Sustainability evolves but supply is lacking

Investors and issuers are confident Australia’s green, social and sustainability (GSS) and sustainability-linked bond (SLB) market is developing, but more supply is needed to catch up.

SWISS When it comes to execution of GSS bonds and SLBs, where the market is evolving fast, should the focus be on giving investors sufficient time for due diligence rather than quick execution?

LARKIN We have had a couple of recent experiences with deals when markets were choppy. I am absolutely convinced we were able to print these deals because they were ESG [environmental, social and governance] financings.

The value of labelled deals is a debate that will no doubt continue, but we have certainly seen incremental demand and interest. Sustainability is a competitive advantage for our business and we will take any opportunity we can to talk to investors about ‘mission zero’, which is our goal to achieve absolute zero scope-one, scope-two and scope-three emissions by 2040. We think this is a constructive entry point to talk about the business and the credit.

We have also set up our deals so that – whether it is a sustainability-linked loan [SLL] or an SLB, whether it is issued by Lendlease headstock or a managed fund – the targets are all consistent with our overall emissions schedule and we can use the same structure for any product. Whether we select a use-of-proceeds or linked mechanism, it is not about the ease of execution but about what suits the facts and circumstances of the borrower.

SWISS Are issuers finding investors are asking more about overall ESG credentials even if they are not issuing a sustainable product?

EGGLETON We are increasingly spending time ensuring we are resourced appropriately to manage this for the future – it will only increase and become a core part of every investor’s credit process.

Some of the assets that sit in Macquarie managed infrastructure funds have put SLLs in place. An example is Port of Newcastle, which is a coal-based terminal that has completed an SLL based around the transformation of the port to diversify away from coal to other products. We have also executed a couple of green loan products via the Macquarie Group name, which were very successful and generated incremental demand. Going forward, we will be spending much more time focusing on SLBs and SLLs because these suit our balance sheet better than traditional green products given our business mix.

VAN DER GEEST A key development in our investor engagement is on the airport’s response to ESG. We have spent time in recent updates outlining our strategy to ensure the investor community is across the key tangible application of scope-one and scope-two emissions – we have a plan in place to reach net zero by 2025 – and other areas of our E, S and G strategies.

How does our strategy translate into funding? As yet, we have not executed a sustainability-linked deal, but we are certainly exploring options. We have been engaging with our debt investor community and communicating our strategy. The engagement and the questions we get from investors is pleasing. We have facts behind us to show what we are doing in this space.

The orderbook in our November 2021 10-year domestic bond was in excess of A$1 billion (US$746.8 million). The demand in the vanilla transaction was strong. We want investors to understand where we are on the journey. Financing does not dictate what we are doing on the strategy side of the equation. It is one element that continues to evolve rapidly.

ESG is fully integrated into our process. If an issuer is poorly rated from an ESG perspective, it will not get funding no matter what the price. The only challenge is how green is green.


SWISS Do investors have a preference between use-of-proceeds bonds and SLBs?

VAN KLAVEREN ESG is fully integrated into our process. If an issuer is poorly rated from an ESG perspective, it will not get funding no matter what the price. The only challenge is how green is green.

Ultimately, we are encouraging better behaviour but we have to think about whether to finance a poor-performing ESG company. This is where the engagement component comes to the fore: if we feel a company is really going to change and move down a better path we could buy it.

BAYLEY We receive a huge amount of questions from our investors. We have done a lot of work integrating ESG into our process. For us, it is about engagement.

It is becoming more critical to understand how each company is managing the transition. It is less about the label – we have to look underneath the hood and understand the drivers.

SWISS How do investors deal with the complexities of ESG in addition to their traditional credit work?

MASON It is a different skill set compared with traditional credit analysis. For example, our head office in the UK has an ESG credit desk as well as a traditional credit desk. What also makes things tricky is the absence of data reporting and collection in Australia compared with Europe and the US. There is no easy way to identify ESG risk that may be embedded in an unlisted corporate, for example.

Our concern is if a bond is labelled green and is priced accordingly and then a negative ESG event happens. If this is something we could not have spotted – similar to fraud – it could cause significant underperformance or even a mandate breach.

VAN KLAVEREN I agree – which means we need more time to assess deals before we can decide whether or not to invest. In the early days, our concerns were about the price impact of credit rating actions. With ESG risk, we can wake up one morning and there is a scandal that means everyone has to sell.

Then there is no liquidity and no bid because nobody can buy it. How do we manage this? ESG is not like a credit rating where we can do our fundamentals and analysis and look at the glide path. The biggest risk for us is governance – which is hard to predict.

We have been fortunate that LendLease has always valued sustainability and has taken a really ambitious approach to targets. This has allowed our financing activity to support corporate strategy and the group's ambitions.


SWISS Sustainability-linked products seem to have more of a positive effect on entire organisations’ ESG credentials. As an issuer of both green bonds and SLBs, does Lendlease think one is more effective than the other?

LARKIN The thing that has enabled us to do what we have done from a financing perspective is the fact that our organisation, our board and senior management were all aligned on a sustainability strategy and on the emissions-reduction targets before we started any financing activity. The organisation’s strategy comes first.

Some of the challenges among corporates with green issuance in this country seem to stem from the fact that some companies are not there yet. A treasury team cannot drive a company’s sustainability strategy.

We have been fortunate that Lendlease has always valued sustainability and has taken a really ambitious approach to targets. This has allowed our financing activity to support corporate strategy and the group’s ambitions.

VAN KLAVEREN From the buy-side perspective, when we get into [European Standards] article 9 or sustainable product, there are hard objectives set by clients, such as beating the index ESG score or carbon emission targets.

Regardless of the credit fundamentals or credit ratings, this means if a company does not meet the carbon emission target we might not be able to invest. Some of our investors have a net zero by 2050 goal and a lot more targeted metrics are coming into play.

MASON Our process in Australia is to assess and embed ESG risk into our models and credit metrics, which derives a level we consider fair value for the ESG and credit risk.

Naturally we want to ensure we are being paid a premium that compensates us for these risks collectively. Personally, I really like the idea of supporting transition names primarily because it is the right thing to do. But it is also where the opportunities are.

VAN KLAVEREN People use the terms interchangeably, but ESG and sustainability are quite different. In Europe, ESG is about engagement – under ESG we could buy a lower scoring company at the right price and then enter into positive engagement. Under a sustainability approach, we cannot.

It is different in Australia because the end investors – the big industry superannuation funds – are setting the trends. They are the ones telling us what we can or cannot do.

EGGLETON Supporting companies in transition is important from an equity investment perspective and also from a debt perspective. If investors just say ‘no, we are out’, who will replace them to finance and own hard-to-abate companies? Investors that do not have any interest in making a difference whatsoever. This is not a desirable outcome.

We need responsible investors who will work together with companies in transition to change real-world outcomes for the better.

We witnessed this with the Port of Newcastle that sits in one of our managed infrastructure funds. A couple of banks would not consider this deal because it is related to coal but we were able to find supportive banks that recognised the port is trying to make a difference by transitioning. This will take time, effort and financing.