Sustaining momentum on sustainable finance

Can this growth be sustained in 2020? Only time will tell – but the hefty weight of investors pushing for more disclosure and transition will have a positive influence on borrowers and is likely to further drive issuance.

"Green bonds continued to dominate the market with global volumes totalling $US271 billion in 2019.”

The outlook of course is not straightforward. While broader than sustainable finance, there is a growing awareness in the investment community of skewed valuations resulting from the ‘fashionable’ nature of sustainability.

According to Morningstar, investors last year tipped a record $US21 billion into socially-responsible investment funds in the US, almost quadruple the rate of inflow of 2018. This is now starting to show up in valuations for companies with strong ESG credentials.

It’s worthwhile therefore to appreciate one element in emerging sustainable finance sector may well be some faddish money – but critically that doesn’t undermine the fundamentals of the sector.

The total market size is now $US1.15 trillion across both bonds and loans. Green bonds continued to dominate the market with global volumes totalling $US271 billion in 2019, according to Bloomberg New Energy Finance.

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The year 2019 also saw the emergence of sustainability-linked bonds, similar to sustainability-linked loans (SLL) where proceeds are used for general corporate purposes and not earmarked for particular projects. Italian energy firm Enel paved the way with a $US1.5 billion United Nations sustainable development goals-linked bond in September.

SLLs grew strongly in 2019 as companies utilise this format of loan to link their sustainability targets to their cost of capital. SLL volumes hit $US121.5 billion, nearly triple the $US45.4 billion in 2018.

Significant momentum

There was significant momentum in this product from corporate borrowers globally, with notable loans from Shell ($US10 billion), Germany’s E.ON (€3.5 billion), renewable energy equipment supplier Siemens Gamesa (€2.5 billion) and chemicals company Lanxess (€1 billion).

Another notable SLL was a $US1.8 billion revolving credit facility for commodities company Louis Dreyfus that covered multiple jurisdictions namely North America, Asia, Europe, Middle East and Africa.

Elsewhere, New Zealand dairy producer Synlait Milk signed New Zealand’s first SLL (ANZ as Lead Arranger) while Canada’s Maple Leaf Foods refinanced existing loans totalling $C2 billion that linked the interest margin to the company’s sustainability targets, a first for that country.

Pressure continues to grow on companies to focus on the risk of climate change and investors have shown they are willing to use their position to advocate for change and transition.

Some examples include Sweden’s central bank Riksbank, which announced in November it had sold all of its Queensland, Western Australian and Alberta government bonds due on climate grounds.

The European Investment Bank said it would end fossil fuel funding and align all funding activities to the Paris Climate Agreement from 2021 and funds management giant Blackrock’s recent decision to exit thermal coal producers should add more pressure on companies to take necessary climate action.

Combined, these moves indicate a growing commitment to sustainable practices which should continue to drive the financing decisions of treasurers through 2020.

Katharine Tapley is Head of Sustainable Finance at ANZ

This article was originally published on ANZ’s Institutional website