FINANCE AS A FORCE FOR GOOD? THE GROWTH OF SUSTAINABLE FINANCE IN ASIA

STELLA SARIS Head of Sustainable Finance - International ANZ

The sustainable finance market is growing rapidly, with innovative products being developed to support companies transition to a lower carbon economy. Stella shares her thoughts on how finance is changing for good.

Last year was the year of climate activism, and there is plenty to come in 2020. From Greta Thunberg crowd sourcing her boat trip across the Atlantic to attend the United Nations Climate Change Conference or COP 25, to climate protestors declaring a ‘Planetwide Rebellion’, and over 60 nations adopting ‘net-zero’ carbon emissions targets, the protection of the planet has never been higher on the public agenda.

Climate concern is shifting consumer behaviors and preferences. Research from Centre for Sustainable Business found that sales of sustainability-marketed products grew 5.6 times faster than conventionally-marketed products in 2019. In the world of finance, consumers are increasingly interested in the impact of their savings, investments and financial products.

Through shareholder action such as Climate Action 100+, to the divestment movement, customers are looking for products that align with their values. Polling from the UK based ‘Good Money Week’ found that for the first time ever, respondents are more likely to be ‘equally concerned about whether my investments make money or make a positive difference’, compared to the historic precedent of being only concerned about financial return. We expect this trend to translate to Asia.

Companies are making pledges to reduce emissions and high carbon emitters are implementing de-carbonisation strategies through a combination of new technologies, e.g. renewable energy and through

10 natural capital. Banks are increasingly focused on sustainable returns, and ANZ is one of the signatories to the Principles for Responsible Banking, representing more than USD47 trillion in assets.

To meet the growth in demand, ANZ has a dedicated Sustainable Finance team in International based in Singapore. Led by Stella Saris Chow, Head of Sustainable Finance - International, and supported by Stephanie Vallance, Director, Sustainable Finance, International, the team works closely with ANZ’s Debt Capital Markets and Loan Syndications teams and the bank’s customers to originate and structure sustainable finance products.

There is a growing concern about the physical risks of climate change and how these translate to financial risks. Banks are increasingly having active discussions on companies’ transition plans to reduce their carbon footprint, and this transition trend is driving investment in new technologies and development of financial products which reward companies for being green or improving sustainability.

MORE THAN GREEN BONDS Three years ago, sustainable finance was dominated by green bonds, which consisted of 95% of the sustainable finance market and very much driven by the European markets. Green bonds and loans are backed by eligible green assets, a ‘use of proceeds’ approach. Now sustainable finance is more diverse, both geographically and by product. Asia Pacific is approximately a third of the total sustainable finance market with products comprising green loans, sustainability linked loans and sustainable supply chain financing. Singapore is increasingly a hub for sustainable finance in South East Asia.

Companies’ initial concerns on issuing sustainable finance is often related to the additional time or cost required. There is a level of additional due diligence and structuring required for sustainable finance. However, these costs can be managed and there are mechanisms in place to encourage more issuance and reduce costs. Central banks like the Monetary Authority of Singapore are encouraging the sustainable finance market through the Sustainable Bond Grant Scheme by providing incentives to issuers by offsetting eligible due diligence costs (which include second party opinion or assurance reports).

In the last three years, sustainability linked loans have been increasing in frequency. ANZ expects to see significant volume growth in this product across Asia in 2020. Currently the highest growing sustainable finance product, Sustainability Linked Loans are appealing because

proceeds of the loan can be used for general corporate purposes, making it more accessible to a greater number of companies. This type of loan also ties loan pricing to achieving sustainability related key performance indicators, and rewards outperformance with a reduction in loan margin.

This year is the year many companies will publicly state their sustainability objectives for the next 10 years. These stretch targets will be transformational with innovation in technology and operations required to achieve them. While ANZ has large financial hubs in Singapore and Hong Kong, it has a longstanding presence in many ASEAN markets including Indonesia and the Philippines, where we’re continuing to see significant effort to develop infrastructure that is climate resistant.

BEYOND CLIMATE While the focus to date has been heavily on the decarbonisation of the economy which includes reducing greenhouse gas emissions, beyond climate risk and mitigation are other issues related to sustainability.

Biodiversity loss has been significant due to climate change and nowhere is this more acute than in Australia with the recent bushfires. In Asia, blended financing models are being used to fund reforestation and conservation.

130 banks from 49 countries representing more than USD47 trillion in assets, showing the financial sectors commitment to change. Fund managers, such as Blackrock, have made public statements with respect to reducing their exposure to thermal coal given its impact on climate. Even central banks, like Sweden’s Riksbank announced it would no longer invest in assets from issuers with a large climate footprint, even if yields were high. This was supported by Riksbank’s sale of bonds from Western Australia and Queensland, and the Canadian province of Alberta.

In addition to advising and arranging sustainable finance for customers, banks are increasingly using sustainable finance for their own financing needs. ANZ issued the first Euro SDG Tier 2 bond by any bank globally, bringing to a total of $A3.4 billion of ANZ bonds on issue in Green and SDG bond format. OCBC, a Singapore bank, issued its inaugural Green Bond, a AUD 500m 3-year where ANZ, BNPP, NAB, OCBC and Westpac acted as Joint Lead Managers and Bookrunners.

Banks in the region are also setting sustainability targets to evidence their commitment to sustainability. ANZ has tripled its existing sustainable finance commitment to $A50 billion ‘sustainability target’ as part of its drive to help customers make the transition towards a low-carbon and more sustainability developed economy.

Speaking at 2019 ANZ Finance & Treasury Forum in Singapore, OLAM’s cofounder & group CEO of Olam International, Sunny Verghese said businesses need to ask if they are leaving a better planet for us all – and that broad acceptance of industry standards is one solution.

Agribusiness companies are effectively managing the risk of further biodiversity loss actively, engaging with their supply chain to mitigate this. In 2019, ANZ was Senior Lead Arranger for Olam’s second Sustainability Linked Loan of USD 525 million and COFCO Hong Kong’s USD 2.1bn Sustainability Linked Loan, demonstrating strong demand from the agribusiness sector for sustainability linked loan financing.

LEADING THE WAY TO A SUSTAINABLE FUTURE Banks are increasingly tying sustainability to their strategy. At ANZ, sustainability focuses on three priority areas that underpin the bank’s purpose – environmental sustainability, housing and financial wellbeing.

ANZ is AustCham Corporate Patron Member