Rising to the transition challenge
To mark Westpac joining the global UN-convened Net-Zero Banking Alliance, two of the bank’s ESG thought leaders outline how it’s leaning into the transition of hard-to-abate industries – and why.
Given the global imperative to reach net-zero emissions, developing and implementing a robust transition presents an existential challenge for many organisations across Australia.
Westpac is stepping up its support of the transition via initiatives such as ground-breaking sustainable finance deals, funding the uptake of electric vehicles, collaborating in industry initiatives and joining the UN-convened Net-Zero Banking Alliance. And, with a long history of sustainability and ‘green firsts’, it’s also investing in upskilling its broader team of bankers in ESG excellence and having proactive discussions with customers.
In this Q+A Westpac Institutional Bank leaders Michael Chen, Head of ESG, and Tim Parker, Director of ESG, outline the bank’s commitment to the rapid evolution of sustainability and explain why supporting the transition of hard-to-abate industries is vital to decarbonising the economy.
More companies in Australia are rising to the transition challenge. How would you describe progress and the appetite for sustainable finance?
We’ve seen a significant shift in carbon reduction targets right across our customer sectors over the past few years – and this includes both the volume and scale of commitments.
In Australia, sustainable finance debt issuance tripled in 2021 compared to 2020 and we are on track for a similar issuance this year. At Westpac, we’ve surpassed our lending target for climate solutions – it was sitting at AUD10.7 billion as of March this year. A third of that finance goes to renewables, half towards green buildings and the rest goes to other areas, such as green transport.
We’ve also seen an evolution in the type of sustainable finance issued, from primarily use-of-proceeds instruments that tie debt raised to green activity, to performance-based instruments like sustainability linked loans and bonds, where the cost of debt is tied to reaching certain KPIs.
How extensive is the transition challenge, even for those outside the hard-to-abate industries?
Most of our customers across all sectors generally have a good transition plan to 2030. It's what happens after that date that can present a hurdle. This is particularly the case for those in hard-to-abate sectors who recognise that achieving targets beyond 2030 may be dependent on breakthrough technologies reaching a commercial scale. So, while a roadmap to 2030 looks pretty clear, they may have to make a leap of faith beyond that, and I think that’s quite challenging.
We are seeing the most successful customers reviewing their current business activities to understand how they can drive down emissions. The biggest hurdles in this category seem to be where innovation, or an undeveloped technology change, is required. Competitors will have similar challenges, so the industries that come out best will be those that collaborate with their peers and value chain to get the desired outcome.
The second category of customer is those who are looking for market opportunities in the net-zero transition. An example would be an organisation in the energy sector looking towards the production of green hydrogen. Those companies that look for additional growth opportunities from the transition are likely to outperform their peers.
Westpac has a number of ‘green firsts’, including a partnership with Genex in 2019 on the world’s first green loan to be certified by the Climate Bonds Standard, as well as the co-funding of a ground-breaking battery finance deal with Edify Energy in 2022. What is the significance of this recent deal?
The Edify Energy battery is the largest approved grid-forming plant in Australia, and it’s significant for a number of reasons. Locating battery storage systems in renewable energy zones like south-west NSW provides more stability and greater grid certainty for the regions. This project also supports the development of regional NSW through the creation of jobs and economic development and can power 40,000 homes for two hours. Another important point is that it’s supported by a power-purchase agreement with Shell and Energy Australia, so it’s helping their customers to reduce their emissions as well.
How is Westpac investing in its own capabilities in the ESG space?
We recognise that, for our institution to be excellent at ESG, we can’t just have more people with ‘ESG’ or ‘sustainable’ in their job titles, like the two of us. We are investing heavily in banker capability across the board so we can all be excellent at ESG.
As an example, approximately 3,000 employees have completed our ESG Fundamentals training. This equips our staff to be able to identify and manage ESG risk in business and institutional transactions. Further, over 800 staff have completed a rigorous ESG opportunities and risks course that was designed in partnership with Monash Sustainable Development Institute and ClimateWorks Australia.
Bankers need to be able to engage with clients on carbon/emissions and pathways to net-zero with the same clarity and confidence they do on cash flow, valuations or asset security.
Last year, Westpac joined the Australian Industry Energy Transitions Initiative, which brings together leaders from industry and business to coordinate learning and action on net-zero emissions supply chains. What is the value of collaboration in this space?
Collaboration on sector wide GHG (greenhouse gas) emission sources is critical to an efficient transition and we believe that the finance sector needs to be involved. If we understand the technology and its applications, we can provide input on the bankability of those projects and support our customers with finance.
The Australian Industry Energy Transitions Initiative is interesting in that rather than a specific technology or organisation, it looks at the full supply chain across a range of hard-to-abate sectors that are critical to Australian industry meeting the Federal and State government commitments. By engaging the full supply chain, it ensures that the significant upstream and downstream Scope 3 emissions are included and the shared knowledge can be combined to minimise GHG emissions.
Westpac leads the way in funding greenfield renewable energy projects, but is also financing the uptake of electric vehicles. How do EVs fit into the broader transition goal, and any thoughts on the key to greater uptake in Australia?
With more than 20 million vehicles in Australia and an average age of vehicle at about 10 years, it will not be a quick transition. Demand for electric passenger and light vehicles has increased rapidly over the past 12 months with the increase in fuel costs. The main issue limiting the transition is the supply of EVs coming into Australia and consumers being confident that they can charge their EVs, given the limited infrastructure currently available.
We are seeing a significant change coming in bus fleets with the net-zero targets of all the state governments. With the reasonably long operating life of buses, most state governments are seeing that the next purchase needs to be electric, so a lot of work is being done on the infrastructure at bus depots to support this transition.
Westpac is active in this sector, through providing loans for electric or hybrid cars and buses. We have also structured auto facilities to institutional customers that finance consumer electric vehicles and recharge equipment.
Finally, what do you see as the value in supporting the transition of hard-to-abate industries like electricity, oil and gas and cement?
It could be quite easy for a bank to reach the target aligned with limiting global warming to 1.5 °C, because we could just exit from high-emitting industries and assets. But then we haven’t helped them transition and the emissions would still be out there. We’re focused not just on reducing our portfolio emissions, but also on reducing real world emissions.
Therefore, we prefer to partner with our emissions-intensive clients and provide guidance, insights and capital to assist with their emissions reduction plan.
Ultimately, we’ll require our customers to have credible transition plans, just like they have credible corporate strategies and financial forecasts. And we're here to help them with those plans and to back the ones that have them in place.
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©2022 Westpac Institutional Bank is a division of Westpac Banking Corporation (‘Westpac’) ABN 33 007 457 141 AFSL and Australian credit licence 233714.
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