Financing a changing climate

From Greta Thunberg crowd sourcing her boat trip across the Atlantic for the United Nations Climate Change Conference (COP 25); to climate protestors declaring a ‘Planet-wide Rebellion’; and over 60 nations adopting ‘net-zero’ carbon emissions targets, the protection of the planet has never been higher on the public agenda.

“There is a growing concern about the physical risks of climate change and how these translate to financial risks.”

Climate concern is shifting consumer behaviour and preferences. Research from the Centre for Sustainable Business found sales of sustainability-marketed products grew almost six times faster than conventionally-marketed products in 2019. In the world of finance, consumers are increasingly interested in the impact of their savings, investments and financial products.

Equally concerned

Through shareholder action such as Climate Action 100+, to the divestment movement, customers are looking for products aligned with their values.

Polling from UK-based Good Money Week found that, for the first time ever, respondents are more likely to be equally concerned about whether their investments make money or make a positive difference. Historically investors were only concerned about financial return. We expect this trend to translate to Asia.

Companies are making pledges to reduce emissions and high carbon emitters are implementing decarbonisation strategies through a combination of new technologies - such as renewable energy - and through natural capital. Banks are increasingly focused on sustainable returns and ANZ is one of the signatories to the Principles for Responsible Banking, representing more than $US47 trillion in assets.

There is growing concern about the physical risks of climate change and how these translate to financial risks. Banks are increasingly having active discussions on companies’ transition plans to reduce their carbon footprint. This transition trend is driving investment in new technologies and development of financial products which reward companies for being green or improving sustainability.

More than green bonds

Three years ago, sustainable finance was dominated by green bonds, which consisted of 95 per cent of the sustainable finance market - driven mainly by European markets.

Green bonds and loans are backed by eligible green assets, a ‘use of proceeds’ approach. Now sustainable finance is more diverse, both geographically and by product. Asia Pacific is approximately a third of the total sustainable finance market with products comprising green loans, sustainability linked loans and sustainable supply chain financing. Singapore is also increasingly becoming a hub for sustainable finance in South East Asia.

Companies’ initial concerns on issuing sustainable finance is often related to the additional time or cost required. There is a level of additional due diligence and structuring required for sustainable finance. However, these costs can be managed and there are mechanisms in place to encourage more issuance and reduce costs.

Central banks like the Monetary Authority of Singapore are encouraging the sustainable finance market through the Sustainable Bond Grant Scheme by providing incentives to issuers by offsetting eligible due diligence costs (which include second party opinion or assurance reports).

In the last three years, sustainability linked loans (SLL) have been increasing in frequency. ANZ expects to see significant volume growth in this product across Asia in 2020. Currently the highest growing sustainable finance product, sustainability-linked loans, are appealing because proceeds of the loan can be used for general corporate purposes, making it more accessible to a greater number of companies. This type of loan also ties loan pricing to achieving sustainability related key performance indicators and rewards outperformance with a reduction in loan margin.

{CF_IMAGE}

Beyond climate

Many companies will soon publicly state their sustainability objectives for the next decade. These stretch targets will be transformational with innovation in technology and operations required to achieve them.

While ANZ has large financial hubs in Singapore and Hong Kong, it has a longstanding presence in many ASEAN markets including Indonesia and the Philippines where there is significant effort to develop climate-resistant infrastructure.

While the focus to-date has been heavily on the decarbonisation of the economy which includes reducing greenhouse gas emissions, beyond climate risk and mitigation are other issues related to sustainability.

Biodiversity loss has been significant due to climate change and nowhere is this more acute than in Australia with the recent bushfires. In Asia, blended financing models are being used to fund reforestation and conservation.

Agribusiness companies are effectively managing the risk of further biodiversity loss actively, engaging with their supply chain to mitigate this. In 2019, ANZ was Senior Lead Arranger for Olam’s second SLL of $US525 million and China Oil and Foodstuffs Corporation (COFCO) Hong Kong’s $US2.1 billion SLL, demonstrating strong demand from the agribusiness sector for sustainability linked loan financing.

Leading the way

Banks are increasingly tying sustainability to their strategy. Last year, the United Nations Finance Initiative’s Principles for Responsible Banking was launched. The Principles were signed by 130 banks from 49 countries representing more than $US47 trillion in assets, showing the financial sectors commitment to change.

Fund managers, such as Blackrock, have made public statements with respect to reducing their exposure to thermal coal given its impact on climate. Even central banks like Sweden’s Riksbank announced it would no longer invest in assets from issuers with a large climate footprint, even if yields were high. This was supported by Riksbank’s sale of bonds from Western Australia and Queensland, and the Canadian province of Alberta.

In addition to advising and arranging sustainable finance for customers, banks are increasingly using sustainable finance for their own financing needs. ANZ issued the first Euro Sustainable Development Goals (SDG) Tier 2 bond by any bank globally, bringing to a total of $A3.4 billion of ANZ bonds on issue in green and SDG bond format. Oversea-Chinese Banking Corporation (OCBC), a Singapore bank, issued its inaugural green bond: a $A500 million, 3-year deal in which ANZ, BNP Paribas, National Australia Bank, OCBC and Westpac acted as joint lead managers and bookrunners.

Banks in the region are also setting sustainability targets to evidence their commitment to sustainability. ANZ has tripled its existing sustainable finance commitment to $A50 billion ‘sustainability target’ as part of its drive to help customers make the transition towards a low-carbon and more sustainability developed economy.

Stella Saris Chow is Head of Sustainable Finance – International at ANZ

To meet the growth in demand, ANZ has a dedicated International Sustainable Finance team based in Singapore. Led by Saris and supported by Director of Sustainable Finance, International, Stephanie Vallance, the team works closely with ANZ’s Debt Capital Markets and Loan Syndications teams and the bank’s customers to originate and structure sustainable finance products.