Sustainable Business: Record year predicted for sustainable bonds

Dean Spicer. Photo / Spicer

ANZ Bank's head of sustainable finance Dean Spicer says 2022 looks as if it will be a record year for sustainable bonds in New Zealand and across the Asia-Pacific region.

He says it's likely to be a global phenomenon as well.

"It's being driven by a wider group of stakeholders now having a much clear understanding of why sustainable finance is important."

The fifth annual ANZ-Finance Asia Poll of 100 investors and borrowers in Asia-Pacific shows the appetite for sustainable finance is accelerating.

Green, Social and Sustainability (GSS) bond markets continue to contribute to the growth in demand. Ratings agency Moody's is forecasting US$1.35 trillion of issuance in 2022, following growth in 2021 of 64 per cent to just shy of US$1t.

Spicer says the poll data show increasing numbers of investors are developing an ESG (environmental, social and governance) investment policy and now use third party ESG ratings to implement their strategy.

Renewable energy is the most prevalent sector followed by energy efficiency and sustainable transport for the two-thirds of respondents already investing in Green, Social, Sustainability bonds and loans. And borrowers' motivation to issue in a sustainable format is mainly driven by the ability to align to their sustainability objectives, followed by greater investor diversification and improved access to capital.

Records are also being broken in New Zealand. There has been NZ$18.885 billion of New Zealand dollar GSS bond issuance since 2014. Last year was a record year with NZ$3.75b and 2022 is on track to beat that. By June 17 over NZ$2.3b had already been issued.

Spicer says New Zealand lagged global peers until recently, but our markets have since caught up and now mirrors what we see overseas.

He says sustainable finance markets have seen an increasing focus on social equity, diversity and inclusion. "The Genesis Youth Trust issued an innovative social impact bond focusing on combining constructive services to promote positive lifestyle changes for at-risk youth and their families," Spicer says.

"Kāinga Ora is New Zealand's largest issuer of sustainability ('wellbeing') bonds.

"The proceeds fund sustainably constructed affordable housing and supporting socio-economic advancement and empowerment."

New Zealand's sustainable finance market is still dominated by bond issuance. Yet Spicer says it has seen a significant acceleration in product development as more and more companies look to align sustainability targets with funding.

The emergence of sustainability-linked loans and bonds follows an international trend.

Says Spicer: "With a sustainability-linked loan, the interest changes depending on whether the borrower reaches ambitious sustainability goals.

"ANZ wrote the first sustainability linked loan in New Zealand for Synlait, where the dairy producer would pay a lower rate of interest on its four-year $50 million loan if could hit environmental, social and governance targets. If the company failed to meet the targets the loan would incur a higher rate of interest.

"Spark Finance issued New Zealand's first sustainability linked bond earlier this year in March. Auckland Council was the first issuer of a green bond in New Zealand in 2018.
"More recently it became the first local government body in New Zealand to complete a sustainability linked loan and a sustainability linked derivative."

Spicer says sustainable finance is not limited to large companies: "There is increasing focus on the supply chain as consumers seek out the providence of the products and services they consume. Smaller businesses that are part of the supply chain are coming under greater scrutiny as a result.

"Modern slavery legislation, already introduced in many countries, is currently under consultation in New Zealand and will increase the focus on working conditions within supply chains."

Beyond supply chain transparency, many consumers are looking at ways to improve sustainability in their day-to-day lives. The increased interest in Plastic Free July and the rise of circular fashion are two examples. People also worry about rising energy and fuel costs.

"Research shows many of the changes people want to make are connected to their homes. Our data shows eight in 10 people have plans or would like to improve the energy efficiency of their homes and for those who wouldn't, most said cost was the main barrier," explains Spicer.

"To support retail customers wanting to increase the energy efficiency of their home, we recently launched the ANZ Good Energy Home Loan. This allows customers to borrow up to $80,000 at a three-year fixed rate of 1 per cent per annum and can be used to upgrade homes with things like solar panels, heating and insulation, double glazing, ventilation systems and rainwater tanks. The loan can be used for electric or hybrid vehicles and EV chargers".

Like many other countries, New Zealand faces two challenges at the same time.

While climate change is now front and centre thanks to extreme weather events both here and overseas, there is an equally important and related biodiversity crisis. New Zealand's economic success depends on its natural environment. It gives us a competitive advantage in two key industries: tourism and primary production.

Spicer says sustainable finance is moving rapidly to use data, technology and knowhow to deliver increasingly sophisticated solutions that deliver meaningful impact. "Nature-based solutions are crucial to addressing biodiversity loss and providing resilience to climate related impacts."

He cites the example of the Wairarapa pāua fishery which has been impacted by climate change and sedimentation. The project pulls together recent advances in marine science with the Māori pāua quota owners, sustainable finance and pāua fishery management.

Another example is the wheatbelt project in West Australia which seeks to integrate native reforestation and carbon farming with the production of biomass for renewable biofuels.

ANZ partnered with INPEX, one of Japan's major energy companies and long-term investor in Australia, for the initial prefeasibility study.

More recently Qantas has joined the project.

It aims to provide landowners with a way of benefiting from more drought-resilient cash crops, diversify farm incomes and reduce the volatility of crop yields and cashflows.

It will also provide direct exposure to the rapidly growing carbon and renewable biofuels markets while supporting scalability.