As the appetite for green bonds grows in Asia, focus is shifting to the potential development of a thriving market in sustainable bank loans, according to the results of a June poll.
The poll conducted by ANZ and FinanceAsia surveyed more than 120 investors and issuers on their attitudes towards green finance and asked them to outline their future plans. It is the second time the poll has been conducted, covering 13 countries across the region.
The results show an overall boost in green financing volumes, an increase in the number of discrete mandates being established by asset owners, and a growing interest in green and sustainable bank loans.
“The market is rapidly moving towards greater awareness and product sophistication, and the newfound interest in green loans is a sign of just how far green financing has come,” said Katharine Tapley, Head of Sustainable Finance at ANZ, commenting on the poll results. “In the early days, investors were more focused on the specifics of the issuance but now they are looking closely at the issuers themselves. They want to see that issuers have a strong story to tell about their transition to a neutral carbon footprint and a programme to make it happen.”
Tapley said market momentum is partly fuelled by regulatory changes in Europe – changes which then feed into other marketplaces. “New rules in the EU require investors to make mandatory disclosures around the climate change risks in their portfolios. This has really sharpened investors’ focus to actively exclude companies that don’t fit with their ESG policies.”
This trend is borne out in the poll results with 19% of investors reporting they actively exclude investments on the grounds of poor ESG metrics, versus 10% of participants from last year’s poll. The results also show a year-on-year uptick in the number of investors expecting to develop an ESG/SRI investment policy in the short-term (30% in 2019 versus 12.5% in 2018), and an increase in those considering buying their first green or sustainable bond within the next two years (53% in 2019 versus 40% in 2018).
Further evidence the market is maturing is in the number of poll respondents who have softened their requirements around the need for independent certification of sustainable bonds. Last year 31.7% of investors said they wouldn’t invest in a bond unless it had independent certification, and 19.5% said they wouldn’t invest without reporting. This year, those figures have dropped to 13.3% and 12.3% respectively.
“Independent reports and certifications are still important to investors but they are no longer a determining factor,” explained Tapley. “It also reflects the growing number of investors who are developing their own in-house ESG/SRI research and analysis capabilities.”
This year’s poll asked investors whether the issuance of an ESG bond would change their view on a company. Nearly half of all respondents said it would result in a favourable uplift, and 14% said they would pay for the uplift. “While most investors won’t admit to paying a premium for green issuance, we are certainly seeing benefits coming through in the form of heavy over-subscription rates and tighter sales processes,” said Tapley. “As the market evolves it is becoming harder for us to say there are no pricing benefits for issuing in this format.”
Tapley points to the experience of Woolworths as an example of how pricing tension is generated during the bookbuilding process. The Australian supermarket chain issued a debut A$400 million green bond in April through joint lead managers ANZ, Citi and JP Morgan. The proceeds will finance a portfolio of low-carbon supermarket assets, as well as energy efficiency projects such as lighting and air conditioning upgrades, and the group’s solar energy installations.
The final book closed with more than A$2 billion in orders from 90 investors, mostly from the domestic market. Nearly all of these were dedicated green investors.
Paul White, Head of Debt Capital Markets, Australia and New Zealand at ANZ, said that while Woolworths’ primary deal priced 10-15 basis points tighter than initial guidance, the biggest uplift came in the secondary market. “The bonds priced at 120bps over the semi-quarterly asset swap curve and quickly traded in by 30bps,” said White, who believes smaller overall deal sizes and larger individual tickets is driving secondary demand.
ISSUERS IN ASIA
The poll results show that over the past 12 months Asia-based companies have sharpened their awareness around green financing. In fact, a whopping 62% of companies which haven’t yet issued in green or sustainable format are now considering it, compared with 44% in last year’s poll. They are driven to issue by a wish to improve investor diversity and meet their sustainability objectives.
Issuers say some obstacles remain, with one of the biggest being an inability to identify a sizeable pool of suitable green assets – 38% of respondents listed this as their number one obstacle. Another 23.8% listed “set up costs” and 19% listed “time consuming” as hurdles.
Jimmy Choi, Head of Debt Capital Markets, Global at ANZ, acknowledges that some Asia-based issuers can struggle to find enough discreet assets to fold into a green bond programme. “The bond markets have a set of unspoken minimum benchmarks for issuance, and investors won’t do the due diligence on a bond under about $300 million,” said Choi. “This puts pressure on issuers to find enough discrete assets and then put those proceeds to use. Ultimately issuers have to weigh up whether it is worth the time and expenditure to issue a bond.”
Choi is hopeful the creation of an active green and sustainable loan market in Asia will give smaller companies – or those at the beginning of the transition process – a viable alternative.
Gavin Chappell who heads ANZ’s Syndications in Australia said the closing of a A$1.4 billion sustainability linked loan (SLL) for Sydney Airport in June is likely to mark the beginning of a wave of interest in this product.
To date the SLL market has been largely driven out of Europe with close to $60 billion in loans completed since 2017, according to Bloomberg Energy Finance data. But momentum is growing in Asia and the US with a number of recent transactions highlighting companies’ transitions to a low-carbon economy.
Unlike a green loan which is usually issued to fund a sustainable project such as a renewable energy plant, a SSL can be used for general corporate purposes. It is structured as a revolver and linked to a borrower’s ability to achieve certain sustainability targets. Borrowers are benchmark based on their current ESG performance and given incentives to improve that performance over time. In the case of Sydney Airport, the benchmarks were set by independent certifier Sustainalytics.
Chappell said the Sydney Airport loan was syndicated to a group of over 10 lenders. “Since it closed we have had a strong flow of reverse enquiries from banks wanting to learn about the deal,” said Chappell. “A lot of banks now have targets for growing the ESG side of their balance sheets, and SSLs will help them to achieve these ratios. We expect volumes in sustainable loans to swell significantly in the next three years.”
Head of Sustainable Finance
T: +61 405 125 086
Head of Syndications Australia
T: +61 448 440 921