Taking a lead on New Zealand sustainable finance

The KangaNews-Westpac New Zealand Sustainable Finance Summit 2020 took place in Auckland late in the year – its very format as an in-person event testimony to New Zealand’s world-leading performance in the COVID-19 pandemic. Market participants came together to talk about a sector, economy and world in a state of high-velocity flux.

"It is clear there will not be a return to business-as-usual practices after the COVID-19 pandemic. Consumer behaviour has changed, flexible working has accelerated and some sectors will face years of uncertainty. Resilience is one of the key lessons we have learnt: now we need to build this into the economy so it can withstand future unforeseen events."

"There is a lot of talk about social procurement, which is great. But there needs to be investment to get Maori, Pasifika and other groups at the margins ‘contract ready’ so they can go through tender processes and set up businesses. Data show that when Maori and Pasifika people own businesses they pay better wages, give better conditions and do more training."

"In the midst of disaster we need to make decisions for the long term. It is very easy to react quickly when markets and liquidity are challenged, and making decisions is necessary. But they need to be ones that will be of benefit in the long term."

"There is no vaccine for climate change. It is a problem that will only be solved by action. Our ethos is about collaborating with like-minded parties and forming relationships, globally, with people that have strong depth of technology experience. It is important actually to do things rather than just talk about them."

"Sustainability in tourism is often thought of in terms of value over volume. But if we create a system that is community-driven and experiences that are supportive of a multi-capital approach, with net benefit, it is not about value or volume but about people providing benefits to culture, society, the environment and the economy."

"If we can build good-quality, warm, dry homes, the quality of outcome for our customers will be higher. This has tangible knock-on effects for mental and physical health. The model of simply building houses and being a landlord is gone. A more inclusive way of delivering social outcomes is now in focus."

"The market has come to the realisation that, to achieve the goals of the Paris Agreement, the sustainable-bond market cannot just focus on green companies becoming a darker shade of green. We need to get emissions-intensive companies on the journey, too. A lot are willing to be involved and transition finance has emerged as a tool to get them started."

There has been a flourishing sustainable-finance market in Europe for 10-12 years. This has been helped by a lack of regulatory barriers, with specific rules only now being introduced – to aid further growth. In New Zealand we have had the opposite, the market has been built up around regulation. This makes for a slower process.

"About 10 years ago, there was a strategic shift from having to justify why we were building green buildings to having to justify it if we were not. It has therefore been sensible for us to introduce green bonds, giving solid congruity between the way we run the business and how we fund it."

"Momentum for labelled bonds is growing as the market matures. The revolution sweeping the world of finance and investment is the realisation that ESG factors affect the financial performance of companies."

"We need to be able to internalise externalities such as CO2 emissions. There are market mechanisms for doing so, such as pricing and property rights, but current efforts are only partial solutions. We need another way of incorporating and internalising environmental impact – and this is quite challenging."

"Our sustainability-linked loan and bond transactions quickly gathered momentum. They were conceived in the treasury team, went through the sustainability team then up to the C-suite and board. Approval came through quickly as our board values leadership and innovation across capital markets as well as sustainability."

"We do not have a vision for what a successful New Zealand looks like and we do not have bilateral or multilateral support for outcomes that might define success. Infrastructure is of no value unless it has some social benefit that is valued by the community. Without this vision it is difficult to make a case for infrastructure development."

"We are at a turning point for sustainability and building sustainable communities, and we need to do something fundamentally different. This involves a proper fiscal response –rather than further monetary response – and would ideally involve a large infrastructure, education and health investment from the Crown."

"Housing affordability has been a growing problem in New Zealand for a long time now. The local-central government relationship is nowhere near where it needs to be if we are going to resolve issues like this."

"We want infrastructure that takes account of the interests of our communities – those who give us our social and environmental license to operate. The process will become faster as we take this into account more, because it will become a natural part of what we do."

"From a sustainability perspective it is a mistake to buy into economic nationalism. Countries will be more environmentally sustainable if they produce things in the most efficient place and then use low-carbon transport mechanisms to get them where they are needed."

"The New Zealand Sustainable Finance Forum recorded a near consensus of New Zealanders who think our current financial system is neither sustainable nor inclusive. There is a challenge to turn this around and transition to economic, environmental and social sustainability."

"If we are going to tackle climate change, people will not be the solution. We might all like to think that consumers will change their behaviour, but this will not address climate change because people will not give up wealth. We need to change the assets in our economies."

"With the pandemic crisis came even lower interest rates, which means the discount factor looks even further ahead. Sustainability is much more important if your discount factor is looking 20-30 years into the future where previously it was 10 years."

"Some iwi trusts are now reporting on the nonfinancial performance of their assets. They have developed metrics and goals for their environment and their people. These may include how many jobs they created, how many of their own people have gone through their training programmes, or the reduction or replacement of chemicals on farms."

"The price of companies with the highest ESG ratings fell by a lot less than ESG laggards in Q1 2020. This is just one quarter but it is consistent with longer-term studies. ESG leaders tend to be more profitable with less volatility and are better at mitigating serious downside risk."

"New Zealand is moving to mandatory reporting against the TCFD, which means companies will need to disclose what they are doing to manage climate-change risks. Investors are doing this kind of work themselves and it will be interesting to see whether this move can enhance or standardise the analysis investors already do."

"Shareholder primacy is a fiction – all capitalism is stakeholder capitalism, and it has been for a long time because it cannot be any other way legally or practically. We need to embrace this and shape decision-making accordingly, by establishing ways of managing and directing business that explicitly recognises the fact and not the fiction. This will be the key to sustainable business and to the sustainable finance that supports it."

"We believe businesses need to change their mindsets to think long term about what they are building and how. To create a thriving, resilient, net-zero-emissions economy, we need to shift our focus to productive, sustainable and inclusive systems."

"The recent updates to the Social Bond Principles provide enhanced guidance for issuers to access social bonds to finance COVID-19 response programmes. Consequently, this has been a record year for social-bond issuance volume and diversity from the public and private sectors."

"We need to deal with multiple crises at the same time, and they are not necessarily mutually exclusive. Climate change is and remains the biggest long-term challenge and we still need to act now. The COVID-19 crisis might have derailed progress, but it has not. It has actually shown us what happens when we are not prepared for a crisis."

"There is a pressing need to keep the decarbonisation of our economy front and centre in the decisions we make today. We need to get off carbon-intensive fossil fuels and into low-cost, renewable electricity. We cannot let the decisions of today bake in more carbon emissions and take us further from our net-zero carbon goal."

"The social component of ESG remains undercooked in a number of ways. We are dealing with patterns that have been in place for three generations. What we know about every crisis is that those who are most exposed will be more affected by the multiple, cumulative impacts. The social issues we face were already complex and they are only becoming more layered."

"There is a lack of good information and quality data for reporting on sustainability outcomes. This is a good place for companies to start – so we can better understand systemic risk and investors can make informed decisions. We want our financial institutions to take a leadership role."

"In sustainable finance there is now a lot of talk about opportunities and possibilities, and the way in which companies are now seeing action on climate change and social issues as a source of competitive advantage."

"The headline narrative globally has been around the delta of trillions of dollars required to deal with carbon emissions. The numbers represent opportunities. We are lucky to have a wide and flexible mandate so we can use our balance sheet to fund all sorts of solutions."

"The whole financial system needs to change – not just financial markets. The challenges we are all talking about are the drivers of risk and value, but they are also creators of opportunity. Financial decisions that providers of capital undertake will go a long way to resolving challenges – or making them worse."

"We now have 34 per cent of farms with environmental plans and aim to have 100 per cent on board by 2025. These help farmers make the best decisions for their operations. All our farmers receive individual carbon and nitrogen statements each year and, from next year, cooperative difference payments will introduce the ‘carrot’ of differential milk prices based on performance against parameters including the environment, and employee and animal welfare."