The Drivers for the Focus on Sustainability

Understanding why sustainability is emerging as an immediate issue in securitisation is not easy, as there are many related factors.

The dominant factors are social conscience and climate change as these have led to changes in attitude and behaviour amongst industry participants; the former because it affects investor demand and the latter because of its impact on risk. The primary drivers are summarised in the table below.

Social conscience Climate change Investor demand Issuer passion

There is a heightened awareness of corporate behaviour globally, particularly in younger generations, which has led to higher expectations of the companies people choose to deal with. Climate change sceptics have gone the way of dinosaurs and there are plenty of examples of severe climate events leading to financial risks. Investors are asking a lot more questions about the ESG credentials of the companies they engage with. Some issuers are satisfying their own social conscience through delivering quantifiably sustainable assets.

Global regulation and goals

Europe is the commonly accepted front runner when it comes to formalising its approach to sustainability and this is directly impacting investor mandates. Global net zero carbon emission targets are also on the radar. Investor demand, incentives, attractive returns and an underlying belief that opportunities will arise from the focus on sustainability are shaping the market’s interest and response. There are many shades of 'green' and not all are attractive Proving the value of a sustainable approach will take time

Participant motivation Greenwashing Impact

Social Conscience

The following comments give a sense of how a social conscience has increased the focus on sustainability.

“There is a social conscious movement, moving through the investment world, and all the superfunds are certainly at the forefront of that, especially the large ones.”

- Global Investor

“We are changing as individuals in terms of our expectations. And that feeds through to these conversations at the corporate level. It's quite indirect, but it's almost directly related because normal human beings expect more from every company they engage with, whether it's their bank or their super fund, and that then feeds into expectations across mandates.”

- Non Bank Issuer

“If you look out into the world, there's a lot of focus now in media, in schools, and people wanting to do good. As a fiduciary that's ultimately what you're there for. You're there to act in the best interest of others and not yourself. So, I think it's literally in the business, the brand, the lifeblood of the company and our people to act in the best interest of others.”

- Service Provider

Climate Change

There are equally strong views on the impact of climate change. In particular, there is a strong belief that inaction on climate introduces risk to the sector. It is a galvanising focus for both the public and the industry.

“My overall, overriding message to everyone is: it doesn't matter what you think of climate change, you've got to be there, or you're not doing the right thing by your company.”

- Non Bank Issuer

“I think the fact that climate factors are translating into financial risks has become tangibly real and we've seen numerous examples of that, whether it's within our oil and gas companies or fossil fuelrelated dominant companies.”

- Local Bank

“I think that it's a matter of the private market, forging their own path on climate change as opposed to waiting for governments to dictate. Ultimately, society will move ahead of any government.”

- Non Bank Issuer “Let's just look at climate change as one factor. Never mind about our domestic politics, we can see offshore governments doing a heck of a lot, whether it's legislating electric vehicles and phasing out internal combustion engines or just various standards coming in. The world is rapidly decarbonising by way of policy.”

- Local Bank

“Also, on climate, it's not an easy discussion because the only solution would be a global price on carbon but nobody's going to do it, right?”

- Service Provider

Issuer Passion

A small number of participants have written their commitment to sustainability into their corporate vision and mission. They are setting their own standards against what they would expect of others.

“So those friction points, whether it's economic, financial, or whether it's literally what we call a brain damage factor (the complexity for the consumer); those are all the friction points that delay the acceleration to the new world. I suppose that was part of the drive, you know, the purpose was to help remove those friction points, to help the everyday Australians to be able to access these renewable assets.”

- Non Bank Issuer

Investor Demand

Investors are also driving conversations about sustainability. They have a rising expectation that issuers will have a philosophy and be able to state their position and credentials. But investor demand is typically driven in the first instance by demand for transparency amongst their own clients.

Investors have heightened expectations of the issuers they deal with. Pitch documents without a focus on ESG factors are becoming increasingly rare.

“I don’t think it’s sudden. It's been around. Australia has just been very slow on the uptake. We’ve been doing an enormous amount of work on it. One of the reasons is, our clients are asking us a lot of questions about it because their equity investors are asking them, and their bond investors are asking them.”

- Local Investor

“We’re getting asked a lot from our clients and prospective clients - every pitch document now, we need to talk about ESG; how we go about it, what we're doing, what's our process, how would we write it into our investment process, etc…”

- Local Investor

Motivation

Whether it’s encouragement from investors, the potential for better returns or the promise of opportunities in the future, there are many good reasons for participants to be taking a closer look at sustainability and the benefits it can bring.

“Having investors sort of care about what you're doing on the ESG side (1) encourages you - it's positive reinforcement - and (2) also provides incentives to prioritise that over other work streams that you have in your day-to-day business.”

- Global Bank

“I think, now, what you're seeing is that people definitely - both from the investor side and the issuer side - people care about the philosophy more.”

- Global Bank

“What we've seen is some really good case studies out there in the market of what happens when businesses run sustainably.”

- Local Investor

“The 'green' bonds are going out the door very easily.”

- Non Bank Issuer

The Europe Factor

There is no doubt the European focus on sustainability is having a direct impact on local awareness and sensitivity. In practical terms, global investors are taking their lead from the work done to introduce standards in Europe and their clients are now expecting them to ask the same questions of issuers they deal with in all other markets.

The increasingly ambitious targets being set for carbon emissions are also impacting the Australian market by heightening their focus on risk, even if it is not a requirement from the Australian regulators. “Generally, managers everywhere - you see it every day - more managers are signing on to the UN Sustainable Development Goals, or the PRI, or what have you. It's, I think, an inevitable trend.”

- Non Bank Issuer

“Outside the investor base, the stars are really aligned in Europe when it came down to having a receptive investor base and probably more importantly a political willingness and push to have sustainability up and running”

- Global Investor “I think the increasing focus comes from things like net zero carbon emission targets by 2030. If you think about corporate bonds, you are actually having deals that mature after those windows. As a financier you want to be making sure that the businesses has plans to address those sorts of things.”

- Local Investor

“You just have to see how big it's grown in Europe and growing in the US, to know that this is a trend that's not going anywhere.”

- Local Investor