For the past few years, we've been told that the global economic outlook was fragile, that the bull market would come to an end, that house prices were overdue for a correction.
But no-one talked about a pandemic.
Many of us recall the financial turmoil following the 1987 crash and the Global Financial Crisis, however neither event brought closed borders, community lockdowns or novel concepts like social distancing. Today's global pandemic has an entirely different feel to it and with no end in sight it's likely to have a far longer tail.
Many of our customers have been forced to contemplate a complete change in their financial outlook in the space of days or weeks.
Rarely have families, communities and businesses felt such a loss of control and certainty.
But now there is an opportunity to look past the pandemic and imagine what sort of society we want to live in on the other side.
We already know that greenhouse gas emissions need to be significantly reduced in order to keep global warming to less than 1.5C above pre-industrial levels, and that we need to alleviate pressure on natural resources.
The capital markets are a potentially powerful tool to help us get there, and banks have a duty to consider how we can use our role as major providers of capital constructively.
The post-Covid allocation of capital has already begun.
Governments around the world are spending up, to prop up businesses and keep workers in jobs, and also to fund infrastructure projects that will create jobs and commercial opportunities in the near future.
Here in New Zealand, net core Crown debt has increased by $19 billion to $78.7b in the past three months, and the Reserve Bank has committed to the purchase of up to $60b in Government bonds in the next year.
Businesses that can will be looking at the cheap cost of borrowing and be eyeing up new capital spending where they see an opportunity.
It's important we take a strategic approach as a country about where public and private funds will be invested.
We are borrowing from future generations and we owe it to them to get it right... we can't expect a further injection of funds down the track to address climate issues and the renewal of ecosystems.
As Governor-General Dame Patsy Reddy recently pointed out in a speech to the Aotearoa Circle, "we are borrowing from future generations and we owe it to them to get it right".
She noted that "we can't expect a further injection of funds down the track to address climate issues and the renewal of ecosystems".
In other words, the well may soon be dry.
This is our chance as a country to embark on a sustainable transformation.
As a starting point, it will pay to look at behavioural changes that emerged from the pandemic and ask ourselves whether proposed investments are designed for a pre-Covid world, or the way we're set to live tomorrow.
If fewer people are commuting can we take a raincheck on the widening of a road for more vehicle lanes, and put that money into digital capability that will allow people to work remotely more easily?
Auckland's water woes are another area where authorities have the chance to prioritise sustainability as they work out how to increase the resilience of the network for future generations.
Oxford University released a study in May which concluded that green projects create more jobs, deliver higher short-term returns per dollar spend and lead to increased long-term cost savings, by comparison with traditional fiscal stimulus.
The study cited investing in renewable energy and retrofitting buildings to be more energy efficient as two recommended green projects for the UK, while rural support spending was highly ranked in developing countries.
Here in New Zealand, we can put ourselves on a path to a more sustainable and climate-resilient future by investing strategically in areas like renewable energy generation, clean transport infrastructure and sustainable food production.
So, how can banks help?
One important way is by looking at our operations and making smart capital expenditure decisions.
For example, we recently committed to transitioning 100 per cent of our Westpac NZ car fleet to electric vehicles by 2025 — one small thing we can do to reduce emissions.
However, the much bigger opportunity lies in leveraging our role as a financer to help organisations embarking on green or social projects connect with like-minded investors.
A year ago, Westpac NZ became the first New Zealand bank to raise funding through the issuance of a green bond.
The 5-year green bond raised €500 million from European investors, to support the funding of climate change solutions.
The transaction attracted €1.1 billion of interest, across 83 investors, and 20 countries.
Proceeds from the bond were used to finance or re-finance sustainable New Zealand projects, such as renewable energy, low carbon commercial property, clean transport and waste reduction initiatives.
Banks can also use their balance sheet to finance sustainability outcomes by being innovative.
In January, we entered into a $50 million, four-year sustainability-linked loan facility with Contact Energy, the first such loan issued by Westpac NZ and one of the first of its kind in New Zealand.
Contact Energy will receive a discounted interest rate on the loan if it meets ambitious targets linked to its environmental, social and governance (ESG) rating, as determined by an independent ratings agency.
Conversely, Contact will pay higher interest costs if it doesn't meet the rating targets agreed with Westpac.
The incentive targets align with continual improvement in Contact Energy's ESG performance, including assessment of its climate strategy, electricity generation mix, corporate governance and stakeholder engagement.
A sustainability-linked loan is a relatively new form of sustainable finance, but the market is expanding rapidly, growing from US$5b in 2017 to US$122b in 2019.
Now is the time to examine how these types of funding arrangements can be brought even further into the mainstream.
Another opportunity lies in social bonds, which require that funds raised must be used to finance specific assets or projects that address social challenges.
Examples of use of proceeds include education, healthcare, affordable housing and generating jobs. Social bonds are not as common as green bonds but are increasing in popularity and a number have been issued globally to help finance recovery from the pandemic.
Global capital markets have felt the impact of Covid-19 and New Zealand was no exception.
However, the New Zealand capital markets have stabilised with a number of high-grade issuers having accessed the market over the past three months.
Conditions are conducive for domestic primary supply. We expect more bond issues in the next 6 months and hope as many as possible are tied to projects that will deliver a sustainable transformation.
The dust is far from settling on this pandemic.
Let's take the chance now to embrace the societal paradigm shift, and make bold decisions, so that we're headed in the right direction when the air clears.
- Simon Power is Westpac NZ General Manager of Commercial, Corporate and Institutional Banking.