during 2017. NAB was also an arranger on the first green securitisation in Australia, as well as the first sustainability bond.

Since I started with the bank, in late 2010, I have been immersed in this sector. We began talking to investors as early as 2011 about how we saw the market developing and getting their thoughts on whether SRI, initially green bonds, made sense for them and their investor bases. You can see we had to commit resources to this sector way before any deals were issued in the domestic market. It’s only now we are seeing the recognition come through – for example, the CBI team has given NAB a green-bond pioneer award.

GODDARD We’ve had the same experience. The first deals that came in this space took a number of years of development before they even hit the screens. So we were doing a lot of work around trying to bring deals to this market before any deals actually materialised. In both the green and social spaces WIB brought the first bonds. WIB was a lead manager on both the World Bank Kangaroo bond, which was the first green bond in the domestic Australian dollar market, and the first SBB for The Benevolent Society.

The World Bank deal we brought to market in April 2014 was about two years in the making. While the end result was a vanilla green bond that could be seen as an ordinary supranational, sovereign and agency (SSA) issue, we spent considerable time working with the issuer to ensure the investors that were offered the bonds were really taking environmental, social and governance (ESG) issues seriously. World Bank didn’t allow us to allocate to some investors because the issuer was clear from the outset that it wanted the inaugural trade in this market to reward investors with SRI-specific mandates and funds.

As the first benchmark deal, the transaction allowed discussions to take place for further issuance. So you could argue that this deal was the cornerstone for setting up all the transactions that followed.

As part of this process, we also spent a lot of time listening to investors. This allowed Westpac Banking Corporation, when structuring its own green bond, to ensure that it was perfectly formed to meet investor requirements.

Deal highlights: National Australia Bank

The National Australia Bank (NAB) duo choose their own bank’s climate bond – the first to be done by a bank in Australia – and award-winning gender-equality bond as deals worthy of particular mention.

SWISS What deals are you most proud of bringing to market?

JENKINS For me it was what we did first – finally getting NAB’s climate bond into the market. It took a long time – we started working on it in 2011 and it took until the end of 2014, working through a host of challenges both internally and externally.

This was a great collaborative effort. We drew on people from areas as diverse as social innovation, sustainability, governance and risk, the clean-energy and infrastructure team, operations, legal, and sales.

Then we also had to partner with investors to bring them along on the journey, as well as working with the Climate Bonds Initiative (CBI) team as they developed their original standards and used us as a pilot. We were the proof point in the sense of whether it could be done and how it would work from an issuer’s perspective.

After all this work, to see the market accept our framework and issuance was very pleasing. The other Australian banks have all followed our approach in the sense of getting their bonds certified by CBI. We have also been able to take the learnings and work with other clients to issue green bonds.

ZILELI I would have to say the deal I am most proud of is the social, gender-equality bond. For NAB, one of the major banks, to go out there and issue a bond that supports gender equality was a very bold statement to make.

The framework and the actual bond itself were both very innovative, but for me what made this bond special is the leadership NAB has taken on a social issue that resonates across the globe.

Swiss Having spoken to both issuers and investors in the domestic market, what is the potential for the SRI market to grow? Will it develop into a viable asset class in its own right, or are we more likely to see intermittent deals? What is driving it and why now?

TAPLEY The Paris Agreement has a lot to do with this. When it was signed, the conversation quickly turned to how all this will get financed. And now the potential for the SDGs to be used as a financing platform is gaining traction.

I think the appetite of and pressure from investors is also a major factor. But it’s also about what makes economic sense. The technology to upgrade buildings or switch power sources to renewable energy is becoming a lot cheaper, which is contracting return periods. There are actually economic benefits to making these investments.

On top of this there’s a realisation that the world needs to transition to a low-carbon economy urgently. People are now taking a longer-term view around asset ownership and asset management.

WHITE I still think you’re going to see one-off deals rather than huge growth in the asset class. But that’s just the nature of the market. If you look at the overall market in Australia it’s very much rates- and high-grade-heavy. So you are unlikely to see continuous issuance in this space from financial institutions given their lending books. On the corporate side, issuance tends to be one deal a year from most large corporates rather than a whole host of deals from any one issuer.

I still think the market will grow but we will see less frequent deals than in offshore markets, due to the nature of the Australian domestic market.

CHEN This will absolutely develop into a viable asset class. To put our money where our mouth is, we recently announced a new target to facilitate up to A$3 billion in climate-change solutions through activities such as green-bond issuance and arrangement. This is in addition to a target of A$25 billion in lending exposure to climate-change solutions by 2030, which is putting our balance sheet at risk to support green solutions over the long term. As you can see, we are committed to backing this market.

GODDARD Demand continues to grow because shareholders, policy holders and other stakeholders are ensuring that institutional investors have a focus on SRI when making investment decisions. Institutional investors have responded in different ways including innovation from the likes of QBE Insurance Group (QBE) with its premiums-for-good programmes. With more of this going on, demand will grow and supply will feed into this demand where possible.

On green bonds, offshore issuers will come to this market when the arbitrage works for them. This will always provide a strong base for the market.

CHEN What’s exciting about the green space is because there’s increasing consensus on what constitutes green, investors can allocate capital to this asset class confident of the ‘greenness’ of the bond.

GODDARD They start from the fact that green bonds are really vanilla. The majority are use-of-proceeds bonds. Because of this, it’s very easy for mainstream investors to put green bonds into their portfolios, to value them and look at them alongside other instruments.

“With SBBs, the capital markets have found a way to structure deals that offer investors good returns for the risks they are taking on but that are also delivering positive social outcomes. It’s a real win-win-win.”

ZILELI This is not a one-off sector for NAB. We have issued three SRI bonds, compared with our peers that have each issued one. It is our expectation that these bonds will form a regular part of our issuance. I say expectation because you need to have the underlying assets to support these transactions. But certainly from my perspective as a funder, I would hope this forms a regular part of our issuance.

I definitely think this market has the potential to grow. We are starting to see a groundswell of movement and support for investing in socially responsible assets. It started in the equity space and now it has shifted into the fixed-income space. We need to see more people demanding their funds be put into socially responsible assets in order for the market to grow.

JENKINS If you look at the growth of the green-bond market over the years, it shows the potential. If you look at the development of the sector in Australia you can see the year-on-year growth. There were three deals in 2015, five in 2016 and, in 2017 to the end of September there had been 10 – noting that these numbers include Australian issuers going offshore. We expect next year to be the same, if not more. Most existing issuers say they are looking to be repeat issuers, and there are also new issuers coming to the table.

These bonds are now part of the discussion we have with issuers. If the continuing inflow of dollars into the responsible-investment space continues, there’s no reason this market won’t continue to grow. The SDGs are helping with this – it’s becoming a default language in the bigger end of the investor universe globally. This may take time to filter down to Australia, but is growing based on our discussions across to the government sector. The banks are all embracing the SDGs, corporate Australia is too, and so are companies in New Zealand.

LING The green-bond market has already grown substantially. The interesting thing about green bonds is that offshore you can achieve a pricing advantage from issuing these products. If you’re issuing into the euro and Asian green markets you get a price differential in a positive way and you could argue that these markets are well on the way to coming of age.

MACFARLANE There is also global imperative. There are a lot of resources globally focusing on a solution to transition, and the green-bond market is part of this.

Deal highlights: ANZ

In choosing which deal it is most proud of bringing to market, the ANZ team says the transaction from Investa Office Fund was a significant milestone.

SWISS What deals are you most proud of bringing to market?

TAPLEY Our own transaction is worth mentioning. We are also very proud of bringing the first corporate, Investa Office Fund (IOF), to the green-bond market in Australia in 2017 – this was a significant milestone. The IOF deal was closely followed by its sister fund’s deal, and together they created a lot of momentum and a general realisation that the green-bond market is real and available to tap into when the timing is right.

Investa Property Group is one of the most highly rated property companies in Australia for sustainability. The company prides itself on its sustainability credentials and culture, as well as the very high-quality nature of the buildings in its overall portfolio.

It was also the first corporate in Australia to put in place science-based environmental sustainability targets, which it did at the beginning of this year.

Issuing a green bond was about aligning its funding needs with the strategy around sustainability. The green bond was a relatively straightforward and obvious thing for IOF to do due to the nature of its portfolio.

Swiss What about the potential of growth for the SBB market?

LING Social impact is trickier – unfortunately it’s still very much a niche market at the moment, with only A$52 million issued so far in Australia. Nobody could say the market has kicked on to the point where it is really up and running with scale.

There were problems on both the supply and demand sides when we first started working on SBBs. Now the demand side of the equation is pretty good and the challenge is the supply side, as there is a lack of social projects you can scale and measure. There are a few organisations that can handle scalable projects so I think we can get there over time, though. However, relatively quickly to get to the hundreds of millions we would like to see, a social-housing bond-aggregation model would be a good step.

The holy grail for social-impact finance that we all seek is scale, and the key to scale is continued growth on the demand side. If we have a steady stream of investors knocking on our door asking us what’s coming next, it will really drive the market to think harder and more laterally to come up with transactions. It would also help if we could find a more standard way to structure and document social-impact bonds as they are still too complex to scale.

GODDARD It doesn’t matter how big the SBB market becomes. When you’re working on a social transaction different measurements and processes are involved. There’s no easy index, it’s not vanilla. What is vital is that we keep seeing growth and that social issues are being addressed successfully via the product. In this context, it is good to see more state governments committing to these types of projects.

CHEN I agree that the SBB market doesn’t need to be as big as the green-bond market. They are quite separate and we are proud of them for different reasons. For the SBB market, all the solutions need to be bespoke for the community or service being provided. As a result of this you will never see the scale that you do in green, but you will see a really strong social impact.

JENKINS It has been encouraging to see the South Australian, Queensland and Victorian governments following New South Wales (NSW)’s lead to test and learn with this financing mechanism so they can improve the transparency and impact of each dollar spent by government.

We were visited by an international guest who was involved in the first social-impact bond in the UK. He suggested that, even though the UK social-impact bond market was more advanced, it was still too early to tell where the market will lead. We hope to learn from the experiences across Australia to create more consistency in approach and structure of SBBs and therefore create efficiencies within the process.

We have completed two SBB transactions, with the NSW and Queensland governments, and we’re working with the Victorian government on a third. With this experience, we are finding ways to do them faster and smarter each time.

CORPORATE POTENTIAL

Swiss The most consistent Australian deal flow so far has come from the banks. SSAs and two semi-government issuers have also issued SRI bonds. There has been limited activity from the corporate sector. Do you think this is the issuance pattern we’re likely to see going forward, and do you anticipate more green-bond issuance from the corporate sector?

CHEN The obvious place for green bonds at the moment is around green buildings and renewables. We are also seeing more activity in the low-carbon transport sector. As green-bond standards develop we will see other sectors starting to come onstream. For example, land use.

GODDARD One of the things I hope is that people are patient with this market and don’t compare it too much with offshore developments. You have to put it into perspective, especially when you talk about the corporate piece. The domestic market in Australia has only had a real corporate bond segment in the last five years, though of course there were sporadic deals before this. To expect the corporate green-bond market to develop rapidly in Australia is unrealistic. What we have seen is a number of offshore SSA issuers and the banks come into this market doing green bonds because they have set up use-of-proceeds programmes alongside their broader funding strategies.

We have seen some corporate issuance and we expect to see more corporates looking at the market – among our customers, for example, a number of our clients are either investigating or preparing for green-bond issuance.

In terms of sectors, property is an obvious one to mention. Because there are National Australian Built Environment Rating System ratings for buildings, it’s easier for investors to get their heads around how green a bond that comes from this sector actually is. Also, the property space is the most well-supplied of all sectors in the Australian corporate bond market. So it’s natural to see green-bond issuance from this sector.

I wouldn’t limit growth to one sector, though. This market will develop across a range of sectors.

“An important thing about social-impact investing is that we are sourcing finance from somewhere other than charities. We’re mobilising capital markets to invest in social causes and we’re creating a new class of investment.”

JENKINS The corporate sector is the most challenging. In terms of scale and volume, critical mass will continue to come from the banks, the SSAs and semi-governments – due to the size of their funding tasks and the fact that SRI bonds aligns with their reasons for being.

Green bonds are well understood in the corporate space – issuers can see that if they are investing in green infrastructure, renewable energy, and green buildings there is an easily understood impact measurement. In the short and medium term, these are the types of sectors where we will see growth.

Then you build on this to see which issuers are making a positive social impact – they can overlay green and social. If you apply this lens to the corporate sector there’s a much bigger universe. We think, going forward, there will be more corporates looking at sustainability – which aligns the green and social elements together.

LING Banks tend to be leaders in financing because that is what we do, and we have big balance sheets that we continue to fund so we’re always on the edge of innovation in funding.

Corporates are funding more for corporate-financing reasons, they’re less frequent borrowers in the capital markets. I believe we will see more and more corporate SRI issuance, though, to follow demand from investors and consumers. It’s great for the brand and you can actually get a pricing advantage and diversification from printing a green bond. So it makes sense for large corporates.

WHITE I think we will see more corporate issuance. There’s certainly room for more deals from the property sector as well as other Australian corporate issuers that have a sustainable strategy. But I also think we will see more from offshore corporates and financials.

Measuring impact

It is all well and good to issue or invest in a green or social bond. But investors want to measure the impact of their investments and borrowers want to ensure they are reporting in a way that ties in with the developing trends in impact measurement.

SWISS One of the biggest challenges for this sector is how to define and measure impact. What are your views here?

JENKINS Impact is the first question we are asked – what impact reporting are you doing and how are you doing it. If you look at the green-bond market as the precursor to where we are now, it has taken a while for the market to land on a common metric.

It was led by the work the supranational, sovereign and agency issuers did a couple of years ago around developing a harmonised framework for impact reporting.

The Climate Bonds Initiative (CBI) has been very good at articulating these measures into benchmarks that allow them to give technical rigour around their standards. This gives us comfort because when we talk to investors we can say low-carbon transport in Sydney or Melbourne is aiding the journey to a two-degree climate-change world by 2050 and here’s the proof – it’s around reducing the emissions footprint over time via modal shift and transitioning to a lower carbon-generation mix.

KATHARINE TAPLEY

We are now starting to look at our Institutional lending book through the SDGs lens. For me, this is the really exciting part – using the SDGs to show the impact we have through our basic reason for being, which is facilitating the flow of money.

KATHARINE TAPLEY ANZ
BUY-SIDE OBSERVATIONS

Swiss What are the main developments on the buy side in Australia? Are more bespoke SRI funds being set up or is SRI being incorporated as part of the overall process?

LING You’ve got everything from the big end of town to specific funds. The government has also been instrumental in driving market development through the Clean Energy Finance Corporation.

At the next level there are high-net-worth individuals, and undoubtedly SRI is going to become a more mainstream product for these clients. Meanwhile, retail investors are potentially more difficult due to different rules relating to listing and related documentation.

MACFARLANE Trustee boards of superannuation funds are already thinking about their sustainability remit as they consider the investments they make. Managed funds have had sustainable options for years, although take up hasn’t always been up to expectation. I think a lot of this is due to the return profile. Millennials are also going to continue demanding more purpose-driven investments and we’re already seeing this reflected in some product offerings.

LING Another important thing about social-impact investing is that we are sourcing finance from somewhere other than charities. We’re mobilising capital markets to invest in social causes and we’re creating a new class of investment.

This has a win-win property to it as social-impact investing is investing in something that is not correlated to the economy – and investors love uncorrelated risk.

GODDARD There’s a mix of bespoke funds and overlays. Overall we are seeing more investors putting a focus on SRI investments. We are seeing the activity of some fund managers changing as end investors are becoming more interested in directing where their funds are allocated. Fund managers want to make sure they are involved in the SRI sector and they don’t want to be left behind – especially as there is insufficient supply.

CHEN SRI-specific funds or investments are one part of the market, but importantly investors are also integrating ESG into their mainstream strategies. We are seeing more of this in addition to specific SRI products or screens. We are also doing this in the lending space – we are assessing how companies perform in ESG as part of our normal credit-assessment process.

A good example of this in our wealth arm, BT Financial Group. It has SRI-type funds, but in addition to this it actively considers ESG factors in its investment analysis and decision-making process.

JENKINS Traditionally, SRI has been a focus of the equity market. It’s only in recent years this has translated into fixed-income offerings. Various retail investment offerings are now being developed. For example, we are seeing the first green exchange-traded funds and the first responsible-investment unitised trust vehicles are being created. NAB is also working on a low-carbon fund which is being marketed to institutional investors.

Regarding whether there are specific funds being set up or fund managers using ESG as an overlay, it’s a mix. There are only around 20 dedicated green-bond funds globally – that’s less than US$2 billion, or less than a percentage point of the green-bond universe. So it’s tiny.

ZILELI Domestically, the supply hasn’t been there – so if an investor set up a dedicated SRI fixed-income fund, there hasn’t been enough supply to choose from. We need to see more supply, then perhaps we will see more dedicated SRI funds.

JENKINS The vast majority of the big end of town applies ESG screening to the investment process. Our recent experience in Europe was that, across the board, investors apply an ESG screen before they will look at a company or issuer. If this makes sense, and the green or social bond stacks up, it then goes to the portfolio-management team which makes a credit and relative-value decision.

ZILELI We have found that in certain jurisdictions in Europe there are dedicated SRI teams that look at your framework, your processes, and the third-party verifications before it’s passed on to the portfolio manager. In other jurisdictions it’s the portfolio managers who are doing the work. But certainly in continental Europe there are dedicated SRI teams.

“We are starting to see a groundswell of support for investing in socially responsible assets. We need to see more people demanding that their funds be put into socially responsible assets in order for the market to grow.”

LOOKING TO THE FUTURE

Swiss What are the main challenges to SRI market development?

WHITE The main challenge is on the supply side rather than the buy side. Among investors there is a lot of momentum and it doesn’t feel like it will stop any time soon. If anything, it will grow further. For us the challenge is how we can increase supply across all sectors.

Pricing and cost are also challenges. Longer term there needs to be a price differential of some sort for this market to really develop. We are still in the very initial stages of this and there are times, particularly in the secondary market, that we see sustainable bonds trading better than vanilla bonds. Whether this can be translated into a benefit for new-issue pricing remains to be seen.

If we can get to a point where an issuer can achieve a more attractive cost of funds, albeit a small one, this will lead to more development of the sector. We are starting to see some of this in Europe, and in the domestic market Queensland Treasury Corporation’s green bond is trading through the issuer’s curve. So there are some signs but more will be positive for the market.

TAPLEY For me, the challenge is continuing the education. We are slowly starting to break down concern over pricing and showing that there are no pricing disadvantages. Now the challenge is around educating issuers that a green or social bond is not ‘just marketing’.

GODDARD Green bonds are easier to structure and issue, social bonds are much more of a challenge. This is the area in which we can have a bigger social impact, but they are hard to do and their lead times are long.

Generally, with more regulation and increased costs, banks have to remain focused on continuing to grow their overall businesses but also deliver these products – which don’t make any money. This is the balance we are looking to attain and maintain.

LING In the social-impact bond market, scalability is the issue. In the green-bond market, I’d say the challenge is making sure the measurement of ‘green’ is robust.

“People need to be patient and to recognise that markets need to build benchmarks to allow relativities to develop. This is what will make the market itself more sustainable going forward – rather than simply trying to rush out deals.”

Swiss What kinds of things are at the top of your wish lists with regard to developments to take place to ensure we maintain and even increase momentum for investing with impact?

LING We need demand. If we continue to see investors wanting these products and this type of innovation, we will continue to see outstanding transactions and success stories. The growth of the market and everything else will follow.

MACFARLANE I agree – there’s a real opportunity to grow this market particularly on the social-impact side. We just need to see demand industrialised and scaled first.

TAPLEY I would like to see more of the large Australian-based institutional investors starting to implement ESG mandates. For example, following what QBE is doing.

WHITE I would like to see one of the blue-chip corporates issuing a green bond.

ZILELI I want to see the basics of supply and demand addressed. I’d like to see more supply from across the spectrum of issuers to keep the momentum going.

On the demand side, I would like to see more of the community demanding that their funds be put to work in a socially responsible way and addressing the transition to a low-carbon economy as well as other societal issues.

JENKINS A broader allocation to fixed income from investors is what I’d wish for. Unless investors allocate more to fixed income, issuers won’t come into this sector. I’d also like to see continued growth of issuance from the corporate sector and others so there’s a good breadth of issuance.

Harmonisation around how to judge a green or social bond is also important. Agreeing on a standardised approach would help the development of the market. Finally, I’d love to see the SDGs become part of everyone’s discussion when they talk about investments.

CHEN I would also like to see more consensus around global standards on social and environmental impact. This will allow us to expand the sectors that can be considered for green- or social-bond issuance.

GODDARD I would like to ask for patience. Too many times people have looked at the Australian bond market and written it off because of its size relative to other markets around the world, particularly compared with the US. Now, though, the Australian bond market has developed and become the third-largest funding pool for many international borrowers. People who called it early suggested the market wouldn’t develop.

The same can be said for the potential of the SRI bond market. People need to be patient and to recognise that markets go through steps of building benchmarks to allow relativities to develop. This is what will make the market itself more sustainable going forward – rather than simply trying to rush out deals.