Bringing sustainability transition finance into the debt-market mainstream

Green, social and sustainability (GSS) bonds opened the door to a more active sustainable debt market in Australia. But they are only the first step. In a roundtable hosted by ANZ and KangaNews in September, credit-market participants looked at the full scope of potential growth in the sustainable-debt universe, including the role of new products in the loan and bond space, and the end goals of this type of financing.

PARTICIPANTS

Bláthnaid Byrne Group Treasurer AGL ENERGY
Gavin Chappell Head of Loan Syndications, Australia ANZ
Nigel Greenwood Chief Financial Officer SYNLAIT
Laura Innes Treasury Manager, Liquidity and Funding COLES
Graham McNamara Managing Partner METRICS CREDIT PARTNERS

Michael Momdjian Group Treasurer SYDNEY AIRPORT
Katharine Tapley Head of Sustainable Finance ANZ
Christina Tonkin Managing Director, Loans and Specialised Finance ANZ
Marayka Ward Senior Credit Manager and ESG Champion QIC

MODERATORS

Helen Craig Head of Operations KANGANEWS

Matt Zaunmayr Senior Staff Writer KANGANEWS

SUSTAINABILITY GOALS

Craig Can we start with a sense of how sustainable finance is evolving in Australia. What are ANZ and corporate borrowers trying to achieve?

TONKIN We want to bring sustainability and transition financing into the mainstream. This is a timely discussion given the growing momentum among key customers to tap the sustainability loan and bond markets as the global economy continues to move away from fossil fuels.

Some interesting trends have developed over the last 12 months. There has been the advent of transition bonds and more recently an ESG [environmental, social and governance]-linked bond for Italian power company ENEL.

The sustainable-finance markets in Australia and New Zealand are moving in line with the trend to focus on transition. We have seen Contact Energy and Investa Property Group develop holistic green-debt programmes. Meanwhile, Housing New Zealand set a benchmark by issuing New Zealand’s first social bond, followed up by the incorporation of all its outstanding lines into wellbeing bonds which are aligned with the New Zealand government’s living-standards framework in its innovative wellbeing budget.

In loan format, we have seen green loans for real-estate companies Fraser’s Property and Brookfield Asset Management. In sustainability-linked-loan (SLL) format we have seen transactions for Adelaide Airport and Sydney Airport. Just this week in New Zealand, dairy producer Synlait announced the country’s first SLL.

The transition to a low-carbon economy is closely aligned with ANZ’s purpose and its increasing focus on issues associated with the environment. We are committed to lowering the direct environmental impact of our activities. Our operations have been net-zero carbon since 2010. ANZ has also recently announced it will be joining the RE100 which will mean its entire operations will be 100 per cent renewable by 2025.

ANZ is a key participant, alongside insurers and investors, in the Australian Sustainable Finance Initiative (ASFI), which is designed to come up with a roadmap for what it will take to deploy more capital into sustainable finance as we move forward.

There is a lot more to do and forums such as these help galvanise awareness and conversations on how we can continue to grow the market.

“We would prefer to work with our long-term customers to assist them to transition, even if they are in a carbon-intensive industry, rather than divest.”

INNES Coles unveiled its refreshed strategy in June, the purpose of which is sustainably to feed all Australians to help them lead happier and healthier lives. Sustainability for us is not a separate, box-ticking exercise and it is not limited to carbon emissions. It permeates our business, from communities to practices and products.

We have a range of ESG goals around indigenous workforce, gender equity and others that are more specific to our business such as food and general waste, animal welfare, sustainable sourcing of food, packaging and greenhouse gases.

MOMDJIAN We have three-year sustainability commitments which cover a broad range of ESG initiatives in areas including climate resilience, fleet electrification and the optimisation of our airfield and airspace.

Sustainable finance further embeds sustainability-performance improvements into our everyday activities. In our case this is by directly linking sustainability performance to our funding costs, incentivising and driving further engagement across our business.

GREENWOOD Our sustainability goals cover three pillars: the environment, enterprise and people. Environmental goals tend to be the main external focus but we look at it from these three perspectives.

The goals that pertain to the pillars include targets for reducing greenhouse gases and water use, improving the representation of women in the workforce and leadership, and building reputational currency through better food safety and transparency standards.

BYRNE AGL Energy (AGL) has maintained its strategy on carbon emissions and having these aligned to a sub-2-degree future. There were questions as to whether this would change with leadership transition but the new chief executive, Brett Redman, has reaffirmed the commitment.

We look at this through the lens of decarbonisation but also of ensuring energy supply continues to be reliable and affordable. It is a ‘trilemma’ that we need to manage – we are walking a tightrope between sustainability, energy security and affordability.

This focus is why we shifted to an integrated reporting format this year. Our sustainability team also sits within the capital markets team, which reflects our view that the team needs to be immersed in the goals and outcomes of AGL’s sustainability measures in order to have meaningful conversations with our debt and equity investors.

Zaunmayr To what extent do issuers’ goals need to tie in with debt funding? In this context, what is the potential scale of financing based on holistic scoring of sustainability performance, such as SLLs versus the use-of-proceeds funding we see in, for instance, the green-bond market?

GREENWOOD I don’t think our sustainability goals are directly linked to our capital-markets funding requirements. In other words, to achieve the goals we do not necessarily need to seek incremental capital-markets funding – whether it be debt or equity.

We did not require the funding to achieve our sustainability goals for our recent ESG risk-weighted loan. Rather, the loan is an appropriate size and links to our purpose statement and who we are as a company as well as the measures we are taking to improve our ESG reporting.

BYRNE A few financing products are suitable for AGL and those are ones not linked to use of proceeds – at least for on-balance-sheet funding. Off-balance-sheet investments could be funded with a use-of-proceeds product.

Renewable energy is a good example of this. We have a 20 per cent equity stake in an Australian renewables fund set up with QIC and The Future Fund. It is a decision point for every project whether we have it on balance sheet, sell it into the fund or do an entirely different form of financing altogether. Given the nature of the company, for on-balance-sheet funding it is important that we are proactive in linking funding to ESG performance.

While this is nice to do today, it isn’t necessary. The hope is that, in future, banks will require the type of thinking from all borrowers and customers that makes them comfortable that where their money is going respects the challenges coming and is prudent in managing and mitigating climate-change risks.

MOMDJIAN The potential scale of financing based on holistic scoring of sustainability performance is massive. We are an issuer that is not currently suited to use-of-proceeds sustainable finance given we lack a critical mass of green investment to fund or refinance. The emergence of SLLs provides an opportunity to engage in this space.

This very much seems to be the case for many other issuers that have reached out to us following our SLL transaction. Aside from the flexibility of holistic scoring, it is worth noting that products such as SLLs offer other unique benefits such as the potential for a direct and transparent pricing discount or penalty.

We will, however, continue to investigate ways in which we can issue use-of-proceeds-based sustainable funding, especially in the context of our balance sheet being primarily comprised of long-dated bonds. Interestingly, more than one in five of the questions asked on our most recent bond investor update through Europe were related to ESG or ESG funding. It is a clear area of increasing interest among our investor base.

TAPLEY Having access to sustainable finance through capital markets has become very important for ANZ as an issuer. We issued our first green bond in 2015 and followed this in early 2018 with a UN Sustainable Development Goal (SDG)-linked bond.

When our treasury team is on a debt-investor roadshow, we now find there are questions around what we are using funding for to shift the nature of our balance sheet. There is a push from the investor base; there is a pull from the client base as well. The connectivity between the funding we raise in capital markets, with an ESG overlay, and how we deliver to our client base is very important.

“I think it would be helpful to have consistency between peers and to have industries working towards common goals. Companies can take different approaches but they should also be comparable by investors.”

Zaunmayr The link between sustainability and long-term shareholder value seems clear. But does the same apply on the debt side? Does it fundamentally matter if the debt market comes along for the ride?

TAPLEY Debt is about 80-90 per cent of the capital stack. We cannot achieve a sustainable economy globally without debt being central to the picture.

MOMDJIAN Whether or not the debt market comes along for the ride, the ability under an SLL potentially to benefit from a pricing discount or suffer a pricing penalty uniquely drives behavioural change. It does so by incentivising issuers to accelerate the delivery of sustainability initiatives and formulate new ones, while ensuring sustainability performance does not deteriorate. This behavioural change has brought sustainability to the fore across our leadership team.

CHAPPELL This is why, over time and when the market gets to the point where most companies are doing it, it is those that don’t that will be penalised – in pricing and in the availability of capital.

INNES A lot of corporates are exploring areas of sustainability that they hadn’t previously. This can be in the supply chain, waste or many other things.

TAPLEY I agree, and I think we will find that consumers will continue rapidly to educate corporates. There has been a lot of research and writing recently on millennials and generation Z coming to acquire most of the world’s wealth within the next 5-15 years. This is driving significant change at the real economy level because consumers are becoming more discerning on where their food and clothes come from, how waste is managed and where their superannuation is managed.

NECESSARY GROWTH

Zaunmayr Europe is clearly leading the way in sustainable finance. But even in Europe there is a sense that the market needs to grow exponentially if it is to have any hope of achieving global goals outlined by the Paris Agreement and the SDGs. Central to this growth will have to be progress beyond use of proceeds as the basis for financing. How clearly does this message resonate with Australian issuers and investors?

GREENWOOD Market leadership is certainly coming from Europe. The process of developing our ESG loan started in June last year when our board went to Europe to meet some of our major partners there, such as Danone and DSM. They told us about their recent ESG risk-weighted loans and this sparked our interest. They showed us how the product worked and the incremental pricing benefit they received based on their risk weighting improving.

Once back in New Zealand we enquired with ANZ about these loans and it began guiding us through the process. ANZ was impressed with our recently announced sustainability goals and thought we would be a good candidate for this type of financing.

I would also like to stress that our loan was not an SLL. It is an ESG risk-weighted loan so it has focus across environmental, social and governance reporting requirements.

CHAPPELL The emergence of SLLs has generated more interest than we have ever seen in the loan market. Sustainability is on the mind of almost every corporate we speak to. The SLL angle has created a huge amount of interest because companies can demonstrate their sustainability objectives without being so focused on the use-of-proceeds angle. We expect this to be the fastest-growing part of the market, by a large margin, over the next few years.

SLLs are suitable for any company that has a sustainability agenda, whereas a green loan or a use-of-proceeds type of financing is not necessarily suitable for everyone.

GREENWOOD This is the beauty of the format. With a green bond the expectation is that the funds be used specifically for capital expenditure with an environmental focus. The ESG risk-weighted loan is part of our standard revolver financing. It is far more effective for a business such as Synlait.

WARD SLLs should also bring along ‘browner’ companies because they offer an incentive to transform. This is where more impact can be achieved than with companies that would have assets to go into a green bond – those that are already on the journey. Funding for transition is going to have a lot more impact than a green bond would.

BYRNE It is important to have the incentive of a lower cost of borrowing. But at the same time there needs to be a penalty as well. Otherwise a company can just stand still and nothing changes.

CHAPPELL A number of CFOs we have spoken to on SLLs have said the product is of interest because it provides an incentive to bring the whole organisation along on the sustainability journey.

When it comes to capital-investment decisions, the CFO can demonstrate the cost of capital being directly affected by increasing sustainability. This incentive is of benefit to all users of capital within an organisation.

MOMDJIAN It is important to understand that sustainability extends beyond investment. Many issuers, including ourselves, have been sitting on the sidelines for many years while green bonds and loans were flourishing. Equally, sustainability performance improvement can be incremental, diverse, and delivered over time by any issuer with an ESG focus – even those transitioning from being large carbon emitters.

While improvements must be meaningful, they need not be delivered via one or two blockbuster initiatives and need not only focus on any one of ‘E’, ‘S’ or ‘G’. Governance is relevant to all issuers, is critical to corporate sustainability and is a great area to focus on. But this element is at times overlooked, sitting in the shadows of more topical and tangible environmental or social initiatives.

“The SLL should also bring along ‘browner’ companies because they offer an incentive to transform. This is where more impact can be achieved than with companies that would have assets to go into a green bond.”

Zaunmayr We should get a view from lenders on the value of offering a sustainability incentive in loan facilities. But first let’s hear about investors’ overall ESG drivers.

MCNAMARA We are a nonbank lender and an alternative asset manager. We are the largest nonbank corporate lender in Australia with around A$5 billion (US$3.4 billion) in assets under management.

ESG is very important at the wholesale end of our investor base. These clients don’t give us targets but they do give us a clear indication of what they like and don’t like. We are required to complete ESG surveys every year for many investors. At this stage their ESG targets are largely broad-based.

We don’t have any explicit exclusions although there are some areas – such as arms, pornography and gaming – that we don’t look at. We have heard from a number of investors that they have restrictions on investing in any carbon-related industries.

As a lender it is very difficult to separate ESG from credit risk. A company or a borrower that has a bad ESG track record will undoubtedly end up being a bad credit risk. This is the way we look at it and it is a big part of our investment process. We have declined a number of transactions because of ESG-related issues with a borrower.

WARD ESG is certainly growing as a risk-return driver. As fixed-income investors we have always thought a lot about governance risk. There have been idiosyncratic issues where an environmental or social issue has affected the price of a bond. BHP Billiton and Volkswagen come to mind.

We have had a range of exclusions for a number of years, similar to what Graham McNamara outlined. We also have a range of clients that are at different stages of their ESG journeys. Some clients are very advanced, particularly those in the insurance industry.

The range of exclusions and reporting requirements we are being asked to do is interesting and aligns with a lot of the work we are doing in thinking about risk in portfolios. For instance, some clients won’t fund energy companies that don’t have a transition plan which meets the company’s national Paris Agreement commitments.

We are fixed-income, predominantly vanilla-bond investors so our central interest is in default risk. In other words, we are downside risk managers. If we get some upside that is great, but this is not equity. We look for issues beyond financial metrics that could affect the price of bonds or the ability of an organisation to repay.

TONKIN The more transparent a borrower becomes the more it affects investor appetite. This brings increasing complexity and linkage. A lot of companies are looking at ethical supply chains. This is an interesting feature of the market which will continue to morph.

Banks will need to become quite clear in what they do and don’t do as well as why they are doing it – and be clear on how they are influencing transition and why.

WARD Blanket exclusions are dangerous, though. Some investment boards won’t invest in coal, but this opens up a discussion as to whether you can invest in bank equity if the bank is making revenue from funding coal. Going down this route does not support any sort of transition.

The role of transition bonds

Corporate balance sheets are more suited to funding based on sustainability scoring than the use-of-proceeds approach taken by green, social and sustainability (GSS) bonds. In theory, there is no reason why financing supported by the principles of sustainability-linked loans (SLLs) could not also be available in bond format.

ZAUNMAYR Could SLL principles be applied to the bond market, perhaps as the basis for the issuance of transition bonds?

TAPLEY It has now happened offshore, with a transaction by ENEL. This is an Italian energy distributor with operations across Europe. It issued a bond referencing its emissions-reduction target. If this is not met by 2021, the coupon the company pays to investors steps up by 25 basis points.

ENEL has not been able to get investors to agree on a coupon step down. But I think this will come in time. It is no different from the risk-rating pricing grid we sometimes see in bond transactions.

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LOAN INCENTIVES

Craig Can SLLs go some way to reversing the problem of exclusion by broadening the scope of sustainability investing?

CHAPPELL SLLs demonstrate and promote companies that are engaging in active transition processes. This can only be positive. The Loan Market Association and Asia-Pacific Loan Market Association have come out with strict guidelines on what is required, and the first point is that the company must have a strong ESG strategy.

The second piece is that SLL goals need to be linked to the company’s ESG strategy. It can’t just be business as usual for the company, either. The targets need to make a meaningful change.

These two factors show that what the market is trying to achieve with SLLs means companies that are focused on improving sustainability can be rewarded. If they are not focused on improving ESG performance an SLL is not the right product.

TAPLEY This is a very important development because it is a way that banks can steward change. Equity investors have been doing this for a long time. Meanwhile, banks have been heavily invested in the specific use-of-proceeds piece. This is great and will continue to have a place and serve a purpose in catalysing investment. But SLLs offer a way that banks can actively participate with their customers, through their balance sheets, in making change happen.

GREENWOOD It is a fantastic initiative from the banks. They are offering incentivised pricing based on improved risk weighting. This means they are giving away funding cost, even though at this point there is no benefit for them in their capital-adequacy requirements. Right now, it is actually costing them money.

Banks are telling me that, with capital becoming scarcer, they want to apply their capital to companies they think will be there for the long term and with lower risk. It is a strong, positive signal from the banks that they will reward companies that are focusing on the right things over the long term. It is up to companies now to get on the bus and commit to it.

TONKIN ANZ is a relationship bank. We have an established set of customers with which we have detailed account-planning sessions to work through issues. Increasingly, the focus around ESG in businesses is becoming essential to these account plans. It is not a tick-the-box compliance exercise, it is central to the strategy of ANZ. Our head of environmental sustainability sits within group strategy so the role is core to strategic direction.

Like Marayka Ward, I think exclusions were initially set as a blunt object to drive change away. Now, the market is developing towards a nuanced approach which means there is less chance of poor outcomes. We would prefer to work with our long-term customers to assist them to transition, even if they are in a carbon-intensive industry, rather than divest.

BYRNE I think the onus is also on borrowers to help the banks help them. We should recognise that banks have their own internal mandates and challenges, in some cases, to justify why they continue to support a borrower. It is on the borrower to show what steps it is taking towards transitioning or ‘greening’ itself so the bank can make the case internally.

“Debt is about 80-90 per cent of the capital stack. We cannot achieve a sustainable economy globally without debt being central to the picture.”

Zaunmayr Does a margin step up or down based on sustainability performance mitigate any pricing disadvantage for lenders?

CHAPPELL I take a long-term view on the way this market is developing. A key reason the bank is potentially providing this discount is because we want to work with borrowers on improving their sustainability risk and performance.

In the long term, as ESG risks become fully integrated into our credit-risk calculations, I can see this changing. It will potentially become the norm for companies to have a pricing penalty if they do not perform. The discount would likely become the standard market price with only the potential for a penalty for poor performance rather than a benefit.

MOMDJIAN I agree. In addition, the acknowledgement and possibility of ESG transition will ensure ‘browner’ companies will still have adequate access to capital at a reasonable price over the long term.

TAPLEY On the Synlait transaction in New Zealand, I was asked about the risk of ANZ taking a hit on its pricing. My response was that we do not see this as a risk. We view it as the right outcome because we want Synlait to continue pushing the boundaries on what is already a strong sustainability agenda.

This is good for farmers, good for consumers and good for the community. It is also very good for ANZ when we look at the long-term risks on our balance sheet. It is a much bigger picture than the immediate transaction.

WARD Hopefully, sustainability performance improves borrowers’ profitability and therefore gives them – and us – more of a ratings cushion. If a borrower gets an upgrade it will be better positioned in our portfolio.

TAPLEY We are talking about mainstreaming sustainability. The concept of SLLs will go a long way to pushing this right to the fore. We will also see this in the bond market.

“The ESG risk-weighted loan is part of our standard revolver financing. It is far more effective for a business such as Synlait.”

MARKET EVOLUTION

Zaunmayr As the market evolves from use-of-proceeds to borrower-level sustainability scoring, one would have to assume the process of agreeing on performance parameters, and assessing and reporting performance will become more complex. Is this a fair assessment?

BYRNE It depends how prepared you are and how much you are already doing. It should not be any more onerous to provide reporting on metrics if you have a robust sustainability-reporting regime in place.

It also depends on how a loan is structured. Sustainability metrics can obviously be tailored to the reporting you are already doing. This can be managed and should not be an excuse not to do an SLL.

MOMDJIAN The fact we have a standalone sustainability function and publish a highly comprehensive sustainability report annually made it much easier to establish our SLL and agree associated targets. Furthermore, engaging Sustainalytics as an independent third party somewhat outsources assessment and allows us to focus on delivering sustainability-performance-improving initiatives over administering our loan.

TAPLEY We receive a lot of investor interest in how we demonstrate the impact of our bond programmes in particular. This is a hot topic and is a particular stream within ASFI.

WARD We have had MSCI ESG scores in our portfolio for a while now. We have added onto this, though. We calculate carbon emissions across all our portfolios down to the security level. With insurance clients, this is a very real risk they need to consider.

At the portfolio level, we are also going through every company we have bought bonds in to look at what they are doing through their supply chains and within their businesses.

I sat on the UN Principles for Responsible Investment sovereign working group and we put out a paper in September on how to include sovereign ESG analysis into a bond portfolio.

We now model, through our portfolios, the domiciles of the issuers we provide bond funding to. This could identify country risk relating to water stress or governance issues, for instance. We can then set up our portfolios to account for these risks. Our portfolios are predominantly Australian dollars and under Australian law. But a lot of the issuers operate under the law of a foreign country so we need to consider sovereign risk.

We use a materiality process to map sustainability risks across industries. We do a lot of impact reporting to understand the use of proceeds from GSS bonds and can look at things like specifically how much carbon an investment has saved.

We also align our reporting with the SDGs, looking at what companies are saying they have aligned to. A lot of impact reporting is driving discussion with clients and some of it is a collaboration with clients as well.

MCNAMARA We are not quite at this level yet – we currently do not do any ESG scoring. We do provide detailed asset reporting to our investors, though. At this stage we only lend to Australian borrowers, which I think is easier than having to look at the operations of offshore borrowers from an ESG-monitoring perspective.

In the last 2-3 years we have gone from virtually no-one requiring ESG reporting to the bulk of our institutional investors requiring us to complete regular reporting on our ESG policies and processes. The onus is on us to report and make sure we know what our borrowers are doing to comply with accepted ESG standards.

WARD Sometimes it appears still to be a box-ticking exercise. But even this is a good starting point and we expect quick progress. Frontier Asset Consultants recently released research, based on a century of climate modelling for superannuation funds, which concludes that climate risk could decrease returns by 25 basis points per year. When the market starts to quantify impact in this way it can also start to target transition in a much better way.

“In the last 2-3 years we have gone from virtually no-one requiring ESG reporting to the bulk of our institutional investors requiring us to complete regular reporting on our ESG policies and processes.”

Zaunmayr Do we need a single framework for determining and measuring sustainability goals and outcomes that borrowers and investors are comfortable with?

TONKIN ASFI has effectively brought together a coalition of the willing across the banking, insurance and investor community as well as notable not-for-profit and industry groups. It is very valuable to have all the key players in the market to provide a common direction.

This does not mean we need identical thinking. What we need is to put the different parts of the puzzle together. This should help get the market at least heading in the right direction with a weight of views that could also influence political thinking in this country, or at least some of the policy settings around the way regulators are looking at issues. The Australian Prudential Regulation Authority and the Australian Securities and Investments Commission are observers in ASFI, which is quite powerful.

TAPLEY I think we need to be very careful with definition. There has been very good work going on in the EU and in Canada, but we need an Australian harmonisation of a broad concept of sustainability. What is sustainable and green in Australia is not necessarily green in a place like Germany, for example.

One of the focuses in a working group within ASFI is looking at what we can take from other jurisdictions and how we can apply it in Australia. There is also quite a high degree of trans-Tasman conversation going on. But, again, the Australian and New Zealand economies are quite different in composition.

MOMDJIAN It is important that frameworks serve to guide issuers and set a standard acceptable to lenders. The proliferation of taxonomies and reporting regimes – in addition to any introduction of overly prescriptive frameworks – will likely stifle further growth in sustainable finance, especially among issuers trying to identify a practical way in which they can get involved.

While frameworks and associated harmonisation are welcome, it is important to acknowledge that sustainability is different from company to company, sector to sector, and region to region.

Craig How useful is the EU taxonomy in Australia?

TAPLEY It is very useful but it needs to be made to work in an Australian context. We have to look at our economic context including the resources that make our wealth. We also need to be aware of the legal and regulatory context we are operating in. We need to understand the whole landscape and figure out what will work best here to enable the transition and mobilisation of capital.

“Banks have their own internal mandates and challenges, in some cases, to justify why they continue to support a borrower. It is on the borrower to show what steps it is taking towards transitioning or ‘greening’ itself so the bank can make the case internally.”

Next steps in Australian market development

Market participants agree that global sustainable-finance markets need exponential growth if they are to achieve ambitious – but critical – environmental goals. Australia is facing the same race against time.

CRAIG How do market participants see the Australian sustainable-finance market evolving over the next 3-5 years? In particular, do they think we will have seen issuance of transition bonds?

BYRNE I think so. At that point Europe will be at the tipping point that Gavin Chappell spoke about, where capital allocation costs have changed for lenders in the space because the lower risk of companies taking environmental, social and governance concerns seriously has been proven.

I think there will have been transition bonds in Australia as well, given the transition that needs to occur in Australia and the potential benefit these instruments could bring.

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Zaunmayr Would sector-specific frameworks be helpful?

INNES I think it would be helpful to have consistency between peers and to have industries working towards common goals. Companies can take different approaches but they should also be comparable by investors.

MOMDJIAN Sector-specific frameworks may indeed be helpful for issuers and even lenders in encouraging some degree of consistency. But flexibility is key and anything that restricts target setting is counterproductive.

TAPLEY I think it is important, though, for businesses to have sustainability goals that are relevant to their strategies. There needs to be alignment. For AGL, this would be around carbon-emissions reduction and changing the power mix whereas for Coles it is about the supply chain and waste.

All parts of the economy need to have a broad approach to ESG. But the approach at business level needs to be refined and appropriate for that company.

INNES I agree that the goals need to be meaningful for the individual business. The focus needs to be on things a business can actually achieve. If you are being graded on something that is not important to you there is no motivation, whereas if you can display a plan to achieve something that is key to the business strategy there will be much greater support.

BYRNE For this exact reason, we decided not to link it to a Sustainalytics rating when we looked at doing our SLL. This is a generic rating across ‘E’, ‘S’ and ‘G’ and it ends up producing a diluted impact.

For a company such as AGL, there are two meaningful triggers which we think are more effective to be measured by: emissions reduction and the renewable-energy mix. It is not the same for all companies. But if you are a company with real impact in certain areas that is where the focus should be.

“We are an issuer that is not currently suited to use-of-proceeds sustainable finance given we lack a critical mass of green investment to fund or refinance. The emergence of SLLs provided the opportunity we were looking for to engage in this space.”

MOMDJIAN Our SLL incorporated an ESG risk rating despite us having several flagship initiatives, including achieving carbon neutrality by 2025. The choice of a holistic performance measure opens us up to delivering a diverse range of meaningful sustainability performance improvements, over and above a few predetermined initiatives, across the entire ESG spectrum.

TONKIN It is about achieving individuality within a common purpose. Every company is different and there needs to be adaptability and flexibility. But the industries and the country in a broader sense need a more focused pathway.

WARD As an investor we like the Task Force on Climate-related Financial Disclosures (TCFD) and we report according to it. However, we are agnostic on what framework a company chooses to report under, as long as it is producing transparency and data.

Having too strict a framework for reporting can become very quantitative. If you become too prescriptive, you move away from what a company is trying to achieve and what is important to it. There is the danger that it takes some investors down the path of just looking at companies within a certain box rather than taking a broader view.

BYRNE It is important for investors not to be too prescriptive because it can be quite onerous for a company to report under five or six different regimes. For us, TCFD was actually quite welcome because a number of investors in our group look at it. It provides a common denominator.

However, if we are not reporting on the exact regime that an investor wants it can be quite difficult because the definitions vary significantly between frameworks.

WARD We have found that ESG ratings do not really tell us much. We still need to go into the detail behind the report and understand what the company is doing, often via direct engagement. No single reporting framework is going to get around this.

MCNAMARA Generally what investors want to see is progress against a measure, rather than against a standard target that everyone has. Which measure is used does not matter that much, and obviously one-size-fits-all does not work. We want to see what is being measured, how it is being measured and what progress is being made.

BYRNE It is the same when we look at our banking group. We look at our lenders through the same lens of their ESG policies. It is not so much about whether they are compliant or align with our policies, it is more about the deltas and how they have changed over the years. We will then have a conversation with those that are not changing about why, because there will be alarm bells.

TAPLEY We do similar qualitative exercises when it comes to deciding what transactions we might partner on. We have strong client-selection processes around what we do in sustainable finance. But equally we take a very close look at who we are arranging transactions with.

BYRNE Integrity and authenticity are very important. The feedback we had on our SLL was that authenticity was there due to the fact it is more difficult for AGL to get a margin benefit than to receive a penalty. Lenders had not seen the stick bigger than the carrot before and were quite surprised by our willingness around this.

TAPLEY AGL’s stick went even further than pricing, to incorporate terms as well. This is where I think we need to direct the market, not just in SLLs but also in the green-loan product.

“In more than 20 years of working in this market there have only been two occasions where borrowers have been this active in approaching us because they want to know how the market is developing. The first was during the events of the financial crisis and the second has been with the advent of SLLs.”

Craig If SLLs are the next step in the evolution of the market, how widespread is the potential application?

CHAPPELL Capacity for SLLs is huge: effectively the whole market could comfortably move towards using SLLs if business objectives were appropriate for the product. In more than 20 years of working in this market there have only been two occasions where borrowers have been this active in approaching us because they want to know how the market is developing. The first was during the events of the financial crisis and the second has been with the advent of SLLs.

This is happening because sustainability is becoming a focus all the way to board level. Finance teams are being asked questions and they need to be properly informed on developments in the space. The interest is significant.

Investors are also becoming more focused. Anyone that lends on a vanilla loan can lend on an SLL basis. Going forward there will likely be more liquidity in this product than there is in vanilla lines.

TONKIN We are not quite there yet, but I am looking forward to the day when I can change the name of the division from loans and specialised finance to sustainable and conservation finance, with all the categories falling underneath it, to be really focused on a common goal.