Pace of delivery

The Westpac-KangaNews New Zealand Sustainable Finance Summit focused on the need to turn decarbonisation plans into action across the local economy, supported by an energised and evolving domestic capital market. At the end of another busy year, Westpac’s Auckland-based head of sustainable finance, Joanna Silver, discusses progress made so far and goals for 2023.

You have always seen sustainable finance through the lens of the bigger picture – in particular, how successfully markets are mobilising finance to achieve the economic transition we all need. How would you assess progress made in New Zealand in 2022?

The past year continued to build on the strong momentum of 2021, with many new and significant players embracing meaningful sustainable finance structures as part of their financial strategies. While global sustainable debt volume in 2022 to 30 November is down 23 per cent from 2021’s record highs – to US$1.4 trillion from US$1.8 trillion – closer to home it has been a strong year for inaugural green-bond issuers and volume is higher than we have ever seen.

Westpac has helped Genesis Energy, Goodman Property and Transpower come to market in green format, and also supported Fonterra Co-operative Group to publish its first Sustainable Finance Framework this year.

New Zealand Debt Management aslo came to market with its debut green bond.

With a couple of loan transactions coming in just as we cross the finish line for 2022, we should see close to last year’s sustainable loan volume with just more than NZ$4 billion (US$2.8 billion), driven by sustainabilitylinked loans (SLLs) and green and sustainability loans.

Borrowers like Genesis are embedding their SLLs across their banking group while many other borrowers are striking their first SLLs, including Auckland Council, Ātihau- Whanganui Incorporation, Deloitte, Oceania Healthcare, T&G Global, Silver Fern Farms, Sudima Hotels and Yealands Wine Group.

To end the year on a real high, it was a pleasure to help Contact Energy close out 2022 with a restructure of an earlier SLL into a new NZ$850 million SLL with broader and more ambitious targets. This momentum demonstrates the value of the SLL structure to borrowers, and the breadth of sectors participating in SLLs now.

It is obviously positive to see issuers deciding to use sustainable debt ‘as is’, but what developments might be coming that can broaden the market further?

There are some early-stage trends and innovations that should give borrowers comfort and will also provide opportunities. Several of the main market principles have been updated and enhanced in 2022, which demonstrates confidence and stability in them. This also typically leads to innovation.

We expect new sustainable structures to emerge in the market – like bank bonds linked to an issuer’s SLL portfolio, as we saw Nordea do, and the sustainability re-linked bond concept we saw from Bank of China late last year, for instance. We are also seeing more sustainability-linked derivatives and the carbon market driving innovation. We predict more innovation springboarding off the existing base of principles the market has embraced.

In New Zealand, both SLL and sustainable bond volumes have increased in 2022. Does this provide some confidence that issuers will now use sustainable finance regardless of the incentives capital market conditions provide to issue one type of debt or another?

Definitely: sustainable finance is a key consideration for almost every large business we are talking to. We expect more sectors will come to market in a sustainable format, especially for SLLs. We also expect more sustainabilitylinked bonds (SLBs), though we are watching the global dialogue about the integrity and transparency of these structures closely.

I like to think there will also be growth in sustainability bond issuance. This can support borrowers to address both climate change mitigation and/ or adaptation, as well as the continuing social consequences from the pandemic and significant social impacts from inflation and higher cost of living.

Behind the issuance itself, New Zealand’s mandatory climate-related disclosures regime will drive behaviour and a stronger focus on climate in the boardroom. There has already been a real shift in the level of focus on this issue among directors, and this will strengthen sustainability strategies and therefore position more issuers for sustainable finance.

“One specific focus of ours is to support issuers that are potentially high impact but are in hard-to-execute business sectors. This means exploring interim emissions reduction targets rather than long- or even medium-term ones, and working out how to make data accessible. We have been through this process to some extent in the agriculture sector, which is why we are now seeing more SLLs coming from it.”

What other developments do you expect to see coming through in 2023?

Greenwashing is going to be even more front of mind for regulators. ASIC [the Australian Securities and Investments Commission] recently dipped its toe in the water by exercising its regulatory might on greenwashing and I suspect we will see more of this in Europe, America and Australasia.

I also expect market noise on ‘green hushing’ will grow next year. We are already hearing investors saying borrowers must not let green hushing be their solution to greenwashing concerns.

However, with the rise of climaterelated disclosure requirements, we expect the climate literacy of companies, from the board down, will start to increase. This, alongside improved data collation and analytical processes, may further support companies to effectively identify and measure climate risks and take further, imminent action. This may translate to an increased use of sustainable finance instruments.

Another one to look out for is transition. My sense is that the market is not yet clear on what the transition label is for – how an issuer gets it and what it means. This will partly be addressed through SLBs, I suspect, and also by further updates to the Climate Transition Finance Handbook. I expect we will get a little more clarity on what a transition structure looks like next year.

Finally, we expect emphasis on environmental, social and governance impacts across the supply chain driven by scope-three reporting and modern slavery legislation. We recently saw evidence of these types of questions when we assisted Transpower with its inaugural Australian dollar green bond, in November.

Does this mean a specifically labelled transition instrument? It feels as if the sustainability-linked product has become the funding tool for transition.

My suspicion is that we will see greater adoption of the Climate Transition Finance Handbook although, for many issuers, it feels like a darker green version of existing bond and loan principles. This is how it was designed, in fact: to be an additional certification or label on top of an underlying sustainable debt structure. The challenge we are seeking to solve with the handbook, however, is that it is quite hard for structurers to get comfortable with sustainability-linked formats for truly hard-to-abate sectors because issuers often cannot offer a pathway that is aligned with a 1.5°C scenario in the short or medium term.

The SLL and SLB structures have provided initial support to borrowers in hard-to-abate sectors that want to show their commitment to transition. But we don’t yet have clarity on how to structure a sustainable finance transaction with the transition label on it. Some clarity will be critical. Westpac is on the ICMA [International Capital Market Association] working group exploring the role of the Climate Transition Finance Handbook, so hopefully we will get that clarity in due course.

The context here is that as more banks sign up to the Net Zero Banking Alliance they are committing to transitioning the emissions from their own portfolios in line with net zero. Westpac is now undertaking significant internal assessments of its own financed emissions – how we hit targets and which sectors come first. It is a very complex task with no playbook.

It makes for a challenging environment but also for really rich and deep conversations with customers about their transition plans. We are having to make the same kind of balanced assessments that investors have been making for a little while, about reducing financed emissions while also financing reduced emissions. We want to increase financing to larger emitters so they can decarbonise at exactly the same time as we are reducing our own financed emissions.

Sustainable finance naturally tends to focus – understandably – on issuers that are engaged with the concept. But is it still too easy for companies simply to sit on the sidelines completely?

I don’t think the media, and even perhaps most investors, have turned their minds to those issuers that are not there yet with their transition strategies. By this I mean laggard companies from sectors that have issued a lot of sustainable debt, and also whole sectors where there has not been a lot of sustainable finance activity to date. In fact, a lot of sectors in New Zealand really aren’t visible in sustainable finance yet – waste, tourism, nonpublic transport and fishing, for instance.

My hope is that the media gets more curious about sustainable finance – that business journalists understand that by asking the right questions of issuers and investors they can activate a stronger focus on those doing really good things, and also on those that have not engaged to date. Highlighting the opportunities for society, the environment and business if they engage could be really powerful in the coming year.

It can be a virtuous circle. When we did the first Contact SLL, three years ago, another energy company called the following day to say it wanted to do something similar. It is similar in the aged care sector: Summerset issued in mid-2021, followed by Metlifecare in late 2021 and then Oceania in 2022. Innovation and leadership create positive competitive tension.

It is not just whack-a-mole with missing sectors, though. One specific focus of ours is to support issuers that are potentially high impact but are in hard-to-execute business sectors. This means exploring interim emissions reduction targets rather than long- or even medium-term ones, and working out how to make data accessible. We have been through this process to some extent in the agriculture sector, which is why we are now seeing more SLLs coming from it.

We are excited about what next year holds for sustainable finance and we are committed to continuing to support our customers on their sustainability journeys. A lot is at stake but we are up for the challenge.