Sustainable Finance Q2 2023 Market Update
Welcome to Westpac IQ’s quarterly sustainable finance market update.
Sustainable debt market update
Global observations
Global issuance (USD bn)
Source for graphs and observations: BloombergNEF as at 30 June 2023. Noting data excludes Social and Sustainability Loans. Australia & New Zealand volumes based off issuer currency (AUD and NZD).
Global sustainable debt issuance totalled USD717bn in 1H2023, up 3% on last half (2H2022) however down 14% on pcp (1H2022), with continued strong momentum in Sustainable Bond issuance not enough to offset the softer Sustainable Loan market. The core drivers for the increase in Sustainable Bonds was a notable increase of total Green, Social, Sustainability and Sustainability-Linked (GSSS) Bonds from key government and sovereign issuers.
Sustainable Bond issuance had its second strongest half ever (only behind the record 1H2021) with issuance reaching USD600bn, driven by the strongest half year performance to date for Green Bonds (USD380bn, up 45% on last half and 19% on pcp) as the desire to invest capital in green projects remains strong, as well as notable performances from both Social and Sustainability Bonds where issuance also exceeded the prior two half year periods. However, while use of proceeds momentum continued to build amid the evolving regulatory landscape, Sustainability-Linked Bond issuance continued to remain subdued as scrutiny of the instrument continues amid greenwashing concerns.
Sustainable Loan issuance continued to decline, however as noted in Q1 this is largely expected to be a return to more normalised levels following the return of bond markets. The decline was largely seen in Sustainability-Linked Loans which fell 68% on pcp and 57% on last half, and Green Loans which were down 30% on pcp and 56% on last half.
Australia-New Zealand observations
Australia-New Zealand issuance (USD bn)
Source for graphs and observations: BloombergNEF as at 30 June 2023. Noting data excludes Social and Sustainability Loans. Australia & New Zealand volumes based off issuer currency (AUD and NZD).
Australia-New Zealand sustainable debt issuance totalled USD22bn in 1H2023, up 52% on last half (2H2022) however down 24% on pcp (1H2022), akin to the global position whereby Sustainable Bond issuance continued its Q1 momentum.
Sustainable Bond issuance reached USD17bn, being the strongest half year performance for Sustainable Bonds to date, up 84% on last half and 24% on pcp. This was driven by Green Bond issuances which also had their strongest half, with 60% of issuance coming from sovereign and government issuances (such as WATC's green bond noted below), as well as Sustainability Bonds (such as Australia Post’s inaugural Sustainability Bond noted below). Sustainability-Linked Bonds continued to remain subdued with only one issuance from Worley.
Sustainable Loan issuance totalled USD 5bn, largely consistent with last half, however considerably down on pcp by 68%. Akin to the global position a portion of this financing is expected to have transitioned to the bond markets, however the key decline in Sustainability-Linked Loans (totalling USD1bn, down from USD11bn in pcp) may also have been impacted by borrowers reviewing the robustness of their ESG data, commitments and processes off the back of significantly higher regulatory/media focus on greenwashing before linking their ESG commitments into their financing structures.
Notable use of proceeds and sustainability-linked issuances
Use of proceeds issuances
Australia Post (Sustainability Bond) – Australia Post issued their inaugural 6-year AUD 100m Sustainability Bond, focused on both environmental and social projects. The bond was issued under their newly developed Sustainable Finance Framework with Second Party Opinion from Sustainalytics. The funds raised will be used to assist Australia Post in delivering on its 2025 sustainability roadmap and community strategy. Westpac acted as joint sustainability coordinator and joint lead manager - press release.
Western Australia Treasury Corporation-WATC (Green Bond) WATC issued its first green bond, with AUD 1.9bn in funding raised supporting eligible government projects that deliver environmental outcomes. The bond issue was heavily oversubscribed with over AUD 6bn in bids from more than 60 investors. The issuance followed the release of WATC’s Sustainability Bond Framework in April and was a culmination of two years of work by WATC building the State's ESG credentials to domestic and international investors. Westpac acted as joint lead manager - press release.
AGL (Green Loan) – AGL’s AUD 500m 5 and 7-year Green Capital Expenditure Loan will be used to fund existing and future firming and renewable energy projects. The transaction is an important financing to support AGL’s transition to a low emissions future in line with the goals of its Climate Transition Action Plan. EY provided a Second Party Opinion on the Green Financing Framework which also received certification by the Climate Bonds Standard Board. Westpac acted as Sustainability Coordinator - press release.
Vector Metering (Green Loan) – Vector Metering issued its first use of proceeds instrument under the new Climate Bonds Standards. Proceeds from this AUD 1.6bn green loan will be used to implement smart electricity meters in homes across Australia and New Zealand. This is critical technology that will help enable a more sustainable energy system, which is important for the country’s transition to net zero. Westpac acted as joint sustainability coordinator - press release.
Sustainability-linked issuances
Seeka (Sustainability-Linked Loan) – Seeka secured it’s NZD 201m Sustainability-Linked Loan, incentivising Seeka to reduce greenhouse gas emissions, increase solar energy generation capacity, and continually improve health and safety across its workforce. Westpac NZ acted as sole sustainability coordinator, agent, and mandated lead arranger and bookrunner - press release.
Metcash (Sustainability-Linked Loan) – in April Metcash issued their inaugural AUD 525m SLLs. Westpac was joint sustainability coordinator.
KMD Brands (Sustainability-Linked Loan) – KMD Brands refinanced NZD 310m of existing debt facilities with SLLs, following their inaugural SLL in 2021. Built on the original targets set in 2021, the sustainability aspect of the new facility is underpinned by material metrics and targets, such as reducing greenhouse gas emissions, B Corp certification, and improving transparency within its supply chain, including around the wellbeing and labour conditions of workers, and environmental metrics. Westpac was a lender - press release.
Regulatory, standards and policy developments
Australia-New Zealand
ACCC releases rules for sustainability claims to address greenwashing
The Australian Competition and Consumer Commission (ACCC) published new rules on environmental and sustainability claims. These rules aim to enhance the integrity of green claims made by companies and follows the regulator’s greater scrutiny on companies for potential greenwashing. These rules are focused on principles including (without limitation) ensuring environmental claims can be backed by evidence, using clear and easily understandable language and avoiding broad and unqualified claims. ACCC July 2023.
Treasury mandates APRA must consider climate risk in duties
APRA has now been mandated by the Federal Government to explicitly consider risks relating to climate change as part of its mandate. This includes promoting transparency in relation to financial risks and the adoption of climate reporting standards. The Government has indicated that APRA should take into consideration the relative size of the regulated entity to avoid burdensome regulations for smaller businesses. Treasury June 2023.
Climate-related financial disclosures 2nd consultation paper released
The Federal Government is seeking further feedback on the detail and implementation of a standardised, internationally aligned set of requirements for disclosing climate-related financial risks and opportunities in Australia. The move is part of the Federal Government’s commitment to ensure Australia’s large businesses and financial institutions provide more standardised data and transparency about how they are contributing to Australia’s net zero ambitions. Treasury June 2023.
Public consultation opens on the Emissions Trading Scheme (ETS)
The New Zealand Government is seeking input on improving the ETS to support cutting emissions and meeting its domestic and international climate change targets. This follows advice from the Climate Change Commission that NZ ETS may currently not be incentivising emissions reductions at source. Presently it is cheaper for many companies to buy emissions units, rather than invest in direct emission reductions. NZ Government June 2023.
International
New IFRS sustainability standards
The International Sustainability Standards Board (ISSB) issued its first two climate-related IFRS sustainability disclosure standards:
- IFRS S1 - General requirements for disclosure of sustainability-related financial information
- IFRS S2 - Climate-related disclosures
These standards will require companies to disclose material information about sustainability and climate-related risks and opportunities that could reasonably be expected to affect the company, particularly current and anticipated financial effects. The Standards are expected to be mandatory from FY25, although there is a transitional period between FY25 and FY27 to allow companies time to uplift internal capabilities to meet these new obligations. IFRS July 2023.
FCA shares findings on the sustainability-linked loan market
The Financial Conduct Authority’s findings indicate that the market has not yet reached full potential due to concerns related to transparency, performance targets, and conflicts of interest. The FCA has recommended a more prescriptive framework and wider adoption of existing principles could drive further growth and assist the low-carbon transition. The regulator will continue monitoring the market to consider additional measures, however, did not mention at present plans for a code of conduct or regulatory standards review. FCA June 2023.
Sustainable finance news
Australia-New Zealand
The CEFC receives an additional $20.5bn from the federal government
The federal government has increased the investment capital available to the Clean Energy Finance Corporation (CEFC) by an additional $20.5bn. This investment capital will be allocated to fund three new investment priorities such as the Rewiring the Nation ($19bn) program which seeks to transform the power grid infrastructure. Funding will also be allocated to the Household Energy Upgrades Fund ($1bn) to provide discounted consumer finance to improve sustainability in the housing sector and the Powering Australia Technology Fund ($0.5bn) to facilitate the commercialisation of clean energy technology. CEFC June 2023.
Inaugural Australia–New Zealand 2+2 climate and finance dialogue joint statement
During the inaugural meeting, the Ministers discussed the urgent need for accelerated climate action in limiting rising temperatures to 1.5°C. Both countries recognised climate change as the greatest existential threat to the Pacific and committed to working together to ensure the resilience and prosperity of the region. The ministers agreed to establish various working groups such as the Net Zero Government Working Group to support decarbonization efforts, dialogues to promote sustainable finance, cooperation in climate policy, including emphasising the importance of Indigenous Peoples' involvement in effective climate action. Ministers Treasury June 2032.
International
ICMA sustainable bond updates
The International Capital Market Association (ICMA) published the 2023 editions of the Climate Transition Finance Handbook (CTFH), Sustainability-Linked Bond Principles (SLBP) and the Key Performance Indicator (KPI) registry. The updated CTFH includes dedicated recommendations for climate-themed green, sustainability and sustainability-linked bonds, while the updated SLBP includes adapted language for sovereign issuers, as well as new metrics for sovereigns and social issues in the KPI registry. ICMA June 2023.
SBTN launches its first corporate science-based targets for freshwater and land
The Science Based Targets Networks (SBTN) has released the first corporate science-based targets for nature, which would aim to complement existing science-based climate targets. The release includes integrated technical guidance for companies to assess and prioritise their impacts on nature, with more advanced guidance for setting science-based targets for freshwater and land. The new targets come as new disclosure systems are established that require companies to assess and report on climate and nature risks and businesses become increasingly focused on nature and biodiversity risks. SBTN May 2023.
Westpac publications and media
Westpac CEO Anthony Miller – Finding certainty in a transitioning world AFR June 2023
Westpac Head of ESG Michael Chen – Biodiversity: a reckoning begins AFR June 2023
Westpac NZ Announce their Sustainable Farm Loan and Sustainable Business Loan
Westpac Wire Why Australia’s property industry sets the pace in sustainable finance - May 2023
Meet our sustainable finance team
Australia team
Neville Grace - Head of Sustainable Finance, Australia
New Zealand team
Joanna Silver - Head of Sustainable Finance, New Zealand
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