Major-bank sustainability focus: ANZ

ANZ Banking Group (ANZ) believes transition to a more holistic sustainability approach is effectively mandated by the changes taking place in the wider world. Key executives outline how the bank is making environmental and social considerations integral to its strategic direction, and how this approach affects its relationships with clients and customers.

Purpose: to shape a world where people and communities thrive

At the heart of ANZ’s approach to environmental, social and governance (ESG) issues is its corporate sustainability framework. This informs the way the bank deals with its corporate and retail customers, and feeds through into major financing initiatives especially around environmental concerns.

But the foundations go even deeper within the bank. At the centre of the corporate-sustainability framework is ANZ’s organisational purpose, which the bank recently re-examined and refreshed under the direction of its chief executive, Shayne Elliott. This process was no less than a root-and-branch review of how – and why – ANZ conducts its business.

Bank executives involved in developing and embedding the refreshed organisational purpose and the corporate-sustainability framework describe the process as, at least in part, a response to a changing world and the consequent need for banks fundamentally to understand their role in society and the economy. Consideration for environmental sustainability is one part, but not the only one.

“The reality is that the world is moving away from a reliance on fossil fuels and transitioning towards a cleaner economy. The key question is how fast the transition will occur,” says Christina Tonkin, managing director, loans and specialised finance at ANZ in Sydney.

“We’re focused on how we remain a profitable business that also has a heightened sense of its social and environmental impact, so everyone benefits today and in generations to come.”

Tonkin tells KangaNews firms in the financial sector need a strong and clear alignment of corporate strategy, at chair and board level as well as within senior leadership teams, to make progress in this context. This requires an explicit strategic drive, to avoid what could otherwise become a piecemeal and therefore less effective approach.

“The alignment between the core strategic direction, what we’re looking at from a governance perspective, and what drives the business has been a focus at ANZ,” Tonkin affirms.

Historic echoes

Tonkin says ANZ’s focus on environmental and socially responsible lending especially in large projects has been in place for well over a decade, and perhaps closer to 20 years. The bank has been a signatory to the Equator Principles since the middle of the last decade. The principles provide a risk-management framework for determining, assessing and managing environmental and social risk in projects, and are primarily intended to provide a minimum standard for due diligence to support responsible risk-based decision making.

“In some respects it’s easier to ringfence funds in project lending and therefore develop a clear understanding of environmental and social issues,” Tonkin explains. “The complexity has been about how this transitions into corporate lending and other types of facilities. We’ve seen this happen over time.”

Within ANZ, developing the bank’s purpose has led to greater internal collaboration on issues relating to sustainability. Group functions such as risk, investor relations, corporate affairs and strategy are working together with the business to drive change throughout the organisation. “It’s the most aligned and focused it has ever been, and a clear change from the historical position where we may have been aiming for a common goal but each area of the business had different priorities,” Tonkin says.

“Sustainability needs to be part of the bank’s DNA, informing strategy, lending decisions, governance and risk management as well as organisational culture. Integration of sustainability into the way we do business is the end game.”

Organisational focus

The foundations for an integrated approach lie in ANZ’s organisational purpose, which speaks to the role of the bank as a whole – including its place in, and relationship with, society. Anita Fleming, ANZ’s Melbourne-based executive manager, group strategy, says the goal of the organisational purpose review was “to determine how we take the bank back to its core purpose and what we have been in the business of doing for the past 185 years – enabling individuals, businesses and the wider community to thrive”.

Fleming says the group strategy team went back to the archives to look at what predecessors and forebears at ANZ stood for and which of their values hold true today. It also spoke to a range of external stakeholders – including regulators, suppliers, academics, key institutional customers, retail customers and long-serving ANZ staff.

“We asked them what society expects of banks today, what is the role we need to be delving into, and what is unique about ANZ compared with our competitors that we should play to as strengths,” Fleming tells KangaNews.

Essentially, this was a process of examining the bank’s heritage, customer expectations and the world situation. Fleming adds: “Delivering our purpose is fundamentally about creating financial and social impact. We’re focused on how we remain a profitable business that also has a heightened sense of its social and environmental impact, so everyone benefits today and in generations to come.”

ANZ’s purpose is to shape a world where people and communities thrive. It wants to build a balanced and sustainable society in which everyone can take part and build a better life. In markets and institutional banking, one of the ways the social aspect of the organisational purpose is reflected is ANZ’s involvement in a unique bond project in Singapore that funds microfinance opportunities for women in south-east Asia (see box below).

Case study: women’s livelihood bond

In July 2017, Impact Investment Exchange (IIX) – a pioneer of impact investment in Asia – closed its Women’s Livelihood Bond (WLB). ANZ was one of two placement agents in a project the bank says demonstrates the application of its social purpose in a markets context.

Proceeds of the US$8 billion WLB are on-lent to a group of microfinance institutions and impact enterprises, the activities of which benefit women in south-east Asia.

By enabling these borrowers to grow their businesses and scale their social impact, the WLB aims to help more than 385,000 women in Cambodia, Vietnam and the Philippines through improved access to capital and credit, market linkages, and affordable goods and services.

Through this type of funding, IIX believes women will effectively be able to “transition from rural subsistence living towards sustainable livelihoods – through access to credit, market linkages and affordable goods”.

While the market for impact investing has grown in recent years, ANZ says the WLB marks the first transaction of its kind focused on lifting communities out of poverty through female entrepreneurship and access to funding.

When women have greater influence over economic decisions, a larger proportion of income is allocated to food, health, education, clothing and nutrition, breaking the cycle of poverty and giving these women the opportunity to build sustainable livelihoods.

“To see the potential for social uplift that can be achieved by bringing together entrepreneurship, innovation and capital is exciting and encouraging,” says Tammy Medard, who was involved in ANZ’s role in the projects in her then role as chief executive of the bank in Laos. “It aligns closely to ANZ’s purpose and to the United Nations Sustainable Development Goals, which guide many of the bank’s sustainability targets.”

The next critical step is hardwiring the organisational purpose into ANZ’s corporate DNA and the way ANZ does business. Fleming describes the purpose as a “statement of ambition”, and a touch stone for business decisions. In this respect, she says governance changes are really important – making the organisational purpose a leading agenda item at board and management level.

ANZ has established a responsible business committee, chaired by Elliott, which puts in place a core group of people whose job it is to make sure the bank fulfils its purpose and makes the purpose live. The committee looks at fundamental issues like who and what ANZ banks, informing choices around specific sectors and customers, and their alignment with the bank’s values and purpose.

Corporate sustainability

The lens through which ANZ’s organisational purpose shines its light in the sustainability arena is the bank’s corporate-sustainability framework. This was refreshed in 2016 on the basis of the work the group-strategy team was doing around organisational purpose.

“We wanted to make sure our corporate sustainability framework reflected the bank’s purpose,” explains Anna Stewart, ANZ’s Melbourne-based head of corporate sustainability. “We also talked to many stakeholders – both external and internal – about the issues which matter most to them, particularly through our annual materiality assessment which delves into the risks and opportunities facing the bank.”

The refreshed framework is based around three priority areas. The first is social and economic participation, focusing on creating opportunities for people to participate in society supported through ANZ’s financial-inclusion programmes, employment programmes for under-represented people –including those with disabilities, refugees, aboriginals and Torres Strait islanders – and workplace-diversity initiatives.

“The reality is that the world is moving away from fossil fuels and transitioning towards a cleaner economy. The key question is how fast the transition will occur. ”

The second priority is sustainable growth, which is about understanding and managing the social and environmental impacts of the bank’s lending decisions and giving balanced consideration to stakeholder needs and concerns.

Third is fair and responsible banking. This looks at how ANZ treats its customers and employees, sustainability in the bank’s supply chain and human rights. “This covers all the basics of what one would expect a big organisation to be doing to be a good corporate citizen,” Stewart adds.

Again, ANZ’s aim is not just to develop convincing language on sustainability but to make it part of the raison d’etre of the whole organisation. Stewart tells KangaNews: “Sustainability needs to be part of the bank’s DNA, informing strategy, lending decisions, governance and risk management, and organisational culture. Integration of sustainability into the way we do business is the end game.”

Corporate relationships

While ANZ has its own internal corporate commitments to sustainability, deploying this agenda at client level is clearly easier when the other side of the table is sympathetic. “For corporates globally, the issue of ESG has crept up the importance list in as a driver of strategic agendas,” Tonkin comments.

The environmental plank of the strategy is naturally the most visible – and the evidence that ANZ’s corporate clients are as interested in environmental transition as the bank is evidenced by the work ANZ has done on green debt with Investa Property Group in Australia (see box below) and Contact Energy in New Zealand (see box below). “The environmental aspect has been amplified as climate change has become a mainstream conversation,” Stewart notes.

Case study: Investa Property Group’s green-bond brace

Investa Office Fund (IOF) printed the Australian dollar market’s first true-corporate green bond in March 2017. Another member of the Investa Property Group (Investa) family followed soon after as Investa Commercial Property Fund (ICPF) printed its green bond in mid-April.

IOF’s deal was a A$150 million (US$119.2 million), seven-year note with ANZ as sole lead while ICPF priced A$100 million of 10-year bonds with ANZ acting as one of two joint leads. Both deals are certified by the Climate Bonds Initiative.

The success of the transactions highlights the steady but accelerating growth in interest in certified green debt in the Australian investor base. For instance, demand for the IOF deal saw its book grow to A$350 million while 30 accounts participated.

ANZ data also show just over half the transaction was placed with green-mandated investors – 22 per cent to “dark green” accounts and 30 per cent to “light green”. Australian investors took 81 per cent of the bonds, with Asia accounting for 15 per cent and the balance going to New Zealand.

Ed Waters, executive director, debt capital markets at ANZ in Sydney, says the level of demand from green-mandated investors is a particularly encouraging sign for local-market development. “We expected a bond from an issuer like IOF to be well received, but seeing this level of specialist demand bodes well for other issuers that wish to extend their commitment to sustainability in new and different ways.”

Investa’s corporate commitment to sustainable development eased the path to printing Australia’s first domestic corporate green bond. ANZ’s Sydney-based head of sustainable finance, Katharine Tapley, says getting to the point of issuance is typically driven by a strong sustainability agenda at the organisational level, then good connection between the sustainability and treasury teams at the transactional level. “Across Investa and IOF, these two teams are peers. This really helped clear the path to successful green-bond issuance”, Tapley explains.

But this focus does not mean social considerations take a back seat – quite the contrary. Stewart continues: “The two areas overlap in many ways, and the corporate sustainability framework helps articulate what this looks like. There’s so much crossover now between social and environmental issues, they don’t just sit in separate buckets.”

Conversations about these issues are taking place in corporate boardrooms across the world – and indeed on all sides of capital markets. “Numerous leading companies have picked up on the importance,” Tonkin says. “We have also clearly seen where the investor community has been moving, as well as the direction global sovereign-wealth funds are taking.”

Transition and impact

ANZ acknowledges that a true commitment to sustainability will inevitably be a long game, and that it is facing a trust deficit with community stakeholders. The fact that all gains cannot be made overnight only accentuates this latter point.

Tonkin tells KangaNews: “We want to be a leader in helping our customers – and the industries and communities they’re part of – be proactive in thinking about environmental issues and to transition from a carbon-based economy.”

Case study: Contact Energy’s green borrowing programme

In August 2017, Contact Energy (Contact) finalised a NZ$1.8 billion (US$1.3 billion) green borrowing programme – the first such certification completed by a New Zealand issuer and the first green certification of an entire debt programme globally. ANZ assisted the implementation.

This is also the largest-ever single green certification by the Climate Bonds Initiative (CBI). The proceeds of the programme will be used to finance existing and future renewable generation assets that meet the CBI’s green-bond principles and climate-bonds standard.

The bulk of Contact’s geothermal assets already qualify, and the company believes standards for hydro-power inclusion should emerge in the relatively near future.

All Contact’s existing bank debt, commercial paper and term bonds are now certified as green under the programme. The company also finalised a new NZ$75 million bank facility with ANZ as its first new green-certified debt issuance.

Stewart says ANZ has deliberately set measurable, quantifiable and public sustainability targets so stakeholders can measure the bank’s progress. Some of these targets have been informed by the United Nations’ Sustainable Development Goals (SDGs).

“The SDGs are really important to what we are doing from a corporate-sustainability perspective, so we went through a mapping exercise last year with each of our targets,” Stewart reveals.

ANZ is focused on the SDGs that are most aligned with its business – such as goals relating to climate change and reduced inequalities. Stewart adds: “We are also seeing increasing interest from investors in how we’re contributing to this globally agreed agenda. The scope provided by the SDGs to drive greater cross-sector collaboration to solve some of society’s most complex social and environmental challenges is really exciting.”