Sustainable finance is quickly becoming a mainstream funding option for Australian corporates, a trend that puts more onus on companies to set relevant, robust targets and deliver progress on their environmental, social and governance (ESG) goals.
“As an issuer, you should be asking yourself ‘what does ambitious look like for me?’ and then working with your bank to embed that in your sustainable financing product overlays,” said Bláthnaid Byrne, director of sustainable finance at the Commonwealth Bank.
Investors are more closely scrutinising the type of ESG factors companies report, the targets they set and the way they measure their progress, as they are growing more conscious of ESG and the sustainable finance market is becoming more mature.
The sustainable finance market has boomed in recent years amid growing appetite from both investors and issuers. Global sustainable debt issuance is forecast to reach $650 billion in 2021, according to research by Moody’s Investors Services. Sustainable bonds are set to account for between 8% and 10% of global bond issuance this year, up from 5.5% in 2020.
“Each company needs to be assessed in their own right - it’s about looking at them and their operations and finding something material and uniquely appropriate for them,” she said.
To help clients structure an effective product, banks need to understand their values, strategic focus, what their stakeholders are asking about ESG, and whether there is a relevant industry metric that they should be reporting but are not.
This soul-searching process can help management land on sustainability metrics that align to their strategy and corporate mission and resonate with their employees and external stakeholders, setting the company up for success, Byrne said.
TAKING THE LEAD
Australia is a leader in the region on various fronts when it comes to ESG investing, pioneering a number of innovative transactions that helped expand the market for sustainable finance.
Australian ESG products often use a carrot and stick approach, where the issuer is rewarded for achieving its targets, but penalised for failing to do so or regressing from where they are today. However, that structure is less common in Asia, where sustainability-linked debt often offers incentives for reaching a goal, but rarely includes a penalty.
Another differentiating factor for Australian ESG issuance is the widespread use of third-party verification for corporate reporting of sustainability-linked loans (SLL) metrics. Getting an objective reading on a company’s progress toward its sustainability targets makes Australian ESG debt more attractive to global investors despite the sector’s relative nascence.
“It’s a real advantage for issuers and gives global investors a lot of confidence that the product is delivering the kind of real-world impact they are looking for,” Byrne said.
Issuers who embrace a higher standard for their ESG goals and reporting can earn a better reputation with investors. This in turn sets up their green or sustainability-linked products for success over the long term, as such products help the company achieve its ESG goals while also becoming sought-after assets among investors, she said.
“All the transactions we seek to support need to be robust and stand up to scrutiny. They need to demonstrate the company’s commitment to transition and support their progress toward their goals,” Byrne said.
Bláthnaid Byrne will be one of the speakers at FinanceAsia’s Financing Climate Change event to be held virtually from June 21-25. Please click here for more information.
Things you should know
This article contains information provided by CommBank for use by FinanceAsia.
Important information: This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. You should consider seeking independent financial advice before making any decision based on this information. The information in this article and any opinions, conclusions or recommendations are reasonably held or made, based on the information available at the time of its publication but no representation or warranty, either expressed or implied, is made or provided as to the accuracy, reliability or completeness of any statement made in this article . Commonwealth Bank of Australia ABN 48 123 123 124. AFSL and Australian Credit Licence 234945.