ESG drives Kangaroo liquidity but pricing benefit still small

Issuers and intermediaries universally point to environmental, social and governance (ESG) alignment as a tailwind for Kangaroo transactions. The pricing benefit of bringing labelled deals is small – incremental demand and investor engagement are the primary benefits.

The number of Kangaroo transactions claiming ESG alignment in their use of proceeds (UOP) was relatively small at the start of 2022 – just six out of the first 27 deals of the year – but they made a significant contribution to volume.

Headlined by European Investment Bank’s A$1.5 billion (US$1.2 billion) Sustainability Awareness Bond priced on 5 January, ESG bonds accounted for more than A$3.5 billion of the year’s first A$8.4 billion of new Kangaroo issuance.

“There is clearly strong underlying demand for ESG product in particular from domestic accounts and, increasingly, from central banks,” says Tim Pinchen, vice president, syndicate at J.P. Morgan in Sydney. “Central-bank investors do not typically have hard ESG mandates but they are certainly taking ESG increasingly into account when making allocations.”

This does not necessarily lead to a borrower pricing advantage for labelled issuance. Daniel Wilson, vice president, DCM Asia Pacific at RBC Capital Markets, suggests an issuer like EIB – with a market-leading ESG programme and an extensive issuance track record globally and in Australia – might benefit to the tune of 1-2 basis points in its labelled transactions relative to vanilla pricing for the same borrower.

However, Wilson continues: “The value of ESG alignment is that it brings incremental demand, with domestic real money playing a big role. ESG issuance also aligns strongly with SSA [supranational, sovereign and agency] issuers’ overall mandates. That said, Australia is not yet in the same position as some global markets, where it is almost a requirement to bring transactions in ESG format. It is more about bringing in investors that might otherwise have been on the fence, especially domestic and Japanese accounts.”

EVAN MORGAN

At the margin, ESG-themed issuance in our experience is a great driver for engaging investors and building momentum in the book, and can ultimately lead to greater price tension throughout the process. The challenge is to manage the limited but growing green assets we have across a number of different markets.

EVAN MORGAN KOMMUNALBANKEN NORWAY

The benefit is real but at the margin. Dominika Rosolowska, Luxembourg-based sustainability funding officer at EIB, told KangaNews after the supranational’s market-opening deal that it attracted new investors from Australia and Asia, while several existing buyers increased the typical size of their orders.

Pinchen comments: “While an ESG label does not ‘guarantee’ increased demand it can increase investor focus on a deal. Every time such a transaction comes to market investors look closely at the UOP and the issuer’s framework, and they invariably ask questions. They are clearly doing their due diligence.”

Kommunalbanken Norway (KBN) elected to issue in the Kangaroo market without a sustainability label in January this year and was clearly not penalised for its choice, attracting an oversubscribed book for a capped A$500 million deal.

Evan Morgan, vice president, international funding at KBN, explains: “At the margin, ESG-themed issuance in our experience is a great driver for engaging investors and building momentum in the book, and can ultimately lead to greater price tension throughout the process. We will look to access the Australian dollar green-bond market again. The challenge is to manage the limited but growing green assets we have across a number of different markets.”