Green & Growing: Australia’s Climate Finance Is Leading The Way

Two years since the Paris Agreement aimed at reducing global carbon emissions, macroeconomic trends are driving investors and issuers towards a low-carbon future. Since the deal was struck, 196 countries have joined – amid continued growth in market understanding, acceptance and a focus on sustainability.

The finance sector is playing its part. Green bond issuance was only US$11 billion globally in 2013 yet it topped US$150 billion last year. ANZ expects further growth in issuance in 2018 – potentially topping $US250 billion globally. Europe accounts for 60 per cent of issuance and Asia just 25 per cent. So far, proceeds have been primarily applied to projects in renewable energy, green buildings and transport.

In Australia, the green bond market in 2017 totalled A$3 billion over 11 transactions, up from $900 million over four transactions in 2016.

Outlook

Growth is being driven by the emergence of frameworks giving participants (both investors and issuers) confidence in the integrity of the market. Developments such as the recommendations of the Task Force on Climate-Related Financial Disclosure and the EU’s High-Level Expert Group on Sustainable Finance, the Social Bond Principles which sit alongside the Green Bond Principles, and increasing reliance on the UN’s Sustainable Development Goals (“SDGs”) as an impact measurement mechanism, have been crucial.

ANZ is expecting banks and other financial market players to continue to innovate, encouraged by the environmental and broader sustainability imperative and the demands of stakeholders: the community, customers, staff, investors and regulators.

Some of the recent innovations following on from the success of the green bond market include:

Social Bond Principles:

Bonds underpinned by the Social Bond Principles are earmarked to finance or refinance endeavours that address societal challenges like low cost housing and access to healthcare and education. The SDGs are often used as an additional framework by which to define these endeavours.

ANZ was recently only the second non-public sector issuer globally of an SDG bond.

Under ANZ’s SDG Bond, proceeds will be used to finance or refinance loan assets and expenditure which directly promote nine of the 17 SDGs including good health and wellbeing, quality education, affordable clean energy and sustainable cities and communities.

The oversubscribed, upscaled, €750 million, five-year bond demonstrates ANZ’s commitment to the UN SDGs and feeds investor demand for positive social, as well as environmental impact. It was the first SDG bond launched in euros and was completed despite a volatile market backdrop.

 

Green Loans:

Following the recent launch of the Green Loan Principles by the Loan Markets Association, ANZ expects “Green Loans” to gain currency. Green Loans finance or refinance assets linked to a wide range of “green” activities like high efficiency buildings or renewable power generation.

In the Australian market ANZ expects such loans will be vetted by an independent third party against a recognised framework governing use of proceeds, selection process, management of proceeds and reporting.

Motivations of borrowers will vary but are likely to include ethical and/or economic reasons. Stakeholders (investors, customers, employees) are likely to encourage this sort of activity while harder-edged economic analysis will appreciate improved resilience in a corporate’s borrowing platform – this is due to the heavy demand for “green” investments, both from banks and the bond market (a green loan program can pave the way for bond issuance).

 

‘Green’ Price Links:

While only discernible in certain markets right now, (notably the project finance market for renewables) ANZ believes the weight of bank and investor demand will translate in future to a divergence in pricing between “green” and “non-green” assets generally.

Although not yet evident in the Australian market, they are starting to see green incentives built in to pricing scales in the offshore syndicated loan market. At this stage the benefits are modest in return for meeting a defined hurdle.

Regulators will be key to the spread of broad and material pricing benefits for “green” endeavours. However, given regulators tend to have an appropriately conservative nature, ANZ sees that there may emerge regulatory capital penalties for “brown” loans rather than a reward for “green” loans. Time will tell.

As allocators of capital, banks and other financial markets participants, including regulators, have a responsibility to encourage innovation to meet the sustainability imperative. Traditional financial products will no-doubt meet the bulk of financial need as we transition to a more sustainable global economy, but borrowers and issuers can expect continued innovation to complement traditional financial products.

Connect with ANZ at the Summit!

And one of the leading financiers in Australia’s transition to a zero-carbon future, ANZ is a proud supporter of the 2018 Emissions Reduction Summit, and will be discussing the financial opportunities in this space throughout the Summit. Catch up with the ANZ team throughout the sessions, and at the ANZ cafe stall. See you there!

 

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