Hydro a case study in misalignment

Climate Bonds Initiative (CBI) published long-awaited hydropower criteria in March this year. Hydro is a major component of New Zealand’s power generation mix. But rather than aligning positively, these two facts demonstrate the challenges even in best-practice, well-intentioned green labelling.

Hydro power provides more than half New Zealand’s total generation according to Ministry of Business, Innovation and Employment data. A number of the main asset owners were active in the sustainable-debt market even before the CBI published its criteria.

New Zealand sustainable-finance bankers are quick to point out that there is no suggestion the criteria themselves are not valid or that local issuers’ assets are not legitimate renewable-energy providers. While local market participants agree that the CBI criteria represent best practice, unfortunately it seems they might be too late in development and applicability to have a material impact on the New Zealand market.

Westpac’s head of sustainable finance, Joanna Silver, explains that the CBI criteria have an “adaptation and resilience” component as well as the climate-change-mitigation aspect. Issuers must engage an international accredited assessor to undertake an environmental, social and governance (ESG) gap-analysis tool assessment of each asset. This tool identifies and addresses gaps against international best practice, covering a range of environmental, social and governance components including labour conditions, water quality and sediment, resettlement, and biodiversity.

These issues are important. However, New Zealand issuers may well be querying the relevance and applicability of the new criteria to the nation’s hydro asset base given its age and the value of incurring a large assessment cost per asset to quantify risks that were largely addressed at construction many decades ago.

“These things absolutely should be looked at when building a hydropower station today – but it is a bit difficult to do so when we are looking at an asset that was built nearly 80 years ago,” Silver tells KangaNews. “We are not saying the CBI criteria are not important. It is just that they are potentially less applicable to New Zealand, except in the case of new infrastructure.”

This was not a major issue prior to the publication of the CBI criteria. In their absence, Meridian and Westpac New Zealand were able to include hydropower in their green-bond pools using the Green Bond Principles (GBP) standard and a similar mitigation benchmark. For instance, Silver says, Westpac’s 2019 euro green-bond deal included an assessment of the hydropower exposure by DNV, that satisfied investor demand.

“We went to the euro market on this basis and there were no problems at all; not one investor said they wouldn’t participate – because we had used the GBPs for the hydro exposure,” Silver tells KangaNews.

Overall, the feeling in New Zealand is that the hydro criteria are more a missed opportunity than a major problem. Louise Tong, general manager, sustainable finance at BNZ, tells KangaNews: “I think to some extent this short-changes the New Zealand hydro industry – which underpins our enviable renewable-electricity position.”

On the other hand, she continues: “I don’t expect it is something companies will spend a great deal of time and effort focusing on. All our new-build generation assets will be renewable – wind, geothermal and solar – and these lend themselves very readily to sustainable finance without the potential complexity of legacy hydro.”

Tong adds: “If hydro criteria had come out some time ago they might have been the spark that ignited the market. But actually I think we have already moved on to some extent. Investors are increasingly focused on forward-looking impact and there is some scepticism about bonds issued against historic assets.”

This is why New Zealand sustainable-finance bankers rate energy generation as a sector with growth potential, even though 80 per cent or more of the nation’s power already comes from renewable sources. ANZ’s head of sustainable finance, Dean Spicer, says Scotland’s success in growing its renewable-energy component to more than 90 per cent from around 30 per cent demonstrates why New Zealand should not rest on its laurels.

“We need to take another look at ourselves and decide it’s time to move things forward,” Spicer comments. “This includes deciding what makes sense for New Zealand. We have some additional wind and solar power generation coming through but we also have to address the remaining challenges to do with reliability on particular days or times of year.”