As sustainable finance moves into the mainstream it is fostering innovation and encouraging demand for high-quality reporting and more uniform standards.
Investors are increasingly asking for more data to show that their investments are genuinely supporting sustainable initiatives and responsible investment, as well as offering a good financial return.
That is in turn requiring market participants to increase their sustainable finance product knowledge and enhance their research capabilities.
Those trends were clearly displayed in the fourth annual poll conducted by ANZ and FinanceAsia.
The survey polled 110 debt issuers and investors across the Asia Pacific region, including New Zealand.
• 87 per cent of all respondents said they consider Green, Social and Sustainability (GSS) issues within their organisations and integrate them into their strategy. That is a steady rise on findings from the same poll in previous years.
• Issuers are mostly driven by the desire to align with their corporate sustainability objectives.
• Institutional investors are particularly interested in the energy transition theme, including renewables and energy efficiency. There is interest in health and aged care, green buildings, education, affordable housing, impact investments, access to essential services and financial literacy.
• More investors now say the performance of GSS instruments was greater than expected during recent market volatility — leading to them placing a higher perceived value on GSS debt.
The poll asked how Covid-19 had impacted respondents' focus on sustainable finance and GSS instruments going forward.
Of the respondents, 32 per cent said the pandemic had resulted in a greater focus, while 44 per cent said there had been no change, with sustainable finance continuing to be a focus for them.
The survey also found a growing number of investment firms are using their own in-house research capability, to complement third-party research.
Of investors surveyed this year, 51 per cent say they now have dedicated in-house Environmental, Social, Governance (ESG) or Socially Responsible Investment (SRI) research capabilities, compared to 31 per cent in 2019 and 44 per cent last year.
Part of this is being driven by demand from clients, who increasingly want to understand how their money is being managed and be reassured it is being done in an ethical and responsible way.
This in turn is increasing the requirements for increased transparency from debt-issuers, which we view as a positive for the sector.
The demand for greater transparency is working hand in hand with increased innovation to drive demand for sustainable finance.
Green bonds have been the most common method of raising money in the green finance world, financing projects such as renewable energy, sustainable resource use, conservation, clean transportation and adaptation to climate change.
But we are seeing new innovations such as sustainability linked loans.
A recent example is ANZ New Zealand's partnership with Kathmandu Holdings Limited to establish a syndicated A$100 million sustainability-linked loan (SLL) facility, the largest syndicated SLL in the New Zealand market. ANZ acted as joint arranger and sustainability co-ordinator for the transaction.
A sustainability-linked loan commits a borrower to deliver key environmental, social and/or governance (ESG) targets. The borrowing costs under the facility are adjusted up or down depending on the performance of the borrower to deliver against predetermined sustainability targets.
Kathmandu's SLL will be measured against a reduction in its greenhouse gas emissions, B Corp certification, and improving the transparency, wellbeing and labour conditions for workers in its supply chain.
We believe this is another important step in the evolution and acceptance of sustainable lending in New Zealand. Increasingly, shareholders and stakeholders want to see a commitment to sustainability, and this is reflected in the growth of this type of lending.
Since 2017 ANZ has acted as Sustainability Co-ordinator and/or Joint Lead Manager on 23 transactions totalling over NZ$2.4 billion.
We recognise that for sustainable finance to become the mainstream it must have the confidence of everyone — issuers, investors and all stakeholders.
That's why we are excited and proud to be a founding partner of the newly established Aotearoa Circle Centre for Sustainable Finance, alongside the other major banks.
The initiative will focus on 11 key recommendations to achieve a sustainable finance system.
These include more education and training around sustainable finance, working closely with public and private sector leaders, and improving data collection and reporting.
We hope initiatives like this will help encourage the development of more uniform standards and reporting within the sector. This should in turn help develop greater public understanding and confidence.
Sustainable finance is moving into the mainstream. But the ultimate goal is still ahead — for the financial system to deliver positive environmental and social impact, and financial inclusion for all.
• Dean Spicer is Head of Sustainable Finance, ANZ NZ
• ANZ is a sponsor partner for the Sustainable Business report.