Leading the way on sustainable and renewables finance
As Australia’s economy recalibrates, the transition to clean, green energy will gain further momentum, predict experts at Westpac, the country’s leading lender to greenfield renewable energy, and the bank is ready to support the next phase. Here’s how.
By Susan Muldowney
The pandemic has presented both unforeseen challenges and fresh opportunities for an economic reset, with a stronger emphasis on prioritising sustainability goals.
Westpac is already leading the way as the largest lender to Australian greenfield renewable energy projects in the past 3 years with a raft of innovative financial tools to help organisations across the sectors to transition to renewables and green practices. The bank – a long-term supporter of sustainability initiatives – is also leading by example and working hard to continuously improve the sustainability of its own operations.
In this Q+A, Michael Chen, Westpac Institutional Bank’s Head of Sustainable Finance, and Myles Walkington, Relationship Manager, Energy, Infrastructure & Resources at Westpac Institutional Bank, highlight some of the smart ways Westpac is supporting customers in the transition to renewables, while internally increasing its own focus on clean, green energy, with a commitment to 100 per cent renewables by 2025.
Our Westpac IQ Infographic reveals how Westpac hit the fast track in financing renewables.
Australia’s transition to renewables was gathering pace prior to COVID-19. To what extent has the pandemic shifted priorities for corporations across the country?
Michael Chen: If anything, COVID-19 has elevated discussions on how the economic recovery must ensure how other social and environmental factors are better taken into account to avoid future crises. As it relates to renewables, the structural shift in the energy system is still necessary and therefore the need for more renewables will only accelerate.
As we recalibrate our economy, I think it’s a very good time to focus more on green investment and, as a bank, we are committed to supporting our customers with the move to renewables.
What does this support look like at Westpac?
Michael Chen: Our share of lending to renewables, as part of our total electricity generation book, has increased from 59 per cent in 2016 to 75 per cent in 2019. As of September this year, we have lent AUD 10.1 billion to climate solutions, and exceeded our 2020 target of AUD 10 billion.
Most of our lending to the electricity generation sector is to renewable energy and, over the last three years, Westpac has been the largest lender to Australian greenfield renewables projects. This refers to new renewables projects, which is particularly important, because to further decarbonise the electricity grid, we need more renewable energy coming on stream.
What about financial products to support the transition to renewables?
Myles Walkington: We’ve come up with some innovative structures. Green loans, for example, allocate the proceeds of loans towards particular climate-change activities.
Last year, we partnered with ASX-listed power generation development company Genex on the world’s first green loan to be certified by the Climate Bonds Standard. It’s an AUD 192 million loan for two solar farms and it includes refinancing of an existing farm in Kidston in North Queensland, as well as funding for a new facility in Jemalong in NSW.
In March this year, we partnered with Local Government Super for a AUD 65 million green loan for its property portfolio, Local Government Property Fund (LGPF). The proceeds of the funds are tagged against their greenest properties.
What is the incentive behind Sustainability Linked Loans?
Michael Chen: The pricing of the loan changes depending on whether the borrower has met its sustainability targets. For example, if we provided a loan in 2020 and the customer was able to meet its sustainability KPIs in 2021 or 2022, we can offer them a discount on the loan margin in those latter years. Conversely, if their sustainability performance deteriorates, we’d apply a penalty on that loan. It is a carrot-and-stick mechanism.
One example of this is a Sustainability Linked Loan we completed with Coriance, a French district heating company. A great thing about that deal is that one of the KPIs is linked to Coriance reducing their carbon emissions intensity in line with the Paris trajectory of net zero by 2050.
We have completed numerous Sustainability Linked Loans and customers really like the structure. The finance teams are all for it, because they can see a pricing differential emerge from funding sustainability initiatives. Sustainability teams also love it, because essentially, the whole organisation is on the hook for achieving KPIs. It’s a good way for different parts of an organisation to join up.
To what extent are these initiatives based on customer requests?
Michael Chen: We’ve taken the initiative on Sustainability Linked Loans to help customers achieve their climate change and social objectives, but we’ve also created structures off the back of custom requests.
An example is the world’s first Green Tailored Deposit, which we developed about two years ago. It came about when we heard that a few entities such as local governments wanted to place their deposits that were used to fund green projects.
We worked with the Climate Bonds Initiative to ensure the green tailored deposit received certification, and we also worked with a third-party verifier to independently confirm that the deposit tool was in fact green. It’s been really well received – although it started with local governments, large corporates are now taking it up.
How is Westpac improving the sustainability of its own operations?
Myles Walkington: Along with supporting our customers, we of course need to look at how we run our own operations. One of the best examples is our commitment to purchasing energy from 100 per cent renewable sources by 2025.
To help us achieve this, we developed a power purchase agreement (PPA) last year that commits us to supporting the Bomen Solar Farm in Wagga Wagga, NSW. It’s a really exciting project that also has a lot of social benefits for the local Wagga Wagga community, including a community fund. It will also benefit our customers in that we’ll use our direct experience with the project to help support their climate strategies.
Securing long-term PPAs also makes sense for securing green power and also for reducing energy bills. These commercial drivers were part of our deal with Bomen and the project is now fully up and running.
One of the biggest drivers of the renewable energy industry over the past five years has been the demand for corporates to move away from traditional carbon-based power generation and acquire their power from clean energy sources.
As one of the largest financiers of renewable energy projects in Australia, we’re working in partnership with the project developers and the corporate off-takers to bring these projects to fruition.
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