Green finance

Green finance set for huge growth in Australia

Debt investors are becoming increasingly influential in green and sustainable finance transactions, as industry bodies and state governments get behind the climate change issue.

Industry players are predicting that Australia’s developing green finance sector will be an essential component of corporate funding within five years.

“We see it as a megatrend, one of those global themes that are going to be integral to Australia’s economic development,” Katharine Tapley, ANZ, sustainable finance, told FinanceAsia.

“In Australia, business is well aware of climate change risk and sustainable development concerns and issues,” said Tapley.

“All the major finance regulators have made clear statements about how climate change risk equates to financial risk. And there’s very rarely a top ASX 100 listed company that doesn’t have clear objectives around sustainability.”

The move towards green financing has, up to now, been driven by equity investors in Australia. They are increasingly agitating, through voting and engagements, for better governance around environmental and social risk. That’s now translating into the debt market, said Tapley.

“Debt investors are really in the game now, advocating for change,” said Tapley, “and that’s pretty significant because you’re talking about 80-90% of the global capital stack.

“If you’ve got that level of focus on environmental risk, that is a mechanism that will change the way money is invested.”

Banks too are feeling the pressure from their investors and from the regulators, around how they are allocating capital. That is driving new initiatives, such as the creation of sustainable finance teams and funding targets aligned to ESG goals. ANZ, for example, has a $15 billion five year funding target that expires in 2020 and has just committed to facilitating $50 billion by 2025 towards sustainable solutions.

Tapley said the scope of the new funding target covers initiatives the help improve environmental sustainability, increase access to affordable housing and promote financial well-being. “The refreshed target is also aligned to a handful of relevant Sustainable Development Goals,” she added.

The banks are bringing to the market well-structured transactions, whether they be green bonds or the latest variation, sustainability linked loans (SLLs), according to Lisa Story, head of corporate planning & treasury at commercial property fund group Investa, based in Sydney.

SLLs are suitable for corporates making a transitioning to greening their business. The loan conditions will set an interest margin of, say, 1% until the firm hits a particular hurdle and then the margin will drop to, say 0.8%.

What sets SLLs apart from green bonds is that the proceeds can be used for general corporate purposes; they don’t have to be spent on environmental projects. Sydney Airport raised a $1.4 billion SLL in May this year.

Investa currently has $1.5 billion of debt facilities, 30% of which are green. It’s a mixture of bank debt, medium term notes, bonds and US private placement money, some of which will have to roll off before it can be green financed. All the company’s buildings are certified green and ‘over the next three years, I expect we could see all the bank debt being green,” said Story.

The supply of social and green bonds, whilst relatively small, has been well supported. “Anytime a transaction comes to market it will be at least three times oversubscribed,” said Tapley.

There’s still a fair amount of scepticism in the wider market. “My peers are asking me why we are bothering with all this. They say there’s no price benefit,” said Story. “I say, well I’m seeing some very attractive pricing, but it true that what’s stopping a lot of people from pushing into green and sustainable finance more is this belief that there’s no price benefit.”

She thinks the Australian Prudential Regulation Authority (APRA) “should really come up with a new tier of capital, which could be priced differently from the outset. In five years, this will stop being a discussion; it will be somewhat institutionalised.”

The Paris Agreement on Climate Change, concluded in 2015 and the UN’s Sustainable Development Goals (SDGs) have been the major catalysts for bringing the debt community into the fray. There have been others, including this year’s establishment of the Australian Sustainable Finance Initiative (ASFI)

Getting a consensus view is a challenge but the ASFI is a genuine cross-industry collaboration, said Tapley. “We need to be looking right across our various sectors as well as society and government, to ensure that we are creating the right environment for our economy and our financial system to be stable through the transition to low carbon."

IAG Group executive Jacki Johnson, co-chair of the initiative, said a sustainable finance roadmap will be delivered in 2020, with recommendations that will assist in mobilising capital and ensuring better informed financial decision making by enhancing disclosures and transparency on ESG risks and opportunities.


This article has been corrected to show the correct spelling of Katharine Tapley's name

This article has been updated to show ANZ's latest target for sustainable funding



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