Green thumbs in the financing sector

In Australia and New Zealand we're seeing plenty of opportunity. The obvious sectors for green bond issuance are commercial property, infrastructure and also renewable energy.

"APRA and ASIC have flagged the importance of climate risk to the economy.”

Green bond issuance globally in 2017 jumped 85% to hit US$161 billion according to data from the Climate Bonds Initiative, with China accounting for US$36.4 billion. 

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The regulatory regime in these countries is also encouraging. The New Zealand Labour government under Prime Minister Jacinda Ardern has pledged to move to a zero carbon economy and announced setting up a $US100 million Green Fund to make Green investments. 

In Australia, the financial regulator APRA and the corporate watch dog ASIC have flagged the importance of climate risk to the economy.

We've had APRA, who is the regulator for the financial services industry, making it very clear in statements to the industry that they see climate risk as a financial risk. We've most recently seen ASIC make comments around similar issues.

Higher costs

However the higher cost of green financing may deter some borrowers particularly given the deep pools of liquidity available in the vanilla bond or bank market.

But this should not be the sole driver for borrowers. My view is if you're in this market merely for a price benefit, it's probably the wrong market to be in. It’s the intangible benefits that tend to generate the value for issuers and that will probably drive better pricing in the longer term.

This is the so-called halo effect of issuing Green or Sustainability bonds. For example aligning to an issuer’s strategy around corporate social responsibility. Moreover, there is no pricing disadvantage between vanilla and green bonds. 

Greater staff engagement is also another driver for companies issuing green bonds. A corporate pride in accessing the responsible investment markets to fund responsible activity - we've seen that in our own issuances, and clients will repeatedly say this to us as well.

Investors are driving demand for green investments by putting more weight on environmental, social and governance (ESG) criteria in their investment strategy and risk analysis, or allocating more capital for investment. 

In Australia and New Zealand, certainly the pace is quickening on the buy side down there. It's very rare that we have a meeting with an investor where ESG is not a component of the conversation.

And it seems that with every roadshow we go on, someone else has popped up with a specific mandate or has introduced ESG as an investment overlay into their processes.

The other thing that I find really heartening is that investors are increasingly talking about ESG analysis being part of their risk analysis.

Companies who lag behind in their transition to a more sustainable business model will be penalised. 

My personal view is those who are not issuing green bonds or who need to fund activity that's not associated with the transition to a low-carbon world will eventually encounter problems with accessing capital. And they'll be paying more for it.

Katharine Tapley is Head of Sustainable Finance at ANZ

This is an edited version of comments she made at a roundtable held by industry publication IFR Asia in July.