SDG the next step forward for Australian – and European – sustainable debt

On 14 February, ANZ Banking Group (ANZ) issued the first-ever bond from an Australian bank to be tied to the UN Sustainable Development Goals (SDGs), the first such deal ever in the euro market and just the second from any bank globally. KangaNews spoke to deal sources about the demand drivers, the bank’s own motivations and the shape of market evolution.

The deal itself is a five-year, fixed-rate bond with volume of €750 million (US$938.2 million) that priced off a book of €1.25 billion. The leads were ANZ, Barclays, BNP Paribas and HSBC. According to an issuer statement, proceeds will “support projects offering broad social, economic and environmental benefits including funding for hospitals, schools, green buildings, clean water, public transport systems or renewable power plants”.

INTERVIEWEES

Mostyn Kau Head of Group Funding ANZ
Alex Machliss Director, Debt Capital Markets BNP PARIBAS

Katharine Tapley Head of Sustainable Finance ANZ
Paul White Co-Head of Capital Markets ANZ

INTERVIEWER

Laurence Davison Managing Editor KANGANEWS

SDG EMERGENCE

Davison Europe is leading the way when it comes to evolution of a sustainable-debt market, but even in Europe the SDG bond is a relatively new development. What is the backdrop to the product and what attracted ANZ as an issuer?

WHITE There has been tremendous growth in the sustainable bond market over the past 24 months, with more than US$130 billion equivalent issued last year. Most of the issuance has been seen in euros, although deal flow from Chinese issuers has increased dramatically in the past year.

The SDG market was really born last year. The World Bank has issued a couple of SDG bonds – one in euros and one in US dollars – while HSBC issued the first bond from the private sector in November last year. This was a US$1 billion, 2023 maturity transaction. The ANZ deal is the first in euros from a private-sector financial institution.

From our perspective the decision was initially led more by investor demand. The European market was very attractive given the breadth of investors that would look at this product. We had more than 100 investors in the book and a very broad spectrum of distribution by investor type [see chart on right].

MACHLISS Although the scale of green-bond-specific funds in Europe is growing exponentially, the larger pool is still with investors looking to target a high proportion of SRI assets under management more generally – whether that be through SRI-specific funds and mandates or ESG overlays embedded within their investment processes.

Source: ANZ 16 February 2018

In this context, the SDGs are becoming an important focus and metric for European investors. In fact, even when they are looking specifically at green bonds, investors increasingly want to understand which SDGs apply to the transaction and its underlying assets. So an SDG-themed bond issue is always likely to attract strong interest.

KAU From a treasury perspective, we are generally agnostic to the currency that we issue in with the most important consideration being achieving a diversified investor base. We hadn’t issued a euro-denominated, five-year, fixed rate transaction for 10 years so the opportunity to do so in a currency that is a natural home for this kind of product was attractive.

We had the opportunity to do this at a cost-effective level – we issued at a very small premium to US or Australian dollars, which is very rare in Europe and part of the reason we hadn’t issued for 10 years.

MACHLISS We believe the use of the SDG framework assisted ANZ in achieving the tightest fixed-rate, senior print by an Australian bank in the euro market since 2007.

“The SDG market was really born last year. The World Bank has issued a couple of SDG while HSBC issued the first bond from the private sector in November last year. The ANZ deal is the first in euros from a private-sector financial institution.”

Davison Given the growth of the sustainable market in Europe, is it possible that at some stage all the euro-denominated issuance by a bank like ANZ could come in some type of sustainable format?

KAU It is feasible in the years to come, though it is probably some way down the track.

But we are almost getting to the point where euro investors are looking at deals on a negative-screen basis rather than a positive one. By which I mean, rather than companies demonstrating to investors that they have assets invested in categories that allow them to issue an SDG or green bond, perhaps investors won’t invest at all if these companies are materially investing in activities not aligned to social or environmental sustainability.

I think it will take time to complete this transition because balance sheets can’t be completely restructured immediately. Investors are becoming more aware of this, though, so there will be a greater onus on us to clean up balance sheets.

Davison Was the deal targeted specifically at SRI-mandated investors and how prevalent were these in the final book?

KAU It’s impossible to say precisely how much of a book goes to ‘dark green’ or ‘light green’ accounts. Around 50 per cent of the bonds were allocated to what we would consider SRI investors or to a SRI-aligned funds within investment firms, and these accounts were certainly prioritised.

While there was a fair degree of overlap between this deal and any euro transaction, what’s especially encouraging is that there was much less fast money participation. The deal was perceived as a strategic trade and therefore more of a buy-and-hold option. Fast money isn’t necessarily attracted to such a trade, especially at relatively tight spreads, so the quality of the book therefore appeared better.

WHITE It was a very strong, quality book with more than 100 investors, predominantly in Europe [see chart on right]. Chinese New Year hampered Asian participation to some extent. Particularly pleasing, to Mostyn Kau’s point about ANZ not being in the senior fixed-rate market in Europe for some time, was the participation out of Benelux, Germany, Austria, France and the UK as well as Scandinavia. €1.2 billion of real-money demand is a very strong book.

Source: ANZ 16 February 2018

PRODUCT DEVELOPMENT

Davison Aligning issuance to the SDGs seems to give flexibility to offer product that is specifically green, specifically social or includes elements of both. Could SDG bonds eventually supersede products like green and social bonds?

KAU It is an interesting question that will obviously play out over time. There are investors that still specifically like green bonds even though our SDG framework includes a lot of environmental aspects, so they could still buy an SDG-bond to invest in environmental or green projects.

In fact there were some green-mandated investors that declined to buy our SDG bond. It was only a very small subset, but they did say it was because it wasn’t specifically a green bond. At the moment we think both formats can co-exist, but I expect as this space develops into the future one will come to be the prevalent type – or indeed it may morph into something else.

MACHLISS The issue is that green-bond funds have a very specific focus on carbon dioxide reduction and won’t want to invest in a product where the assets aren’t exclusively targeted at carbon dioxide. The challenge is that even if an issuer’s SDG bond exclusively comprises carbon dioxide-targeting assets its issuance framework will likely allow substitution of other SDG assets, which won’t necessarily have the same focus. Investors will look at the framework as well as the transaction.

“Rather than companies demonstrating to investors that they have assets invested in categories that allow them to issue an SDG or green bond, perhaps investors won’t invest at all if these companies are materially investing in activities not aligned to social or environmental sustainability.”

TAPLEY The investor side is definitely a part of it, but the borrower side is also relevant. The driver is the pressure coming onto the real economy, in particular from things like the Task Force for Climate-Related Financial Disclosure and the Paris Agreement, as well as consumer-driven sentiment around the environment and social issues. Corporations are rethinking their balance sheets and making strategic decisions about where they are going to invest for future sustainability – not only of their businesses but also the longer-term social and environmental viability of the economy.

My view is that there will be a universe of SRI and ESG instruments. Green, SDG, sustainability and social bonds will all play a role. We will see a number of products evolve, with the underlying driver being a fundamental focus on what drives impact. We are only at the start of this.

Davison What is the asset base of the ANZ SDG bond?

TAPLEY We took the SDGs and mapped them against a certain part of our balance sheet - project finance, mostly, but we also looked at corporate lending in tertiary education, aged care and health care.

We then identified that nine of the 17 SDGs were the best fit with the nature of our business, our organisational purpose and our corporate sustainability framework.

For example, we have aged-care and healthcare facilities under SDG 3, “good health and wellbeing”. We have loans, project finance and project-related corporate lending under SDG 4, “quality education”. Under SDG 7, “affordable and clean energy”, we have wind farms. This is a portfolio that is significantly bigger, at €925 million equivalent, than the bond we issued.

It’s worth highlighting that this is distinct from our green-bond framework, where our issuance is a separate asset base focused solely on carbon-reduction activities in renewable energy and low-carbon buildings.

“My view is that there will be a universe of SRI and ESG instruments. Green, SDG, sustainability and social bonds will all play a role. We will see a number of products evolve, with the underlying driver being a fundamental focus on what drives impact.”

Davison It seems at face value that the process of issuing an SDG bond is similar to a green bond when it comes to certification and third-party assessment. Is this accurate?

TAPLEY Yes, the architecture we applied and the framework we put in place is largely the same as what we have seen in the green bond market. We are using the International Capital Market Association (ICMA) Green- and Social-Bond Principles, which together ICMA refers to as the Sustainability Bond Guidelines.

The four key pillars of those principles are the use of proceeds, project selection, management of proceeds, and reporting and disclosure.

Our framework is based on these and it is essentially the same framework as our green-bond programme. We have rules around how we use proceeds, how we manage them and how we report – we will be reporting on use of proceeds on a semi-annual basis. We also intend to do impact reporting annually, which is another key theme emerging out of investor interest.

Overlaying all this is an opinion from Sustainalytics. This is about our framework and its alignment to the sustainability bond guidelines. We also have our asset portfolio assured by EY. This confirms the assets meet the criteria in the framework and that they align to the Sustainability Bond Guidelines.

Davison At some stage ANZ clearly had to make a positive call to go ahead and issue what is a fairly new product. How did the issuer develop sufficient confidence to do so?

TAPLEY An important factor that drove us to doing this transaction was ANZ’s own agenda. This is the bank’s purpose, to shape a world where people and communities thrive, together with our corporate sustainability framework.

Also, in October 2015, we set a A$10 billion target to fund and facilitate low-carbon and environmental sustainability activities by 2020. We increased this last year, to A$15 billion, because of how well we were progressing. Crucially, we are also a signatory to Australia’s CEO statement of support for the SDGs, and a member of the UN Global Compact Network of Australia. All these things point to our business agenda.

What’s key is that it is all very much linked back to the SDGs, around things like environmental wellbeing, environmental sustainability, financial inclusion and access to housing. Issuing bonds in this space as part of our funding plans aligns with what we stand for as an organisation.

It also goes back to the point I made before, that this market isn’t being driven just by investors, it is being driven by the real economy.

“The SDGs are becoming an important focus and metric for European investors. In fact, even when they are looking specifically at green bonds, investors increasingly want to understand which SDGs apply to the transaction and its underlying assets.”