Kāinga Ora is New Zealand's largest issuer of sustainability bonds.
Chief financial officer Matthew Needham says the Crown agency is proud to own that title.
It has been well received by overseas investors, particularly those in Australia and Europe.
"That makes us clearly big advocates for it (sustainability) but interestingly enough, the issue of sustainable finance also helps drive our organisation as well."
When Kāinga Ora emerged from Housing New Zealand, it was targeting the Homestar 5 standard.
Needham says sustainability finance has helped Kāinga Ora bring forward plans to move up to the Homestar 6 standard by six to 12 months. He says now there's a lot of talk about shooting for Homestar 7 and 8 in conversations about new developments that are starting to be built. The agency's target for the Greys Avenue development in central Auckland is a minimum of Homestar 7.
Alec Tang, Kāinga Ora director of sustainability, says Homestar is great because it deals with one of the challenges of green finance. Investors want to know how a project is going, they need to see proof it is performing. Homestar gives investors that verification.
"There are still aspects that are hard to measure such as how people's everyday wellbeing improves as a result of living in a warm, dry house," says Tang. Over time we'll see less people with, say, asthma because of better housing, but proving the link will be a challenge.
He emphasises the Crown agency is market-leading, but it's also helping to transform the market which is "another big thing". "Both the housing market itself, but also the finance sector as well and how we're driving that transformation is a really important part of the Kāinga Ora outcomes or mandates that have been set for us."
Homestar gives the home construction industry the guidelines it needs to make more informed choices about materials to use and practices to follow.
Says Needham: "There are two aspects to the efficiency, one is the actual cost of construction, of the homes, and the efficiency of actually building them, but secondly, the people who live in our homes are some of the most disadvantaged people in New Zealand and have lower levels of income.
"We don't want people to have to make the choice between having to heat the house or put food on the table, so the lower the cost of the house is to run, then that means there's more money, obviously, to feed the family, and obviously that has better outcomes we well for people."
Kāinga Ora made its entry into sustainable financing following in the footsteps of Auckland Council which issued its first green bond in June 2018. Needham says the Crown agency was encouraged to follow suit. "We thought a lot about green bonds and particularly construction," he says. "Construction is one of the largest components to landfill of any activity. Some 60 per cent of all waste going to landfill is from construction. And then there are the trucks going to and from sites.
"We thought that while the end product may well be classed as green, but the actual construction process doesn't appear to be very green."
Then we thought more broadly about the ESG (environmental, social, and governance) characteristics.
We decided that we've got environmental impacts, we've got real social benefits, in terms of building sustainable housing, or better housing for New Zealanders so that we would go very much via the sustainability route.
"I'm really glad that we did because it makes enormous sense from our organisation's mission, vision and objectives perspective. We issued our sustainability framework in March 2019 and then updated it again in September 2019, and linked it to the Government's Wellbeing agenda."
To date Kāinga Ora has issued bonds worth $5.3 billion split 89:11 between domestic and offshore issuers. Banks make up about half of the investors and fund managers make up around 45 per cent.
The remaining five per cent is from brokers, insurers and traders. Needham says he expects the number of offshore investors to increase over time as the agency issues more debt.
Tang, who earlier led Auckland Council's chief sustainability office, says the approach will help Kāinga Ora as it transitions to a more climate-resilient future. "It also helps concentrate minds in an organisation where many people are focused on day-to-day decision making".
Building to better standards
Sustainability is demonstrated in Kāinga Ora's massive home building programme. The agency currently has 2620 homes under construction. A further 3310 homes are at the consent and planning stage.
From last June, Kāinga Ora committed to building all new homes to the Homestar 6 standard. This means they are well above normal building code standards.
Homestar is an independent rating system run by the New Zealand Green Building Council. It measures the health, efficiency and sustainability of new homes.
Homes with a higher rating are easier to keep warm, healthier to live in and more environmentally friendly.
Because they use less energy, they save tenants money. Use of rainwater, water and wastewater management are all taken into account.
Building materials are greener and more sustainable and builders generate less waste during construction.
There's a focus on emissions, not only in the buildings themselves, but also in the building supply chain. The Homestar standard even includes future proofing so that people will be able to charge electric vehicles.
Higher numbers are better. It's a points based system and a series of benchmarks.
This compares with typical new developments built to the Homestar 4 standard.
Benefits of borrowing in private debt capital markets
Deloitte identified six key benefits of the Crown agency borrowing in private debt capital markets instead of through the New Zealand Debt Management Office (DMO).
● Stewardship — Kāinga Ora is a large asset holder and has responsibilities for maintaining assets over the whole of their lives. Direct borrowing from capital markets allows the agency to act in the best interest of its portfolio rather than the annual budget process. Credit agency monitoring and investor due diligence brings a level of oversight that would be hard to replicate with government monitoring agencies.
● Funding certainty — allows Kāinga Ora to enter longer-term arrangements with suppliers. This means better pricing for both parties.
● Improved long-term planning — certainty means Kāinga Ora can sequence projects in the way to produce the best outcomes.
● Greater agility and flexibility — means Kāinga Ora can take advantage of market conditions to raise debt when required and to match its capital programme, rather than be locked into certain issuance periods. This, in turn, increases the commercial discipline of the organisation. However, The Crown still has control over Kāinga Ora through its ownership and monitoring.
● Transparency — New Zealand Debt Management Office debt is priced with a risk margin — however, this is a proxy. The price determined by investors is true market risk assessment.
● Broader capital market benefits — overseas investors have limited opportunity to invest in high grade New Zealand assets. This is especially the case for ESG investments. New Zealand Debt Management doesn't have an ESG offering. the Kāinga Ora issuance give overseas investors a New Zealand opportunity they might not otherwise have.
• The Deloitte report was commissioned by Kāinga Ora.
● Kāinga Ora is a sponsor partner for the Herald's 2021 Sustainable Business report.