New Zealand retail not chasing green – but issuers still keen

The New Zealand corporate market provides as clear a sign as any that investor demand is often not the primary driver of borrower decisions to pursue sustainability-labelled debt issuance. While local retail investors – the most active corporate bond buyers in 2022 – may not be demanding labelled product, however, there are still plenty of signs of growing market momentum.

Laurence Davison Head of Content KANGANEWS

Kathryn Lee Staff Writer KANGANEWS

New Zealand’s domestic corporate bond market shrugged off global turmoil to record a very positive first half of 2022. The NZ$1.8 billion (US$1.1 billion) of new issuance priced from January to June makes 2022 the busiest first half for corporate supply since 2008, according to KangaNews data.

Deal flow also contained a substantial component of environmental, social and governance (ESG) aligned bonds – more than NZ$1 billion of either green use-of-proceeds (UOP) or sustainability-linked bond (SLB) supply (see chart 1).

A total of nine corporate borrowers have priced ESG-themed bonds in New Zealand since the first such deal in 2019, including five this year alone – four of them debut issuers in this format (see chart 2). The fact that themed supply represents more than half of total issuance in H1 2022 demonstrates local issuers’ increasing willingness to bring these formats to market and their confidence in the value of labelled deals.

What it does not do, however, is provide evidence of specific incremental demand for issuance with a sustainability label, including green bonds. A primary reason why corporate issuance continued to flow in New Zealand in H1 while other credit markets – including in Australia – largely went quiet is the presence of a retail bid. However, New Zealand issuers and intermediaries freely acknowledge that this investor base is not leading the charge for sustainable debt instruments.

For instance, Contact Energy issued NZ$225 million of hybrid capital in November last year and the company’s Wellington-based corporate treasurer, Will Thomson, confirms that distribution was, as expected, very retail-focused. The issuer still decided to offer a UOP green security.

“We knew going into the process that green bonds were not necessarily a primary driver of retail demand, and I doubt it would have made a huge difference if we had offered an unlabelled product – the main appeal was the yield of the hybrid,” Thomson tells KangaNews. “But all our existing capital markets debt is all green bonds so it made sense to use the format in this case, too. It demonstrates our commitment to the environment by funding renewable generation.”

A similar story comes from Mercury NZ, which has issued NZ$757 million in five green-bond deals – making it New Zealand’s largest corporate issuer in the format. However, it elected not to offer a green bond for the NZ$250 million of subordinated debt it priced in May this year. “Our sense is that there is not significant additional demand or a greenium for labelled product at the moment, though it potentially brings in new accounts. We have seen some large wholesale investors express a preference for green over nongreen issuance,” says Geoff Smits, acting treasury manager at Mercury in Auckland.

Intermediaries say it is not so much a case of retail investors actively eschewing ESG product as it not being a priority – or at least not a quantifiable one. Certainly, they agree, the label is even further from being a prerequisite of attracting retail demand than it is in the institutional space.

Mike Faville, head of capital markets at BNZ in Auckland, says: “The best thing that can be said about retail demand for labelled product is ‘it’s hard to tell’. With institutional investors, we can get some sense of their incremental demand, even if it is anecdotal: we might see them come into a labelled Kauri deal when they have not bid on vanilla ones, for instance, or they might tell us they have a larger bid for a corporate deal. The feedback we get from retail distribution channels is much less clear as it relates to ESG as a demand factor.”

Why this is the case is not certain, in a world in which institutional investors report their clients are increasingly engaged with ESG and demanding that their money be managed according to sustainability and ethical principles.

Some New Zealand market users suggest retail buyers may feel more able to make ESG demands when they are paying a fee to an institutional asset manager to invest on their behalf. Others argue the profile of direct retail bond buyers – typically older and wealthier – is the flip side of the oft-repeated line that younger investors have the highest degree of ESG focus on their savings.

This is not to say there is no reason for issuers to bring labelled deals to a primarily retail investor base, even if there does not appear to be a direct benefit in the form of additional demand or better price tension. Perhaps the biggest benefit for issuers in the investor relations space is a wider halo effect that extends well beyond individual debt funding transactions.

“Offering a labelled sustainable debt product to the retail market might have some positive connotations for issuers in the sense that these buyers would be pleased to see a company making a positive statement on ESG, and committing its balance sheet and strategic priorities to measurable sustainability assets and outcomes,” suggests Joanna Silver, Auckland-based head of sustainable finance at Westpac. “It does not yet come through in quantifiable specific, incremental demand for the bond itself. However, a labelled sustainable debt product provides a tailwind to execution.”

On the other hand, the expectation of a largely retail investor base can make issuers more cautious about applying a label. It is no coincidence that Mercury elected not to label its hybrid issue.

“We are conscious of potential greenwashing concerns and give careful consideration to whether the use of proceeds from green securities is contributing to a more sustainable outcome,” Smits comments. “In this case the UOP related to the acquisition of the Trustpower retail business as opposed to eligible assets under our green financing framework. As such, we decided to do a vanilla transaction.”

“If we do a senior bond in retail format we expect to see significant institutional demand, and this sector is much more engaged with ESG. In fact, we got a bigger institutional bid in our hybrid than we expected and, while it is hard to say for certain, it is possible this bid was supported by ESG funds.”


A‘retail format’ deal does not mean an exclusively retail buyer base, however. Some issuers note positive demand outcomes from the institutional sector for labelled deals, even those that might expect to be retail dominated.

Thomson tells KangaNews: “If we do a senior bond in retail format we expect to see significant institutional demand, and this sector is much more engaged with ESG. In fact, we got a bigger institutional bid in our hybrid than we expected and, while it is hard to say for certain, it is possible this bid was supported by ESG funds.”

There are signs that institutional investor engagement with ESG is growing and maturing. New Zealand fund managers typically report that they deploy at least some element of ESG overlay in their investment process, but historically, in many or even most cases this only goes as far as an exclusionary screen. Again, this is in part driven by the nature of underlying demand.

For instance, Fergus McDonald, head of bonds and currency at Nikko Asset Management in Auckland, tells KangaNews some mandates – such as those from listed insurance companies – reflect these clients’ own reporting requirements. In practical terms this has tended only to go as far as a negative screen requirement, but McDonald says reporting requirements are rapidly increasing.

Iwi and community trust investors, meanwhile, often have specific socially responsible investment requirements, driven by regulation, political trustee appointments and a general desire for positive impact. McDonald confirms that ‘true’ retail investors do not often have strong ESG requirements.

“Our sense is that there is not significant additional demand or a greenium for labelled product at the moment, though it potentially brings in new accounts. We have seen some large wholesale investors express a preference for green over nongreen issuance.”

Where money is covered by ESG mandates, it tends only to add incrementally to the liquidity an investor can make available to labelled transactions. Josh Meier, senior analyst at Booster Investment Management in Wellington, says many specialist mandates still rely on a negative screen – just a more demanding one. Booster can make more money available to labelled deals, however, as all its funds should be able to participate.

Many New Zealand market participants describe Harbour Asset Management as a buy-side leader in sustainable finance. But even for Harbour the value of specifically labelled bond deals is more to do with what the process reveals about the issuer as a whole than a direct preference for the label itself.

Simon Pannett, director and senior credit analyst at Harbour in Wellington, tells KangaNews: “In the past I would have said we do not care about the label at all – just the issuer’s ESG credentials. But I would qualify this nowadays. Interestingly, what is helpful for us is the things that seem to come with labelling – going through the process of labelling a deal typically means an issuer has enhanced its overall sustainability work.”

The key fundamental issue in the New Zealand corporate market, however, is likely its longstanding supply-demand imbalance. A supportive underlying retail bid and ongoing growth in KiwiSaver assets under management means investors have long complained about the shortage of local credit supply. Under these circumstances, most funds are not in a position to impose further impediments on their access to high-quality credit.

Silver comments: “Most investors we speak with say ESG is, at the very least, a ‘nice to have’. But the constant theme is that there is not enough quality fixed-income product in New Zealand. Even when an investor is asking really detailed questions about bonds to make sure they meet the requirements of specialist ESG funds, the reality is they will likely buy for their other funds anyway. There is more visible evidence of pricing and volume benefits offshore, however – and it is likely we will begin to see this in New Zealand.”

New Zealand dollar high-grade investors seeking labelled issuance are relatively well served. Other than the sovereign – which plans to debut in the green-bond market this year – a significant proportion of local syndicated high-grade issuance comes in labelled UOP format, rising to an outright majority so far this year (see chart 3).

New Zealand dollar high-grade investors seeking labelled issuance are relatively well served. Other than the sovereign – which plans to debut in the green-bond market this year – a significant proportion of local syndicated high-grade issuance comes in labelled UOP format, rising to an outright majority so far this year (see chart 3).

Auckland Council and Kāinga Ora – Homes and Communities are the most prominent local issuers while labelled Kauri supply outpaced vanilla deal flow by nearly three to one in the first seven months of 2022. In aggregate, these issuers combined for NZ$5.3 billion of labelled bond supply in the first seven months of the year.

The proportion of corporate issuance executed with an ESG label has been similar – a majority – in 2022, but this is the extent of labelled issuance in the credit sector. Banks issued more than NZ$4.5 billion in the local market between January and July, none of it with an ESG label. In fact, the only labelled deal by a New Zealand bank went offshore and was issued in 2019.

Local banks say this is not the product of lack of engagement with sustainable finance – far from it – but of challenges on the path to more consistent labelled funding (see box).


The pattern of deal flow in 2022 demonstrates that corporate issuers are motivated to bring labelled structures to market even in the absence of specific investor requirements. The rationale is always the same: a desire to align financing with corporate sustainability goals. While this may result in cost or liquidity advantages down the line, borrowers believe it is the right strategic approach even before such an incentive emerges.

“For Mercury, the use of sustainable financing reflects our desire to promote renewable energy and the positive environmental and economic outcomes associated with investing in renewable energy assets,” Smits explains.

Thomson adds: “Our roadmap is scaling down thermal assets so green-bond issuance fits in with our corporate strategy. This kind of issuance gives us a reason to speak about our sustainability journey – including to retail investors, even if this is not the basis on which they buy. In effect, we did not see any reason not to issue a green bond. It limits the use of proceeds but this is where our strategy is anyway.”

Labelled issuance may bring a direct advantage in capital markets beyond what H1 2022 activity suggests. For one thing, market participants believe more issuers will seek to bring sustainability-linked bonds (SLBs) to market in the wake of Spark Finance pricing New Zealand’s first such deal, in March this year.

Following that deal, Dean Spicer, Wellington-based head of sustainable finance, New Zealand at ANZ, told KangaNews: “Climate change is centre stage for executives and boards. The interest to align ESG ambition with financial instruments is seeing a significant upswing in New Zealand and we are confident further SLB issuance will follow.”

Silver adds: “Our view is that an outcome of the combination of sustainability drivers for issuers could be growth in SLB issuance. The price kicker is important – it means there is an in-built incentive for issuers. However, as with green bonds and SLLs, price is usually not the key driver for an issuer’s engagement in sustainable finance.”

This may take time, though. Even issuers that have already done the groundwork for UOP funding have to take steps to prepare the type of data gathering and reporting required for SLB issuance, specifically on a whole-entity basis rather than just on an asset pool. But the motivation certainly appears to be in place. Smits says the sustainability-linked space is potentially even more interesting to Mercury than UOP issuance. The issuer is working on developing meaningful sustainability targets – which it views as a necessary precursor to any sustainability-linked deal.

SLBs could also align better with institutional investor preferences. Iain Cox, head of fixed income and cash at ANZ Investments in Auckland, explains: “We are seeing something of a fear factor among institutional investors – across Australasian fixed income – when it comes to ESG labelling on funds, because we have seen some asset managers offshore being fined over funds that did not do exactly as their advertising implied. Increasingly, anything claiming to be green has to be measurable and reported as such. This leads us to prefer sustainability-linked product, which inherently incorporates measurable targets.”

The buy side also continues to evolve, including beyond the negative screen approach. McDonald comments: “We have ESG screens in place but – like most fund managers – we are on a bigger journey toward full integration of ESG risk. We don’t want to ‘ban’ companies from our portfolios but instead to know that they are on top of environmental transformation.”

Assets remain the challenge for bank issuance

New Zealand’s major banks are ramping up their sustainability credentials including as lenders and intermediaries. But substantially increasing their presence in the sustainable funding space will be hard given the mortgage-heavy composition of their overall asset books.

Westpac became – and remains – the first New Zealand bank to issue a green bond, when it priced a €500 million (US$515.3 million) five-year deal through its London branch in June 2019. The bank’s treasurer, Ben Turner, says the main impediment to further issuance lies on the asset side.

“There has been a cultural shift at the banks in the sense that ‘doing the right thing’ is as important now as the traditional profit motive,” he tells KangaNews. “The biggest challenge in sustainable funding at the moment is a practical one: quantum of certifiable assets. We need to originate green assets in order to issue green bonds, and the reality is these still make up a relatively small proportion of our book.”

Specifically, the challenge is that residential mortgages are the largest part of the banks’ asset books and there is little readily availability data that could make mortgages suitable backing for green issuance.

Turner continues: “There is notable growth on the corporate lending side, for instance through sustainable loans. But the key would be coming up with a definition of a green mortgage that could be universally agreed upon. Mortgages are the predominant assets we fund in New Zealand and thus account for the bulk of our own issuance, but it is hard to define a mortgage as certifiably green at present as there is not a universal and credible energy efficiency certification.”

The practical challenge is on the data side. Turner acknowledges that banks have struggled to deliver technology enhancements to match the pace of sustainable finance evolution. The technology banks use is typically very robust, he explains. But it is not always as flexible as it would have to be to extract the required data to state with confidence that, as a liability-side example, one of two otherwise identical deposits is certifiably green. Mandatory climate risk reporting may help, Turner suggests.

“I would like every bond we issue to be a green bond but we can only fund the assets we have – and that are certifiably green,” Turner concludes. “We certainly won’t issue anything that has even a sniff of greenwashing.”