Product innovation matches market ambition in Australian sustainable debt

In August, ANZ and KangaNews hosted a roundtable to discuss the evolution of sustainable-debt product in Australia. Local investors share views on how the emergence of new security types can satisfy their burgeoning demand for more detail and greater insight into funds’ impact. Meanwhile, issuers from the corporate and bank sectors discus matching product to their own sustainability ambitions.

  • Andrew Brown Director, Sustainable Finance, Capital Markets ANZ
  • Tessa Dann Director, Sustainable Finance ANZ
  • Sybil Dixon Senior Investment Analyst UNISUPER
  • Cathie Drysdale Associate Director, Fixed Income Sales ANZ
  • Scott Gifford Head of Debt Investor Relations ANZ
  • David Hanna Division Director, Fixed Income MACQUARIE INVESTMENT MANAGEMENT
  • Shan Kwee Portfolio Manager JANUS HENDERSON
  • Luigi Mottolini Executive General Manager, Group Finance WESFARMERS
  • Matt Zaunmayr Deputy Editor KANGANEWS

Zaunmayr How keen are investors to see growth in supply of sustainability-linked bonds (SLBs) in Australia – as a proportion of the vanilla credit market and relative to the issuance of use-of-proceeds (UOP) green, social and sustainability bonds?

DIXON It is a really interesting time for the market, in which we are seeking and seeing greater ambition in corporate issuers’ targets. The SLB instrument provides a financial incentive for these targets.

The size of the financial penalty is not huge but it still requires SLB issuers to put their money where their mouths are. It also shows an integration of sustainability targets throughout an organisation. SLBs are another way of committing to these targets, beyond just making a public commitment. I think this is positive.

One thing that may slow new issuance is that we are yet to see what happens at maturity. We do not yet know what the real ramifications are or how measurement and reporting goes over the full lifecycle of an SLB. We need to get to the end of what could be a five-year or longer reporting period to make an assessment about whether objectives and KPIs have been met.

While we are in this phase of not having seen the full lifecycle of a loan or a bond, I think there will be some hesitancy in the market that potentially prevents the structure from really taking off. At the same time, there is fairly strong appetite.

KWEE We can say, even now, that we would love to see one in 10 deals come in SLB format. I understand it is early days so I would like to thank Wesfarmers for being brave enough to start the trend in Australia. If we include UOP bonds, we would love to see one in five bonds – or 20 per cent of the market – in sustainable format. This will of course depend on how large each transaction is, but this sort of frequency and opportunity set reflects our demand.

We view sustainability-linked structures as companies contractually formalising many of the discussions and questions we have given issuers over the years about commitments and ambitions on the sustainability front. Wesfarmers highlighted this commitment to contractual obligation in its SLB deal roadshow, and it had to align the upper echelons of the business before making this step.

Mottolini Is the 20 per cent target roughly proportional to the percentage of investor funds that are looking for or mandated to invest in sustainable finance?

KWEE No. This part of the market is aspirational and we are coming from a proportion in Australia of around 1 per cent or less of outstanding debt volume. The pace of issuance has to pick up well beyond historical standards.

Our approach is unusual in that we are applying our positive-impact philosophy across 100 per cent of our investors’ capital rather than having buckets for sustainable-labelled vehicles.

We think this reflects the temperature of the time. We have reached a nexus of social and political concern along with an appreciation of how debt investors can influence corporate behaviour in a different way from shareholders. We feel this is a way we can align our objectives and the sustainable social licences of companies with what our investors are seeking in credit investment.

“We need more issuance to make progress toward harmonisation. The nature of the questions we received for Wesfarmers’ SLB suggests standardisation is going to be a very long-evolving process, because this space is so dynamic and broad. I think this will be investor-led.”

DIXON I completely agree – and I also think the SLB market could become a lot larger than the UOP bond market because the instrument could apply to any issuer. It is about the targets and objectives the company sets and holding the company accountable. I could see this market becoming more mainstream even than green bonds because it is not necessarily associated with a particular project – it is more about the end game.

HANNA I think SLBs are great for making investors aware of what to look for in corporate engagement. When analysts look at companies that are not issuing SLBs, they can now ask questions about those issuers’ goals in the context of the option available to them.

I see SLBs as a bridge to get to a future state of improved reporting, where companies’ balance sheets and earnings statements will also include a lot of data on how that company is moving toward sustainability goals. When we get to this point, the spread will not be a penalty or a pick-up – it will just be what the market chooses to pay given the progress an issuer is making.

The end goal is that this reporting is available and companies are judged on it, with the price of paper trading in the market becoming a reflection of this.

MOTTOLINI I agree that what a company is doing on ESG [environmental, social and governance] issues should form part of the overall analysis. It should be taken into account by investors, alongside the balance sheet and profit and loss, in assessing an issuer’s creditworthiness. It should not just be about one particular bond or separate pockets of investment being sustainable or non-sustainable.

I see some evidence of the rating agencies thinking this way in the effort they are putting into developing methodologies that incorporate ESG scores. Ideally, if Wesfarmers is rated A3/A- from a balance sheet point of view, we would also be A3/A- from a sustainability point of view.

HANNA This point is right on the money. It should be about the future state, encompassing not just profit and loss but also the movements of factors including social considerations or emissions reduction.

SLBs beyond the corporate sector

The sustainability-linked bond (SLB) has to date been used primarily by nonfinancial corporate issuers, while entities from other sectors typically focus on use-of-proceeds (UOP) structures. The KPI-based instrument could have wider application but there are natural hurdles to overcome.

DANN How much appetite is there for SLBs from issuers outside the corporate sector, for example from public-sector borrowers?

KWEE The SLB format applies to all sectors because it is not only about green or project finance. Issuers can tie social targets and KPIs into bond financing. Some sustainability-linked loans (SLLs) already have these included as targets and the format could suit governments, supranational issuers and other parts of the capital market as well.

DIXON The main challenge is to set really ambitious targets. Distinguishing the purpose of the bond as opposed to the ordinary course of business could be difficult for a government. For example, it is the job of government to run hospitals and we would not want to have an SLB associated with these goals. Targets should be more of a stretch.

I think keeping the targets reasonably concentrated – meaning one or two rather than a laundry list – helps with pricing. The more complicated it gets, the harder it is to figure out what will pay off. This would also be a challenge for governments in choosing which targets to include.


The SLB format applies to all sectors because it is not only about green or project finance. Issuers can tie social targets and KPIs into bond financing. Some SLLs already have these included as targets and the format could suit governments, supranational issuers and other parts of the capital market as well.


Zaunmayr The volume of data required in the sustainable-finance sector – by participants including regulators and investors – is growing exponentially. Do the reporting requirements integral to sustainability-linked loans (SLLs) and SLBs allow investors to factor ESG criteria into credit assessments to the extent desired?

BROWN Many borrowers take the view that if they publish their ESG strategy they should not need to look at labelled issuance. I think there is more to it. When we sit down with a borrower to discuss how granular disclosure needs to be for an SLB, the feedback is almost always that the reporting is more than they thought it would be.

Investors are looking for more transparency, though – and in this context the SLB process is actually very helpful in speeding up progress toward delivery of the reporting investors ultimately want. In other words, exploring SLB issuance universally highlights to borrowers that they can do much more with their reporting and data provision as a means of differentiating themselves.

KWEE SLBs’ targets and measurable items that go along with reporting will help supplement sustainability and credit reporting. At this stage, we are trying to encourage improvement and accelerated timelines for providing this kind of insight to investors. Ultimately, some of the pricing discussion will be on companies’ future mitigation of ESG risk. This will allow us to have a firmer opinion on credit risk in future.

DIXON It would be great to have more standardisation of certain metrics. This would provide a level of rigour and auditing validity we don’t get with current standards of sustainability reporting.

Many companies do sustainability reporting but not many of these reports have been audited. This means there is not much consistency in how numbers are reported. The question this raises is separate to the KPIs companies set, because KPIs should be meaningful and appropriate to the company.

The way Wesfarmers approached the targets it set in its SLB was indicative of where its largest area of risk is. The target in the chemicals part of Wesfarmers’ business is not appropriate for 99 per cent of the companies in Australia but it is highly appropriate for Wesfarmers’ specific ESG focus.

In other words, there are two angles: standardisation of reporting for mainstream metrics and then what is appropriate for a particular business’s SLBs. KPIs bring out company-level nuance.

When it comes to credit in general, more standardisation leads to greater comparability. Customisation makes it harder. A mix between the two – as well as actually delivering on long-term sustainability goals – will ultimately be a good reflection of how a company is able to get to a future state.

HANNA Standardisation is critical and it has to be global. There is no point having a great system in Australia and then, when we are managing global portfolios, not being able to compare like with like. Once this is the case the reporting should fall into place quite easily as well.

“We do not yet know what the real ramifications are or how measurement and reporting goes over the full lifecycle of an SLB. We need to get to the end of what could be a five-year or longer reporting period to make an assessment about whether objectives and KPIs have been met.”

Zaunmayr Do data and measurability limits restrict ambition on KPIs for sustainability-linked instruments?

MOTTOLINI The first target in our SLB is to reach 100 per cent renewable-electricity use in our retail businesses. Plenty of data is available on this because there are many global retailers that have committed to targets in this area. We can also easily demonstrate that we are being ambitious because we are the first global retailer we have been able to identify with this sort of target within a five-year timeframe.

The emission target is much more difficult because reporting from other companies in the industrial sector is more inconsistent. There are various reporting standards and different types of emissions in the industrial-chemicals space.

The main emission in our ammonium-nitrate business is nitrous oxide. To report this, it has to be converted to a CO2 equivalent – which brings the conversion factor into play and thus makes it more difficult to compare.

From my perspective, there are differences in the reporting on emissions from peers in Australia and globally. We can point to the reporting that does exist and to what our regulators in Australia require. As such, we demonstrate that we are well inside regulatory emissions requirements and our peers’ emissions – to the extent that we can identify from publicly available information.

This was how we had to construct the SLB offering. So yes, lack of data and comparability of this data can be a problem.

HANNA We find consistency of reporting among corporates to be quite good, mainly spearheaded by listed companies. What tends to complicate things in the context of a credit portfolio is the presence of structured securities and unlisted corporates, which do not have the same reporting obligations.

It can be challenging if a client asks us to show what our whole portfolio looks like. There will be some companies for which we have access to a lot of reporting but others where we do not. There are still some large gaps in the debt market.

“I see SLBs as a bridge to get to a future state of improved reporting. When we get to this point, the spread will not be a penalty or a pick-up – it will just be what the market chooses to pay given the progress an issuer is making.”

Zaunmayr From an investor perspective, how important are assurance and verification providers for SLB transactions?

KWEE As we do with any credit work, we form an independent opinion regardless of external assurance and ratings. The usefulness of reputable secondary assurance for the wider market is that not all investors will have the time or resources to do this work, and independent verification and audit of a company’s measurable data related to sustainability performance targets triggers becomes more critical in an SLB. Appropriate assurance may also be necessary for indices to be created from these instruments and for passive investment.

Zaunmayr What form might harmonisation take in the SLB space? Will it inevitably be industry-led in Australia or is there a role for policy or regulation?

DANN The industry is currently grappling with the fact standardisation potentially means different things to different market participants, and that there are different extents of harmonisation. For example, in the SLB market, the ICMA [International Capital Market Association] SLB working group has released some guidance on potential KPIs for SLBs and the process for selecting KPIs. This is helpful in structuring these transactions and providing some harmony in approach.

I think harmonisation of transparency for SLBs and SLLs will be important. It is worthwhile noting here that transparency expectations are currently different between the two products. The public bond market expects SLB issuers publicly to disclose transaction targets and effectively be held to public account, whereas SLL metrics are disclosed in documentation to the bank group but not very often publicly. This has piqued conversations about harmonisation between the two products.

The market is moving in the right direction globally when it comes to harmonisation of product definitions and disclosure requirements. Regarding sustainable taxonomies, I think we can expect harmonisation to an extent with many jurisdictions developing their own taxonomies. We expect commonalities but also regional differences.

DRYSDALE We need more issuance to make progress toward harmonisation. The nature of the questions we received for Wesfarmers’ SLB suggests standardisation will be a very long-evolving process, because this space is so dynamic and broad. I think progress will be investor-led.

Not green becomes brown

As environmental, social and governance (ESG) integration becomes ever-more mainstream on the buy side, issuers face something of a sustainability arms race. It is no longer sufficient to sequester a limited supply of green assets for labelled issuance – they have to walk the talk across their business and the whole debt book.

DIXON Is there a growing perception that issuers not engaged with sustainability-themed issuance are by definition ‘brown’? What are the consequences?

GIFFORD As capital shifts toward impact and ESG-aware funds, if you are not meeting the increasing disclosure standards you are locking yourself out of a growing portion of the bond market. It is important for us to maintain access to the most diverse and wide investor universe possible. This is a big driver, as well as wanting to be at the table and at the forefront of innovation and development. We also want to help set standards, so we see our role as a leader in the market.


Zaunmayr What are the key differences in structure and execution of SLLs compared with SLBs? What do issuers that have completed SLLs need to be aware of if they are contemplating rolling out this type of financing to SLB format?

MOTTOLINI As we moved down the sustainable-finance path, a key aspect was keeping senior management and the board abreast of developments in the sustainable-finance market. We did this for several years before we even contemplated doing the SLL we entered into early in 2020.

We focused particularly on new developments and why a company might issue in this market. We advised senior management on developments offshore and in Australia. We also acknowledged the rapidly growing number of investors that are now focusing on this market and additional feedback from our bank advisers.

The SLL was more straightforward because it is a smaller loan size and has two-way pricing. We get a benefit if we meet ambitious targets and a penalty if we do not. The board was happy to accept this.

When we came to the SLB, the pricing step-up generated many questions from the board – specifically why there is not two-way pricing with a benefit as well as a penalty, as there is in the SLL. This led to questions about how we determine the benefits of an SLB given there is a potential penalty if we do not meet targets that, by definition, have to be ambitious.

The risk of not meeting the SLB targets is real. Part of the complexity of putting together targets was ensuring divisional managing directors and the board understood this risk.

We also talked a lot about our hope the SLB format would increase interest in the transaction. With a greater number of investors looking at this sort of financing we were encouraged that we could get a better deal with larger volume and, potentially, tighter pricing.

This is difficult to quantify, though. Even after issuing the SLB, we can’t specifically quantify the financial benefit other than to say it was definitely a very pleasing outcome. There was a lot of interest in the bond, it was substantially oversubscribed and we received positive comments from the great majority of investors. This gave us some comfort that we have been rewarded with some pricing benefit. It was certainly more of a challenge than the SLL, though.

“Even after issuing the SLB, we can’t specifically quantify the financial benefit other than to say it was definitely a very pleasing outcome. There was a lot of interest in the bond, it was substantially oversubscribed and we received positive comments from the great majority of investors.”

DRYSDALE There was a real buzz on the fixed-income sales desk and excitement from many of our investors during the roadshow and mandate process on the Wesfarmers deal. It was obvious from just how quickly the one-on-one sessions were snapped up by investors.

The level of questions and scrutiny we had in these meetings was unlike anything I have seen, but Wesfarmers’ responses led to the strength of the book. There was incredible interest in the deal and it was very well coordinated. I think there is definitely appetite for more.

GIFFORD We have had very similar positive experiences in our Australian dollar UOP deals – but there is not necessarily a direct financial benefit. By contrast, in Europe there is now a genuine greenium – for us it is around 5 basis points in euros between sustainability and vanilla debt.

Conversations about managing future ESG risks and the market providing a lower cost of capital are a bit more advanced in offshore markets. I expect the Australian dollar market will continue to develop and in time a greenium will develop in Australia as well, though.

This being said, I think all of us on the issuer side would agree the primary objective of sustainability issuance is not necessarily to save money. Rather, the main objective is to align the bank’s purpose and strategic agenda with treasury’s funding and capital platform – aligning our debt investors as key stakeholders for the business.

As a bank, we have a A$50 billion [US$36.6 billion] sustainable-financing target and our UOP SDG [UN Sustainable Development Goals] platform maps beautifully to this. The ability to share this opportunity to drive positive impact with our offshore investors is really powerful. Any coupon or cost-of-funds saving is a secondary consideration in this context.

Aligning debt and equity investment

Debt investors reject the notion that their sector is generically ‘behind’ equity in sustainability uptake. Even so, there is potential for greater efficiency if the two asset classes can more closely align their efforts – for instance on reporting.

HANNA Debt is only one part of the capital equation. Corporates need to make considerations about how much debt and equity they hold in their capital mix, and as a result debt investors can only drive impact to the extent we are needed. To what extent are sustainability coordinators looking at engagement on the equity side and do we need to be engaging more holistically between debt and equity?

DANN It is important that the targets we use as part of a transaction are consistent with what investors want to see across debt and equity. Sustainability-linked transactions should be using targets that are core to the business and its ESG [environmental, social and governance] risks and impact.

The materiality of ESG factors is the key focus when we are structuring these transactions and selecting their targets. The materiality assessments we look at consider the whole company and we expect the material sustainability issues to be similar for debt and equity investors.

Zaunmayr Could SLB issuance work for ANZ and, if so, how would it fit with the UOP programme?

GIFFORD We think they are complementary. The SLB structure would give us more flexibility whereas the SDG UOP platform relies on available supply of qualifying loans and expenditures that align with our SDG framework.

We have done a lot of work marketing our SDG programme in Europe and now have a really strong following there, so we do not see SLBs as a replacement for our UOP bonds. I agree that the SLB structure could become akin to vanilla issuance in the future. We already get a lot of questions on ESG when we go to Europe to issue in vanilla format.

I also agree that SLBs are a good stepping stone to better data and transparency in sustainability metrics. We feel setting extremely high benchmarks for transparency is important and we simply will not put data out there that cannot be audited or assured.

This is important to avoid accusations or perceptions of greenwashing and also to anticipate any future regulatory reviews of our sector. If regulators decide to take a look at the banks some time in the future it is important that we have strong, robust transparency and assurance.


Zaunmayr To what degree do bond investors want input on issuers’ KPIs?

HANNA One of the things companies have to be fairly sure about when they are considering SLB issuance is that they can achieve the goals. As a result, they may not want our input on stretch targets. But I think some form of engagement with investors would make sense when trying to develop targets.

We would probably come back with a shopping list of thoughts on what we would like to see. This might be different from what other investors want. Casting the net to get input is good but as investors we have to respect that our opinions may not be what drive the transaction. Ultimately it is our choice to invest or not based on the goals presented.

“It is hard to get across in the execution process just how in-depth the conversations a structuring agent has with a company like Wesfarmers over a six-week period are. We try to understand what is possible and see exactly how much is changing within the organisation in establishing KPIs for an SLB.”

KWEE We have ensured our credit team has ESG embedded so we are not relying on a separate department within the firm. We are in a position at least to provide early feedback to the structuring team and issuer about the direction in which they are going with KPIs and targets.

We have brought up whether issuers could have a list of targets in their regular sustainability reporting, which in future could be selected from for sustainability-linked issuance. This would create public awareness of the types of targets that could be inserted into future bond issuance. We could opine in advance about which targets we feel are most attractive and appropriate without wall crossing. However, this may be a disclosure too far or be too difficult to do in the annual sustainability-reporting process.

GIFFORD This is not a bad strategy. We have not done an SLB yet but we are thinking about targets – and the first port of call is to look at our corporate-sustainability review, which is assured by KPMG every year and includes our corporate targets.

The question on our mind for an SLB is whether the targets are deemed ambitious enough or just business-as-usual targets. This would be the starting point, though – so we are on the same wavelength.

There is an interesting corollary from our UOP bonds, for which we produce an impact report. We have been through several cycles of the impact report and we throw the process open to investors for feedback on what they would like to see us publish. We have had great dialogue with investors from this.

For example, we have published that our SDG bonds have helped build 5,250 hospital beds. Investors have asked if we can be more granular than this, for instance by reporting how many cases of cancer we have helped. We would love to be able to do this, but we run up against data limitations. We cannot get this assured or audited because there is no robustness in the data, so we are unable to publish it.

There is great dialogue between investors and issuers but ultimately it might be that the issuer cannot deviate from its targets for assurance or audit reasons. The dialogue is as important as the outcome, though, particularly in a developing market where innovation is happening rapidly. Dialogue might help the next deal.

Bringing social into SLBs

Sustainability-linked bonds (SLBs) have blended environmental and social targets since their earliest adoption. Weighting multiple KPIs is not always straightforward, however.

ZAUNMAYR What are the challenges associated with reporting on social impact?

DANN The majority of SLBs issued globally to date have environmental targets, most frequently focused on reducing emissions and increasing renewable energy. These areas are already becoming more standardised as a result, which creates greater ability to compare between transactions.

Social targets have been much less frequent in SLBs so far. The majority of investors, corporates and consumers are still more focused on environmental impact, though this is shifting as awareness, measurement and reporting of social indicators increases.


SLLs usually have 3-5 metrics built into transactions while SLBs tend to have fewer – perhaps one or two. This requires prioritisation, and the social element seems to be coming through much more strongly in SLLs as the larger number of metrics means issuers can cover more bases through a single transaction.


DANN One difficulty is that market principles require targets used in SLBs to be beyond business-as-usual. They have to be ambitious but also achievable. The nuance is in communicating how a selected target meets all these touchpoints, particularly given most SLBs only feature a coupon step-up for failure to achieve the targets rather than a step-down rewarding the issuer for stretch performance.

It is also worth noting that the role of sustainability coordinator is certainly not passive. We have frank conversations with borrowers about the ambition of their targets, with the ultimate goal of bringing high-quality, robust transactions that will satisfy investors.

Zaunmayr Is the sustainability coordinator’s role partly to fill the resource gaps that exist within issuer and investor organisations?

DANN While structuring these deals we are certainly focused on what will meet investor and lender expectations. Demonstrating ambition is a key priority. I am not sure this should replace resourcing but it should provide some comfort on the rigour of the structuring process.    

As a sustainability coordinator, we sift through all the historical data and future projections a borrower has available. We assess this data and interrogate the methodologies for potential targets. We have significant discussion and negotiation to arrive at the final product. Hopefully, over time we can educate the market more on the role of a sustainability coordinator so investors can understand just how much work has been done as part of structuring these deals. ANZ takes the role very seriously and realises we are putting our name toward these transactions, too.

DIXON When it comes to setting targets, I think there is a huge benefit in consistency. We should not be seeing completely new targets for a bond that are not aligned with general corporate targets and are not reflected in sustainability reporting. My expectation is bond reporting forms part of an issuer’s sustainability reporting and annual reporting. SLBs are not like UOP bonds, which can be very targeted. They are general corporate issuance so should be part of normal corporate reporting.

We don’t want to overcomplicate things. Ultimately, targets should be meaningful for a business and actually drive engagement throughout the organisation.

At the same time, if a deal has two targets I think it is important that at least one of them is comparable with global standards and easy to understand. With Wesfarmers, the target of 100 per cent renewable energy for the retail portfolio was quite easy for investors to get their heads around. The target for the chemicals business required more discussion. I think this balance was quite useful.

Zaunmayr What is the difference for SLBs compared with SLLs on the syndicate and structuring side? Is one inherently more complicated?

BROWN The hardest thing from our perspective is communicating to investors just how intricate the structuring process is. This is because there is ultimately no change in execution for an SLB relative to a regular bond. We put up a mandate, do a group investor call and some one-on-ones, then we launch and price.

It is hard to get across in the execution process just how in-depth the conversations a structuring agent has with a company like Wesfarmers are, over a six-week period. As part of the process of establishing KPIs for an SLB, we try to understand what is possible and also exactly how much is changing within the organisation.

It is a very rigorous process and ultimately we have a pretty condensed time to get the message across. It would be great for investors to see the amount of work that goes on before the deal comes to them. But this is pretty difficult within the dynamics of the public bond market.

“There is great dialogue between investors and issuers but ultimately it might be that the issuer cannot deviate from its targets for assurance or audit reasons. The dialogue is as important as the outcome, though, particularly in a developing market where innovation is happening rapidly.”

Zaunmayr Is there any appetite, or would it be possible, to have multiple trigger dates in SLBs?

HANNA It would be an even greater challenge for our back office and operational teams. Philosophically, I think it is a great idea because everyone want incentives to be ongoing. But we are dealing with systems that are not easy to change and it can be challenging in this context. This should not distract from getting the market right, but it is important to highlight the practicalities.

DRYSDALE This is an issue we experience with many investors. In theory multiple triggers could help with setting more ambitious targets. But there are significant practical limitations we are probably a number of years away from being able to overcome.

GIFFORD It also depends on tenor. There is probably no need for multiple triggers even in a 5-7 year deal. But if a company is doing an ultra-long bond, I can see the merit for having multiple gates along the way.

Kwee I agree it would be a good idea to create incentives over the full life of the lending period but doing so brings more complexities. The Wesfarmers deal had seven- and 10-year tenor with the same trigger date for both tranches. Was this driven by credit appetite or did some investors not want the life of the bond to be much longer than the reporting period?

MOTTOLINI We had a lot of discussion about the appropriate trigger date with the structuring advisers. We were originally thinking of one tranche but our thinking shifted to a dual-tranche deal, at which point we considered whether they should have the same trigger date.

The decision came down to being the first SLB issuer in Australia and wanting to keep things as simple as possible. We concluded that one trigger date for both targets was the easiest way to explain the trigger and how it works.

The complexity in our transaction is that the target for 100 per cent renewable energy is a drop-dead trigger date while the emissions-intensity target needs to be maintained over a period of 24 months. In theory, an issuer could game the system with some targets – meeting them at one point in time but not for the rest of the bond.

We have to demonstrate that we are meeting the emissions target over a 24-month period, which we think adds to ambitiousness. Importantly, the businesses in the group had to be aligned with the trigger date.

BROWN We had a lot of questions from investors on how Wesfarmers’ structure compares with SLBs in other markets. But I think investors’ decision on which tenor to participate in was largely driven by credit or duration.

Zaunmayr Another norm that has developed in the SLB market is one-way, rather than two-way, price variation. Is two-way pricing a possibility?

KWEE I think one-way pricing has market application across the full range of investors. Some have explicit policies or impact objectives and may be happy to accept two-way pricing, but others just want a Wesfarmers security and may be less inclined to give two-way pricing.

Having the pricing step-up should give issuers pricing tension upfront. With two-way pricing it is less clear because it is potentially symmetrical. The issuer may be getting a future benefit rather than upfront benefit, in effect.

We are willing to provide the flexibility of two-way pricing. But I know it has not become the norm and issuers may capture a smaller audience by insisting on it.

DIXON Two-way pricing is challenging from a fiduciary point of view. I can see it working for a very emissions-intensive business, which could say two-way pricing protects it from higher credit spreads in future as its assets become more risky. But the benefit is not there at this point in time.

Also, if there is a kicker because an issuer does not meet its obligations, we do not want to be in a position where we are getting a financial benefit from a poor environmental outcome.

KWEE It is not a stated objective of the whole cohort of investors that we can give up return for an impact benefit. This could come back to the point about incorporating ESG and credit ratings. We think about the step down as mitigation of future risk within a business. If a company’s rating improves because of ESG performance it would be much easier to justify two-way pricing – but at the moment there is no guarantee of linkage between the two.

HANNA The other dimension to this is that efficient markets should mean bonds that are not sustainability-linked will end up pricing and trading according to the same principles as SLBs. As a result, investors will be able to get the same benefits as an SLB without investing in one.