Chapman Tripp finance partner Luke Ford. Photo / Supplied
New Zealand is behind the pack on sustainable finance — including green and social bonds, sustainability-linked loans, impact investment, and responsible or ethical investment. We have watched from a distance as other countries have innovated ahead of us, and set a cracking pace.
Environmental Finance Data reports that sustainable bond issues rose from US$326 billion in 2019 to US$606b in 2020, to US$1.03 trillion in 2021 and that they are set to reach US$1.5t this year.
Sustainable bond issuance here over the same three years has hovered at around $2-3b, which is not insignificant in a country our size but means we finished 2021 further behind in world rankings than we were in 2017 when we issued our first green bonds.
But the position is not as static as this figure would suggest.
There are glimmers of hope that we may yet join the global leaders — or at least narrow the gap.
Sustainability-linked bank loans, where interest rates are pegged to the achievement of ambitious environmental, social and governance (ESG) targets, have become more widely used among New Zealand corporates and are now beginning to rival the bond in popularity. They make a natural fit with the ongoing relationship banks have with people and businesses across the economy.
The first sustainability-linked loan was entered in 2019, but last year the product took off with 11 new borrowers and at least $3.3b committed — more than has ever been issued in sustainable bonds in any year in New Zealand.
This year has gotten off to a slower start, but there are a number of reasons to suggest that demand for sustainable financing options will pick up sharply in the near future across the spectrum of the public sector, retail investors, communities, venture capital and corporates.
The Government has a range of direct initiatives, in place or in prospect — including NZ Green Investment Finance, the Crown Responsible Investment Framework and this year's Emissions Reduction Plan, which acknowledges finance as an important catalyst for lowering emissions and increasing climate resilience and includes the objective of mobilising public-private capital towards climate objectives.
The Sovereign Green Bond programme, expected later this year, will provide a shot in the arm to sustainable bond volumes while providing benchmark pricing, liquidity and a "canary effect" for local issuers that should make New Zealand a more intriguing prospect for international sustainable finance investors.
Then there is the multibillion-dollar spend anticipated in the New Zealand Infrastructure Strategy 2022 to 2052. As much of this investment will be dedicated to decarbonising the economy, with a greater emphasis on debt funding, we expect a mix of sustainable bonds and loans to be natural capital raising choices.
In the private sector also there is cause for optimism about the market's immediate growth potential.
From Values to Riches 2022, a report by the Responsible Investment Association of Australasia (RIAA) and Mindful Money, shows continuing strong support for ethical investment among the New Zealand public — a trend we expect will strengthen as the physical effects of climate change intensify, and as the millennials and subsequent generations become more influential in the investment marketplace.
And the latest RIAA annual survey has the proportion of fund managers that have achieved Responsible Investor Leader status almost doubling — which accords with Chapman Tripp's experience that the industry is investing more effort in its ESG (environment, social and governance) policies.
Targeted "impact investment" — being investment made with the intention to generate positive, measurable social and environmental impacts alongside a financial return — also continues to grow. Typically these investments are made at the community or local level, and in New Zealand, they are often Māori-led or informed by te ao Māori values.
As Chapman Tripp hoa rangapū (partner) Te Aopare Dewes describes in our recent report, Investing for impact: Sustainable finance in New Zealand, the general trends toward impact investing and ESG principles dovetail neatly with and are reinforced in the Aotearoa context by, te ao Māori.
A Māori approach to investing necessarily incorporates a focus on social and environmental outcomes as well as financial — multiple "bottom lines". Iwi may consider whether a particular investment includes opportunities for job creation for its members, evaluate the likely impact of an investment on the environment and on the welfare of their whānua, and take a long-term view.
ESG is also about to get a big kick-along in the corporate sector through the introduction of mandatory climate-related disclosure (a world-first) for listed issuers and large financial/insurance institutions, beginning in fiscal years on or after 1 January 2023.
The reporting requirements are still being developed by XRB but already it is clear that they will be rigorous and expensive to implement. Our message is that to treat them as a compliance exercise will be to miss an opportunity as — properly implemented — they will provide a useful business resilience tool that can be deployed to manage a range of business risks.
So where to from here? One reason New Zealand has lagged behind comparable economies is that we have lacked urgency — so have dawdled while others have dashed.
But the effect of climate change and Covid-19, in combination with inflation pressures after years of relative price stability, has put us — and the rest of the world — at a crossroads.
We know the future will be different, we just don't yet know how different and in what ways. We can be sure, however, that there will be a much bigger role for sustainable finance.
It would be a mistake to just settle back and see what happens. The active response is needed. This may include:
• Commoditising and right-sizing sustainable finance products, so that the majority of our market can access them and participate. Our economy is highly represented by small and medium enterprises (SMEs). General accessibility is vital.
• Taking a simple and understandable approach to labels and disclosure. Market understanding and comparability are important to confident investor participation.
• Bringing impact investment from the few to the many, including by connecting investment opportunities to traditional distribution networks.
• Taking a clear and consistent path to regulation, focusing on building up participation rather than punishing mistakes.
Whether these elements will come together is yet to be seen. But we have a clear pathway laid out ahead of us. We just need to get a move on.
• Luke Ford is a Chapman Tripp finance partner specialising in sustainable finance, markets and regulation. Chapman Tripp's recent latest publication Investing for Impact — Trends & Insights 2022 features articles across a number of focus areas for sustainable finance in New Zealand. It can be viewed at