Chairman’s foreword | Sir Rod Eddington AO Chairman, Infrastructure Partnerships Australia

It is my pleasure to present the 2019 edition of Future Building. This publication provides a journal of proceedings from Australia’s most prestigious gathering of infrastructure leaders – Partnerships.

Infrastructure Partnerships Australia’s program this year covered the future of infrastructure and how, as a sector, we must prepare for the challenges and opportunities that lie ahead.

State Treasurers’ Dominic Perrottet and Tim Pallas discussed their experiences at the forefront of reform and whether state-led reform is the prime avenue for future progress.

The Respected Leaders’ panel comprising the Productivity Commission’s Michael Brennan, the Hon. Mark Birrell, and Bechtel’s Ailie MacAdam considered the need for long-term planning and the importance of maintaining a visible pipeline of evidence-based projects.

Chief Executive Officer of Infrastructure Australia Romilly Madew AO shared her perspective about the direction of the independent advisory body and the scale of infrastructure investment underway across the nation.

The program also included panel sessions on the evolution of end-user engagement in infrastructure, the increasingly influential role of behavioural science in decision-making, how we safeguard critical assets from cybersecurity threats, and the future of social infrastructure.

Chairman’s foreword

I thoroughly enjoyed my conversation with broadcaster and journalist Ticky Fullerton on the evolving business environment and how the current political upheaval abroad is shaping investment decisions.

I was also pleased that author Matthew Warren could join us to provide a keynote address on his book Blackout. Matthew provided a compelling account of the changing energy landscape and the policy missteps that have undermined Australia’s energy security.

Providing an open forum for these honest policy discussions is critical if we are to confront the challenges and opportunities before us. I hope that the proceedings of Partnerships 2019 offer new insights for policymakers and regulators to better navigate an uncertain future.

Sir Rod Eddington AO Chairman Infrastructure Partnerships Australia

Sustainable finance

By John Hirjee, Executive Director, ANZ

This year is set to be another record year for sustainable debt, as investors continue to focus on incorporating environmental, social and governance (ESG) into their investment processes, and as broader global sustainable finance developments encourage further market growth.

Green bonds continue to dominate sustainable debt issuance. Global year-to-date (YTD) issuance of green bonds now totals ~US$120.6 billion (as at 30 June). Sustainability-linked loans (SLLs) are the fastest-growing sustainable finance product. By the end of September, YTD issuance (~US$34 billion) has already almost surpassed total 2018 issuance (~US$37 billion).

Transition bonds could be the next major market development. AXA Investment Managers published suggested guidelines for transition bonds, particularly for carbon-intensive companies that want to become greener. Sustainability bonds are expected to feature more prominently, as investors and issuers increasingly use the United Nations Sustainable Development Goals (UN SDGs) as a basis for reporting impact. Both issuers and investors are adopting policies and strategies linked to the UN SDGs, and this trend is expected to continue.

Social bonds continue to feature in the market, though to a lesser extent. In March of this year, the National Housing Finance and Investment Corporation (NHFIC) issued its first A$315-million social bond for social and affordable housing. The transaction was heavily oversubscribed, with the final order book reaching more than A$1.3 billion.

Regulators across the globe continue to reinforce the need to disclose climate change risks, including the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Comission (ASIC), and the Reserve Bank of Australia (RBA). The Task Force on Climate-related Financial Disclosures (TCFD) Recommendations have gained significant momentum and attention, and continue to be referenced as the preferred reporting framework for climate change risks. Various jurisdictions focus on the development of the sustainable finance market through government and/ or industry-led initiatives.

The Australian Sustainable Finance Initiative (ASFI) has established working groups, which will guide the development of the Australian Sustainable Finance Roadmap. ANZ is proudly part of the ASFI Steering Committee and is cochairing the Technical Working Group on Mobilising Capital.

Results from a poll conducted by ANZ and FinanceAsia in June 2019 show that environmental, social and corporate governance (ESG) investing is becoming more mainstream, and that the sustainable finance market is accelerating in the Asia-Pacific region. Of the investors surveyed: ► 74 per cent either already have ESG/socially responsible investing (SRI) investment policy or are expecting to develop one in the short term ► 48 per cent say that an ESG format bond offering would favourably change their view of a company, and 15 per cent say they would pay for it.

The emergence of sustainabilitylinked loans

Under an SLL structure, a company’s cost of capital is explicitly tied to its third party–verified sustainability

TOTAL SUSTAINABLE DEBT ON ISSUE

2019 Monthly issuance

Total sustainable debt on issue 45 200 40 180 160 35 140 30 120 25 100 20 80 15 60 10

USD bn USD bn

performance – i.e. the margin on a loan is directly linked to the borrower’s performance against pre-agreed sustainability target(s). Proceeds can be used for general corporate purposes (i.e. not tied to a specific green or social asset), so the SLL may be suitable for companies that would not traditionally have access to the green bond/loan market due to lack of ownership of green assets. SLLs are relevant for companies with a determination to improve their sustainability performance and align their cost of capital with that performance.

It is important that the parties agree on sustainability target/s that Source: BloombergNEF as at 30 September 2019 are ambitious in order to incentivise material improvement in sustainability performance. Pre-agreed targets must be meaningful and carefully aligned with the borrower’s sustainability strategy. Where companies have very broad sustainability ambitions, a material improvement in their ESG rating, provided by an independent third-party rating agency, may be an appropriate target.

The Asia Pacific Loan Market Association has recently released the SLL Principles as guidance for lenders and borrowers. These principles underpin market integrity and consistency.

The majority of SLL transactions completed to date have been in Europe, with a handful completed more recently in Asia and the United States.

SLLs are new to the Australian 2019 MONTHLY ISSUANCEmarket. The first SLL was a bilateral

facility provided to Adelaide Airport by ANZ in December 2018, and the first syndicated SLL to launch in Australia was by Sydney Airport in May 2019, where ANZ and BNP Paribas were the sustainability coordinators.

ANZ has committed to fund and facilitate at least A$15 billion in lowcarbon and sustainable solutions by October 2020, with A$14.5 billion already committed as at 31 March 2019. ANZ has played a key role in developing the green, social and sustainability bond and loan markets across Australia, New Zealand and Asia.

ANZ has arranged more than ~A$16 billion (equivalent) of green, social and sustainability bonds and loans across Australia, New Zealand and Asia in Australian dollars (AUD),

Source: BloombergNEF as at 30 September 2019 New Zealand dollars (NZD), US dollars (USD), Chinese renminbi yuan (CNH) and euros (EUR) for a broad range of corporate and frequent issuers. ANZ also has strong experience as an issuer of both green and sustainability bonds. In FY2019 to date, ANZ has successfully arranged ~A$3.8 billion (equivalent) of green, social and sustainability bonds.

At the same time, the loan market has gained momentum, and ANZ has arranged ~A$3.3 billion (equivalent) of green loans and SLLs. Highlights include four Australian firsts: ► Investa’s bilateral green loan ($170 million) ► Frasers Property syndicated green loan (A$600 million) ► Adelaide Airport’s bilateral SLL (A$50 million) ► Sydney Airport’s syndicated SLL (A$1.4 billion).

In 2018, ANZ was awarded Finance Asia’s Best Sustainable Finance House at the Australian Achievement Awards 2018, reflecting its position as a clear leader in the sustainable finance sector in Australia. It is a Green Bond Principles member and a Climate Bonds Initiative partner. ANZ also participates in the Asia Pacific Loan Market Association’s Green and Sustainable Loans Committee. ♦

300 1000 900 250 800 700 200 600 150 500 400 100 300 200 50 100 0 0 2012 2013 2014 2015 2016 2017 2018 2019

USD bn USD bn

Green Bond Green Bond Social Bond Sustainability Bond Sustainability-Linked Bond Green Loan Sustainability-Linked Loan Total Issuance (RHS)

Social Bond Sustainability Bond SustainabilityLinked Bond Green Loan SustainabilityLinked Loan

Total sustainable debt on issue Total Issuance (RHS) 2019 Monthly issuance

40

5 20

0

Jan Feb Mar Apr May Jun 0

2018 (LHS) 2019 (LHS) 2018 Annual Cumulative Issuance (RHS) 2019 Annual Cumulative Issuance (RHS)

2018 (LHS) 2019 (LHS)Source: BloombergNEF as at 30 June 2019

2018 Annual Cumulative Issuance (RHS) 2019 Annual Cumulative Issuance (RHS)

For further details, please contact John Hirjee, ANZ Executive Director – Resources, Energy and Infrastructure. Email John.Hirjee@anz.com or call 0466 716 298.

Source: BloombergNEF as at 30 June 2019