Creating a more compelling sustainable debt market

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The growing appeal of sustainable finance

The market for GSS and sustainability-linked debt continues to expand in the region, driven by investors, issuers and other stakeholders.

“Across a wide range of our clients, there is a general perception and desire for portfolios to help rather than hinder society,” said Fergus McDonald, head of bonds & currency at Nikko Asset Management.

Indeed, moving towards measurable and positive outcomes is a key area of focus for Manulife as an investor, according to Eric Nietsch, head of ESG for the firm in Asia.

This is the case in Australia, too. “We are supportive of the development of all ESG-linked bonds and we have seen a number of new issuers in Australia in recent years,” said Adrian David, division director at Macquarie Asset Management.

Issuers are also spearheading activity across the sustainable finance landscape – spurred by what Tessa Dann, director sustainable finance at ANZ, described as greater comfort around potential forthcoming regulation.

“This shows greater awareness of the impact of taxonomies and the more embedded nature of sustainability products among investors,” she added.

For borrows like Auckland Council, for example, Andrew John, funding manager, called it “exciting” to be able to fund infrastructure using sustainable finance and have a positive impact on the environment. “Our focus is trying to expand the tools and opportunities that exist in the sustainable finance space.”

Growing appetite for sustainable finance in mainland Asia

There is also mounting evidence of GSS and sustainability-linked debt becoming mainstream across mainland Asia.

In Southeast Asia, for example, there has been a shift based on policymaking towards tackling climate issues. Singapore, as a result, is becoming a sustainable finance hub with a clear green agenda and a lot of firsts in terms of sustainability instruments, explained Stella Saris Chow, head of sustainable finance, international at ANZ.

“I expect to see further growth in both sustainability-linked bonds (SLBs) and sustainability-linked loans (SLLs), moving away from the traditional use of proceeds. It will also be interesting to see how the market for transition bonds develops,” she added.

In Northeast Asia, there has also been a notable change in attitudes towards sustainable finance, which bodes well for future issuance plans.

In markets like mainland China, South Korea and Japan, energy transition will be a big focus for the corporate landscape, said Kang Jae Kim, head of capital markets at ANZ in Asia. “Investments into renewables at a government level, such as in China, is also growing strongly. The percentage of ESG versus traditional instruments is accelerating and this trend will continue.”

Key hurdles to developing GSS and sustainability-linked funding in APAC

Inevitably, there are some challenges to overcome as this segment of the capital markets develops further.

At QBE, for example, issues that James Pearson, head of impact and responsible investments, said it faces as an investor include the availability, accuracy, consistency and transparency of data, “to enable us to compare investments and make informed decisions, as well as protect against greenwashing."

This makes it difficult to accurately identify the characteristics of instruments and of issuers, and then map these to product labelling and disclosure standards. “Being able to genuinely and transparently demonstrate the sustainability features and benefits of a particular instrument in a portfolio can be difficult, especially as investors' expectations and understanding can vary,” said Gabriel Wilson-Otto, director sustainable investing at Fidelity International.
Other investors are also grappling with this. “We have been trying to embed ESG into our process for a couple of years. The credit rating process is very scientific using many years of accumulated data, whereas the process for sustainable finance is still evolving,” said Iain Cox, head of fixed interest & cash at ANZ Investment Management.

Data is a concern for issuers, too, with some finding fragmentation within the market to be a frustration.

For example, explained Chante Mueller, head of investor relations and assistant treasurer at Spark, there are different methodologies across ESG scoring providers, as well as a variety of approaches among internal teams at various investors. “For all of these, we need to try to meet individual requirements.”

According to David at Macquarie Asset Management, the fact that many issuers are private companies and disclosure is not as good as the firm would like, makes due diligence tricky. “Accessing information on E, S or G, and building historical datasets, haven’t been easy tasks for some issuers.”

Amid the feedback from investors that sourcing up-to-date centralised data is challenging Georgina Jones, senior associate funding and liquidity at Queensland Treasury Corporation (QTC), said her organisation’s role, as the issuer, is to “support and facilitate their requirements”.

For Auckland Council, one of the challenges it faces, is how to identify targets that not only meet the criteria for a sustainability-linked product, but contribute towards the firm’s sustainability goals in a meaningful way, explained Helen Mahoney, senior corporate sustainability advisor.

From Optus’ perspective, Michael Sims, senior director treasury, the key has been to connect its financing and sustainability strategies – not only for our investors and bankers, but also employees and other stakeholders. “Finding meaningful targets is important for us,” he added.

In Singapore, meanwhile, Jing Li Thoh, head of group corporate finance & treasury at Sembcorp Industries, the challenge she highlighted is to ensure the investment community recognises the scale of the company’s ambition of its sustainability targets. “Our strategy is to go from ‘brown’ to ‘green’ and we are committed to reducing our Scope 1 and 2 carbon emissions by 90% by 2030. There are too many targets generally in the market, so we want to be able to communicate our approach and ensure it resonates with investors.”

In Hong Kong, Julian Lee, executive director finance at the Hong Kong Airport Authority, said the focus is to link its financing strategy to its ESG goals. “Despite airports being a carbon-intensive sector, we have many initiatives to move towards net zero targets. The different ESG financing formats are evolving rapidly and sometimes draw debates amongst stakeholders, so we have decided to stick with more conventional sustainable finance instruments initially.”

According to Venn Saltirov, director, Asia fixed income & credit at BlackRock, a lot of potential borrowers seem to be looking at the sustainable finance markets as a way to market their sustainability commitments. “We are focused on the availability of robust sustainable finance instruments from companies that are fully embracing sustainability as a new investment strategy. We want to see a greater choice of issuance, and also issuers, navigating the transition challenges.”

This highlights the extent to which investor sophistication has grown – something that Kate Gunthorp, director sustainable finance at ANZ observed – with buyers wanting to now know that a GSS issuance is backed up by a fulsome sustainability strategy. “This leads to a future challenge: how to actually achieve commitments that most market participants have made in terms of net zero targets and the Paris Agreement,” she added.

Addressing consistency in data and standards for investors

To tackle these challenges, Pearson at QBE said education is key. “More research, regulations, taxonomies and other initiatives can provide a layer of comfort for investment professionals when performing due diligence and to enable more confidence to invest. This can help overcome current fears among some investors of not being as informed as they would like to be.”

The problem of fragmented approaches specifically impacts smaller teams, such as Nikko Asset Management. As a result, the easier it is to monitor and understand the evolving landscape, the better. “Without this understanding, we would tend to focus on what we already know, instead of spending time on products that might make more of a difference to society overall,” said McDonald.

Cox at ANZ Investment Management said he now sees more companies establishing sustainability goals. “We would now like to see the plans for how these goals will be achieved to help move away from labelling.”

For larger firms such as Fidelity, having more analysts across the markets it covers enables it to bridge gaps in reported data. However, added Wilson-Otto, standardised frameworks for assessing instruments and issuers will help move the market in the right direction, so capability building is a key next step, followed by using various datasets to try to calibrate and triangulate the characteristics of an issuer. “There is no silver bullet, so a narrower universe and education would help.”

The situation should improve in line with the push towards net zero. “About 90% of the world’s GDP is covered by net zero commitments and as countries move from planning towards implementation, we will see more and more incentives from issuers to align their activities with the various regulations and taxonomies,” said Saltirov at BlackRock.

In Asia, for instance, his firm has seen a lot of developments that move the region towards international standards and strong growth in the green finance market. “All of this will have a positive impact on disclosure and the sustainable finance market,” added Saltirov.

Expanding GSS issuance

To enable the market to further grow and expand, Mueller at Spark said the firm would like to issue more in a GSS format. Yet a hindrance is that it might not have developed targets to use, so it is more of a timing issue that holds us back. “At this stage we don’t intend to issue via use of proceeds and prefer SLBs, so being able to focus on a certain type of instrument would help issuers that are starting on their sustainable finance journey.”

In terms of regulations, John at Auckland Council said the concern is the potential additional cost as a roadblock to making sustainable finance mainstream. “The process needs to be as simple and low cost as possible to encourage greater uptake from a wide range of market participants,” he explained. “At the same time, we need to be cognisant that the benefits of sustainable finance have a longer-term horizon associated, which needs to be factored into the cost/benefit analysis.”

In some cases, Dann at ANZ said it can be more straightforward for issuers to use a certain instrument over another when deciding between use of proceeds and sustainability-linked transactions. “It’s important to also consider the investor assessments and due diligence and presenting the necessary information,” she said.

At QTC, for example, Jones said the strategy is to support the state’s pathway towards a low-carbon, environmentally sustainable economy through its green bond programme. “With our green bond pool now at a critical size which allows us to issue larger volume lines to increase liquidity for investors, our focus has shifted to further diversifying the assets in the pool. As the GSS landscape evolves, we will look to adapt to investor feedback, and market developments across a range of factors.”

For an airport, meanwhile, finding the right carbon target to focus on is essential. “A few years ago, we looked at carbon intensity as a natural benchmark. This has developed since Covid-19 to also consider both passengers and cargo. We are on the prudent side and hence prefer to issue green bonds first,” explained Lee at the Hong Kong Airport Authority.

Growing appetite for SLBs

For a growing number of market players, there is growing appeal for SLBs.

“Sustainability-linked structures bring a lot of flexibility, mostly because of the greater ability to map the targets to general corporate purposes instead of specific projects in use of proceeds bonds. This can create advantages for issuers as well as for investors,” said Nietsch at Manulife.

For Auckland Council, green bonds appealed when it first issued sustainable debt in 2018, given its focus on long-term infrastructure, explained John. Since then, it has issued green bonds whenever possible; to date it has NZ$2 billion equivalent of green bonds outstanding, representing 19% of its portfolio, with issuance in both NZD and EUR. “The challenge we have found is accumulating further assets for use of proceeds products, like green bonds. We just issued our first SLL and like the idea of SLBs and SLLs for the future.”

At Sembcorp Industries, its sustainability strategy was borne out of necessity given the energy transition and shift towards climate issues. “We realised we couldn’t continue business as usual, so we have set clear and aggressive targets for our portfolio,” said Thoh. “This has made it easier for us to establish our green and sustainable financing frameworks.”

The experience for Optus has been that it is easier to do an SLB rather than use of proceeds transaction. “We have found that a lot of investors like the structure of an SLB, but it is a learning curve for everyone,” said Sims.

With such transactions, investors want the targets to be a stretch for an issuer, explained Pearson at QBE, “not just BAU, to ensure they help drive change in the organisation and have an ESG impact.”

Dann at ANZ acknowledged there are still question marks about how to standardise SLBs and SLLs.

David at Macquarie Asset Management agreed. “A challenge for us as an investor is the limited amount of data on SLBs, given that each transaction is tailored. The only information we have access to is the publicly disclosed ESG information.”

He elaborated that when he is looking at GSS instruments and SLBs from companies that are issuing for the first time and could be new names to the firm, he might only have 45 minutes to speak with senior management. “In that time, we need to get to know their industry, how the company funds itself and the overall strategy. We also need to understand their sustainability framework. Although there is an ongoing obligation on issuers to provide reporting, investors are in favour of this to enable us to see whether agreed sustainability targets are being met,” said David.

When investors look at an SLB as an investor, they need to look at a range of factors beyond the ambitions linked to the instrument, and include a broader set of considerations. “We need to look at the entire range of sustainability activities for that corporate, so the amount of due diligence needed is a big challenge,” added Wilson-Otto at Fidelity.
The fact that SLBs are relatively new has meant there has been a variety of approaches to structuring them and to the ambitious nature of targets.

There has also been a sharp focus on greenwashing, added Chow at ANZ. “So, for issuers to come to market with SLBs, there is increased value by engaging with investors upfront. More disclosure and more ambitious targets will be better received with more open dialogue.”

Enhancing collaboration

Ultimately, investors, borrowers and other stakeholders need to continue to engage with each other to help develop the market.

“We have been looking to diversify the sustainability targets that we include in our products,” said Mahoney at Auckland Council. “It is important for investors to understand that identifying and putting targets in place takes time, especially for a large issuer like Auckland Council. This is especially the case with qualitative targets where there is less data available.”

According to Jones at QTC, an open, two-way conversation and feedback between issuers and investors will help in the long run. “In our investor meetings, being able to get questions ahead of time enables us to be better prepared with the detailed information needed.”

In Pearson’s view, at QBE, it is important that the industry gets the balance right between accountability and stretch. “We don’t want to discourage issuers from GSS instruments, SLBs and SLLs with too many restrictions and expectations.”

Clear communication is also key, added Kim at ANZ, with formal dialogue and feedback between investors and issuers. “This would allow more consistency in understanding among all parties.”

In general, Dann at ANZ believes the market is moving in right direction, based on the collaboration that she sees between issuers and investors.