Innovation outscores volume in New Zealand labelled issuance

Global supranational, sovereign and agency (SSA) issuers are the most common source of supply of New Zealand green, social and sustainability (GSS) bonds, supplemented by deal flow from local government-sector names. New Zealand has fewer active semi-government issuers than Australia but its sovereign entered the green-bond market before the Australian Commonwealth.

In the credit sector, New Zealand has a cohort of corporate borrowers with a natural affinity for GSS funding – several of which now have ‘all green’ issuance programmes. But, like in Australia, the sustainability-linked bond (SLB) product flickered and faded, while bank issuance is nonexistent.

Surveying progress over the first seven years of local labelled product, Dean Spicer, head of sustainable finance, New Zealand at ANZ in Wellington, tells KangaNews he thought the market would embrace green bonds and the asset class would take off – but it “didn’t quite happen like that”. Nonetheless, he and other local intermediaries remain optimistic about the future of sustainable bond financing.

The early signs were good. Following the IFC deal, Mike Faville, BNZ’s Auckland-based head of debt capital markets, said: “We continue to talk to a number of issuers, both SSAs and domestic institutions, about green bonds – but it is a process. Nine months ago, many of our domestic issuers were still in the skeptics’ camp. Now they are asking questions about the nitty gritty of how to issue. We take this as a very positive sign.”

The feedback IFC received in the wake of its transaction also suggested there was latent demand for labelled product, according to Flora Chao, senior funding officer at IFC – at the time, based in Singapore. “We met with several investors in Auckland and it’s clear there is a very keen interest in green bonds,” she said.

In the years following, global SSA issuers demonstrated their commitment to the GSS format by returning regularly to access the Kauri market. By mid-2024, KangaNews data show that global SSAs have contributed almost exactly half the total of NZ$62.4 billion of labelled bonds issued in New Zealand.

New Zealand’s greatest contribution to GSS evolution has arguably come from local names, however – and the domestic government sector has been the main trailblazer. Auckland Council was the first local green-bond issuer, with a NZ$200 million deal priced in June 2018.

Kāinga Ora – Homes and Communities then picked up the baton via its financing entity, Housing New Zealand. Having priced its first sustainability bond in March 2019, later the same year the issuer pioneered the approach of bringing not just all its future issuance but also all its outstanding bonds under a labelled programme – its “wellbeing bonds” sustainability framework.

Other major breakthroughs for the sector include New Zealand Debt Management (NZDM)’s November 2022 debut in the green-bond market, with a NZ$3 billion transaction that remains comfortably the largest GSS deal in New Zealand, and New Zealand Local Government Funding Agency (LGFA)’s sustainable financing bond framework.

The latter bases financing off an innovative blended pool of use of proceeds and sustainability-linked loans to local councils. While the nature of the underlying assets mean the programme cannot fully align with International Capital Market Association principles, it has been well received by investors since LGFA first used it to print a NZ$1.1 billion deal in April 2023.

Mark Butcher, chief executive at LGFA in Wellington, said after the debut: “We had a lot more interest in the transaction and the framework compared with previous syndications – I was surprised by the level of investor interest, in fact. This included some accounts we had not previously engaged with, that wanted to understand the framework better – partly because it is novel from a global perspective but also because they have existing New Zealand dollar investments but no LGFA exposure.”

The New Zealand dollar high-grade sustainable debt market has not been without challenges, however. For international SSAs, the main one is market conditions. In 2023, the Reserve Bank of New Zealand effectively put the Kauri market on hold as it conducted its liquidity policy review, which temporarily threatened the status of Kauri bonds as liquid assets for banks.

While this situation appeared to have been resolved late in the year, narrow demand and unfavourable pricing conditions have suppressed Kauri activity of all kinds in 2024. When Kauri issuers can come to market they are still happy to offer GSS bonds: NZ$3.3 billion of the NZ$5.6 billion of Kauri supply since the start of last year carries a GSS label.

In the domestic market, the biggest headwind for labelled supply was the government’s November 2022 decision to fold Kāinga Ora’s funding into the NZDM programme. Not only does this remove a programmatic borrower from the market but it also did not immediately add to sovereign GSS capacity: Kāinga Ora’s assets are primarily aligned with social issuance, but NZDM has a green-bond programme.

Labelled issuance adoption has been mixed in the credit sector. There is little to report in the financial institution space: the New Zealand dollar market has yet to price a bank GSS bond or securitisation deal, although Westpac New Zealand priced a €500 million (US$538 million) green bond in June 2019.

The corporate sector has been more fruitful, despite an early regulatory challenge. The Financial Markets Authority (FMA) determined that labelled bonds were effectively a different class of instrument from vanilla issuance and therefore issuers could not use the same-class exemption approach. Same-class exemption significantly streamlines repeat issuers’ process of bringing deals that are available to the local retail investor base, which is traditionally important to corporate transactions.

However, the New Zealand corporate sector features a number of issuers for which going an extra mile was a step worth taking. Contact Energy was the first issuer to go fully green in its debt financing, in 2017. Joanna Silver, head of sustainable finance at Westpac in Auckland, says: “Contact broke the mould when it issued in green format without a product disclosure statement – which it was able to do by reclassifying all its vanilla bonds as green bonds.”

More recently – in 2022 – Spark Finance issued New Zealand’s first, and so far only, SLB. Just as in other markets, there was a lot of initial hope about the potential for SLBs to provide access to labelled finance with cost incentives to support transition. But local and global headwinds have stalled growth.

SLB issuers in New Zealand face the same regulatory market access challenges as the GSS market, in the form of the same-class exemption barrier. Meanwhile, Silver says, corporate attention has tended to be focused on the new mandatory climate risk reporting regime, leaving little bandwidth for developing the targets and reporting framework to support SLB issuance.

More broadly, the recent loss of faith in SLBs in Europe also “rippled across to New Zealand shores”, Silver continues. Despite heightened scrutiny of targets and corporate ambition, however, she also says the asset class may have turned a corner. “SLBs have a significant role to play in helping businesses transition,” Silver insists.

Issuers that have addressed the labelled market have generally been welcomed by the New Zealand dollar investor base. “Most of the time, issuing in labelled format gives borrowers greater diversity in their books,” Spicer says.

In a poll ANZ conducted, Spicer adds, the results suggest: “The three top drivers for issuers of GSS instruments are alignment with sustainability objectives, better access to capital and investor diversification. I believe these three things hold true today and will carry the market.”

On the other hand, growth in demand from specialist funds appears to have fallen at least somewhat short of expectations. “Issuers want diversification and to access pools of capital they couldn’t previously tap into,” says Silver. “If they’re accessing the same pool of capital, there is not the same impetus to issue a labelled bond in the New Zealand dollar market.”

This makes a sustainable bond label a “nice to have” rather than a necessity in New Zealand, Silver continues. “It would be great to move to a point where we have retail and institutional demand driving the creation of darker green funds, ESG [environmental, social and governance]-only investment vehicles and, subsequently, supply,” she comments.

The market continues to develop, however. Spicer points out that, historically, investors would mainly focus on the use-of-proceeds aspect when looking at a labelled deal. By contrast, they now challenge issuers that cannot clearly articulate their sustainability strategy, or are not moving quickly enough, regardless of what product or capital instrument is on offer.