Sustainable Finance: Billions to be bold

Louise Tong. Photo / Supplied

Lockdown was challenging, it also brought a stillness to our lives. In that moment we reimagined our futures and what a better life might look like.

The thinking was that we have the opportunity to recalibrate our economic focus and build a highly productive, low emissions economy that cares for the environment and increases the wellbeing of all New Zealanders.

Rather than some faraway nirvana, this is a journey we are already on. What was moving slowly has been accelerated by Covid-19 and further collective action, driven by the financial and business sector, has the potential to make real change for the benefit of future generations.

Sustainability in all its guises is good business and should be a core aspect of business strategy.

Thanks to greater understanding, science and disclosure, and the development of markets enabling prices for "externalities" such as carbon, our ability to analyse the value and cost of business operations is more sophisticated and holistic.

In today's extraordinarily low interest rate environment, the present value of our current actions and future impacts is much greater than it once was. Helpfully, this supports a shift from a "today trumps tomorrow" mindset and raises the importance of addressing tragedy on the horizon now, rather than later.

The finance sector is looking not only at the opportunities and incentives involved in a transition to a low carbon world, but equally focusing on the associated climate risks.

These risks are already clear and translate to tangible financial impacts, alongside the associated social disruption that would result.

To take one example, NIWA estimated in 2019 that $12.5 billion of New Zealand property is already exposed to extreme coastal flooding in New Zealand, and that each 10cm of sea level rise puts another $2.4b of assets at risk.

Given impacts like this, many large organisations are gearing up (as we are) to report in alignment with the Taskforce for Climate-related Financial Disclosure framework, providing stakeholders with information on business vulnerabilities to climate change. This enables stakeholders to assess climate change financial risks that are disclosed in a way that is transparent, comparable and supports informed capital allocation by investors.

Equally, financial institutions are looking to incentivise greater sustainability ambition and action at the same time as investors and lenders broaden their view of risk-adjusted returns to incorporate ESG factors.

An October 2020 Bank of England report showed a dramatic increase in investment funds with above-average sustainability ratings that amount to $4.6 trillion in assets globally. Accordingly, investment portfolios and strategies around the world are being overhauled to match, buoyed by the performance of companies with strong ESG credentials through the first half of this year.

Together with New Zealand business, we want to accelerate the transition through the way we finance and have set an ambitious target of $10b in sustainable finance lending by 2025.

We will do this by increasing our lending to companies and organisations with strong ESG credentials, supporting our customers to have greater positive social and environmental impacts through the use of sustainability linked loans, as well as the issuance of green, social and sustainable bonds.

Green bond issuance has worked in New Zealand, we've experienced it first-hand, most notably supporting Auckland Council's 30-year $500 million green bond. Proceeds from this bond are committed to projects which will benefit the environment such as low carbon transport, energy efficient buildings and improved waste management.

Likewise, Mercury's inaugural green bond, which raised NZ$200m towards projects and assets with climate benefits, such as renewable energy projects, energy efficiency and electrification and clean transportation, is another proof point for the appetite for "green" in New Zealand's debt capital markets.

The positive market response to these instruments gives us confidence to increase our efforts not only to deliver more issuance to support positive environmental outcomes, but also to use financial tools to improve social outcomes for New Zealanders.

Housing New Zealand Limited, a subsidiary of Kāinga Ora-Homes and Communities, has been actively issuing bonds under their Wellbeing framework. The proceeds from these bonds are used to fund the development and retrofit for social housing stock, supporting increased energy efficiency in housing designs and construction and a reduction in emissions and waste.

The bonds themselves allow long-term financing and appeal to asset managers with long term investment horizons. But the critical impact is the creation of greener, more sustainable communities and access to a warm, dry healthy home for the more vulnerable in society.

We are also focused on playing a role to shape the market to support a more sustainable, inclusive future that supports the regeneration of the natural environment. We have been proud to work with The Aotearoa Circle's Sustainable Finance Forum, setting the roadmap for the NZ financial sector, in collaboration with Government, iwi and our communities, to work together to build a more sustainable economy.

Alongside the Ministry for Primary Industries and other financial organisations, BNZ is also participating in the Sustainable Agriculture Forum Initiative (SAFI). The aim of SAFI is to develop a definition for sustainable agriculture for use by the finance sector in considering agriculture lending and investment.

Agriculture is core to New Zealand's prosperity and its long-term success relies on both prudent financial and environmental management, as highlighted in our recent Shift Happens report.

Let's not forget New Zealand's SMEs either. We have a goal of enabling at least half our SME customers to measure their emissions, set reduction targets and report on their climate change impacts by 2025.

As with many sustainable endeavours, this requires collective action and we have partnered with the Sustainable Business Network, Meridian Energy, Waka Kotahi, EECA, NZ trade and Enterprise and business.govt.nz to develop a digital toolbox to support SMEs to take climate action.

The opportunity to create a better future is right in front of us. We have the tools, the capital and the determination, and we must all collectively lead the change.

● Louise Tong is GM Sustainable Development at BNZ.