Sustainable Finance Q3 2023 Market Update
Welcome to Westpac IQ’s quarterly sustainable finance market update.
Sustainable debt market update
Global observations
Source for graphs and observations: BloombergNEF as at 30 September 2023. Noting data excludes Social and Sustainability Loans.
Global sustainable debt issuance totalled USD 1,010bn during Q1-Q3 2023, down 15% on PCP (Q1-Q3 2022), with continued stronger momentum in Sustainable Bond issuance not enough to offset the softer Sustainable Loan market.
Sustainable Bond issuance exceeded pcp (Q1-Q3 2022) by 5% despite a softer Q3 with less sovereign and supranational issuances (a previous driver of the half year volumes). Issuance continues to be dominated by Green Bonds which are tracking ahead of PCP volumes (+11%) and making up half of the total global Sustainable Debt issued this year. Social Bonds also continue to contribute favourably, up 12% on pcp. In light of this, Moody’s Investor Services revised its Sustainable Debt forecast as it estimates that 2023 Sustainable Bond issuance could ‘eclipse’ its initial USD 950bn forecast, notably forecasting increasing issuance from carbon-intensive sectors.
However, this was offset by the decrease in the Sustainable Loan market which continued to see muted issuance through Q1-Q3 when compared to PCP, namely due to reduced volumes of Sustainability-Linked Loans (-61%), with Green Loans only nominally down (-5%).
While Sustainable Debt volumes have remained subdued for the year to 30 September, possibly due to heightened scrutiny of potential greenwashing and an increasingly complex ESG regulatory and political landscape, the formalisation of more comprehensive decarbonisation plans by a growing number of issuers supports long-term Sustainable Debt growth.
Australia-New Zealand observations
Source for graphs and observations: BloombergNEF as at 30 September 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 USD 30bn during Q1-Q3 2023, down 12% on PCP (Q1-Q3 2022), despite a stronger Q3 which exceeded pcp (Q3 2022) by 48%.
Aligned to the global market, Sustainable Bonds have dominated Sustainable Debt issuance in the Australia-New Zealand market this year, with Green Bonds contributing USD 11.5bn / 37% of total issuance year to date, up 188% on PCP, continuing the strongest year to date contribution from the instrument that was seen in the first half performance. This was driven by sovereign, supranational and government issuances, which contributed 82% to overall Sustainable Bond issuances.
In terms of Sustainable Loan volumes, Sustainability-Linked Loans rebounded slightly in Q3 2023, with USD 2.7bn issuance over the quarter, surpassing the total USD 1.3bn executed over Q1-Q2 2023 and USD 0.5bn in pcp (Q3 2022). However these volumes are still expected to 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
Infrashore (Social Loan) - Westpac supported Infrashore’s, an SPV owned by the Dexus Community Infrastructure Fund (CommIF), inaugural AUD448.2m Social Loan as Sustainability Coordinator in the refinance of its PPP for Royal North Shore Hospital (“RNSH”). The Social Loan builds on CommIF’s commitment to deliver on the long-term investment objectives for positive social outcomes for communities which the Funds invest in; the RNSH Project in particular elevated the provision of essential healthcare services, establish critical social infrastructure, support the Aboriginal and Torres Strait Islander, and LGBTIQ community. Westpac acted as Joint Sustainability Coordinator.
NBN Co (Green Bond) – NBN has successfully raised AUD 850m in a new five-year benchmark, positioning the company as the largest corporate bond issuer in Australia. The net proceeds will be fully allocated to eligible green projects undertaken as part of the company’s commitment to energy efficiency. The latest debt raising follows the company’s release of its second Sustainability Bond Report in August. Westpac acted as a Joint Lead Manager Press release.
PFI (Green Loan) - PFI signed its inaugural NZD150m of Green Loan tranches alongside publication of its Green Finance Framework. The Green Loan proceeds will support the development of properties targeting 5 Green Star Design and Built ratings. Westpac acted as Joint Sustainability Coordinator Press Release
La Trobe University (Green Bond) – La Trobe University issued its inaugural Green Bond to fund a diverse range of eligible eco-friendly projects and initiatives in areas such as renewable energy, green buildings, sustainable water and waste management and terrestrial and aquatic biodiversity and conservation. Press Release.
Sustainability-Linked Issuances
Australian Unity (Sustainability-Linked Loan) – Australian Unity executed an AUD 50m SLL connected to the groups Community & Social Value Framework (CSV Framework) and annual social impact performance. The financing instrument is linked to Australian Unity’s material delivery of wellbeing outcomes as measured by the CSV Framework and will be available to support the group’s general funding needs and investments that drive CSV value and ongoing wellbeing initiatives. Westpac acted as Sole Sustainability Coordinator Press Release.
Queenstown Airport (Sustainability-Linked Loan) - In July Queenstown Airport established its inaugural Sustainability-Linked Loans totalling $100m. Targets included achieving Level 4 Airport Carbon Accreditation, reducing Scope 1 and 2 greenhouse gas emissions, installing infrastructure that supports reductions in Queenstown Airport’s Scope 3 greenhouse gas emissions, and reducing specific waste streams sent to landfill across the terminal precinct. Westpac NZ acted as Joint Sustainability Coordinator. Press Release.
Port of Melbourne (Sustainability-Linked Loan) – Port of Melbourne completed an AUD 475m SLL linked to two sustainability indicators covering scope 1 and 2 emissions reduction, and a mental health first aid workplace certification, together with an overarching gateway target tied to engagement with port stakeholders to facilitate scope 3 emissions reduction. CEO Saul Cannon said the deal reflected Port of Melbourne’s goal of working with stakeholders to build a sustainable port for the benefit of the Victorian economy and liveability of Melbourne. Press Release.
Macquarie University (Sustainability-Linked Loan) – Macquarie University established an AUD 450m SLL, linked to six KPIs, including: scope 1 and 2 emissions reduction; scope 3 emissions measurement and future target setting; biodiversity / restoration of critically endangered forest; student and staff training on Manawari and the Sustainable Development Goals; gender equality aligned to WGEA’s 40:40 vision; and widening participation in stem. Press release.
Regulatory, standards and policy developments
Australia - New Zealand
AASB releases exposure draft for the first draft Australian Sustainability Reporting Standards (ASRS) on Disclosure of Climate-related Financial Information
TThe AASB has released an exposure draft of standards that it proposes would apply to annual reporting periods beginning on or after 1 July 2024. Treasury is yet to release its position paper (following its second consultation in June 2023) to provide clarity on which entities will be in scope of the ASRS Standards and when. AASB is seeking feedback on the proposed standards until 1 March 2024. AASB Oct 2023.
Australian Federal Government considering adoption of a cross-border adjustment mechanism
The federal government is weighing up the adoption of a cross-border adjustment mechanism (CBAM) – or ‘green tariff’ – to avoid disadvantaging domestic companies in industries like steel and cement that may be subject to the Australian safeguard mechanisms. The move would see Australia follow the European Union by imposing tariffs on some imports from nations with less ambitious climate goals. AFR Aug 2023.
Australian Sustainable Finance Institute (ASFI) Announces the Taxonomy Technical Expert Group
ASFI commenced the development phase of the Australian sustainable finance taxonomy with the appointment of the independent Taxonomy Technical Expert Group, which includes twenty-five senior leaders, and will provide strategic direction over, input into and endorsement of an Australian sustainable finance taxonomy for consideration by government. The taxonomy project is a joint government-industry initiative that will provide a common standard for green and transition finance, helping accelerate the allocation of capital towards sustainable activities to achieve Australia’s net-zero ambitions. ASFI August 2023.
International
Final Taskforce on Nature-related Financial Disclosures Recommendations are published
The Taskforce on Nature-related Financial Disclosures (TNFD) released a final risk management and disclosure framework which seek to identity, assess, and manage nature-related financial risks and opportunities. The Framework is expected to be integrated into accounting standards via the International Sustainability Standards Board (ISSB). TNFD Sept 2023.
The US Securities and Exchange Commission (SEC) finalises amendment to the Names Rule, capturing ESG Funds
The Names Rule reflects a basic idea that a fund’s investment portfolio should match a fund’s advertised investment focus. The amendment requires funds with a specific named focus (e.g. “sustainable” or “green”) to ensure 80% of assets by value are allocated to that focus area. Additionally, the Names Rule has been expanded to require transparency around a fund's investment methods. The SEC will require a fund to clearly define the terms it uses, how it selects relevant investments in line with that philosophy, and what current portfolio assets meet those criteria to therefore fulfil its 80% obligation. SEC 2023.
EU to ban generic environmental claims
EU announced it will ban sweeping environmental claims such as “climate neutral”, “environmentally friendly”, “natural”, “biodegradable” or “eco” by 2026 unless companies can prove the claim is accurate and ban sustainability labels not based on approved certification schemes or established by public authorities. The agreement updates the existing EU list of banned commercial practices to mitigate risk of greenwashing in marketing. EU Parliament Sept 2023.
California state passes the Greenhouse Gas Reporting Bill and the Climate Risk Reporting Bill
The Greenhouse Gas Reporting Bill requires companies with more than USD 1bn in annual revenue that operate in California to disclose Scope 1 and 2 emissions annually from 2027, and Scope 3 emissions in 2027 with limited assurance required from 2030. Additionally, companies operating in California with operating revenue greater than USD 500m will be required to report climate-related financial risk every other year, commencing from 2026, under the Climate Risk Reporting Bill. BBC Oct 2023.
The British government published pricing tiers for statutory biodiversity credits as part of its upcoming Biodiversity Net Gain legislation.
Biodiversity credits are emerging as valuable economic instruments to finance activities that deliver net positive results for the environment. A biodiversity market legislation has already been introduced in Australia under the Nature Repair Market Bill 2023 (Cth), largely in response to the 2021 State of the Environment Report, which painted a dire picture of the health of the country’s environment. Overseas, as part of its upcoming Biodiversity Net Gain legislation, the UK Government has proposed for developers to buy statutory biodiversity credits as a last resort option if they are unable to use on-site or off-site units to deliver a biodiversity net gain. The revenue from the sale of these biodiversity credits will be used to invest in habitat creation projects and administer the programme. UK Govt Aug 2023.
EU establishes carbon tax on ships
European Union is phasing in an emissions surcharge for all ships into EU ports. EU ports will levy 50% of CO2 emissions from voyages that start or end at EU ports, or 100% of emissions that occur between two EU ports. The new rules will be phased in over the next few years. Shipping companies must buy and surrender allowances of 40% of applicable emissions next year, 70% from 2025, and 100% from 2027. Business Desk Sept 2023.
Sustainable finance news
Australia-New Zealand
Reserve Bank of Australia Deputy Governor gives speech on Climate Change and Central Banks
The speech concluded that ‘Climate change has macroeconomic implications that are relevant for the setting of monetary policy and the Reserve Bank’s financial stability remit’, noting that while there are some familiar elements, ‘some are new – in particular, the heightened uncertainty around how the climate will change and how this will impact the economy and financial system.’ They also noted that they are “monitoring and analysing climate-related investment trends and their implications for the cost and availability of green and sustainable finance in Australia.” Climate Change and Central Banks | Speeches | RBA
Reserve Bank of Australia released Bulletin on Green and Sustainable Finance in Australia
The RBA released a Bulletin discussing the financial market developments in Australia that are working to address the issues surrounding the significant amounts of investment and financing required as we move away from a carbon-intensive economy in Australia to achieve our net zero greenhouse gas emissions by 2050. Specifically, the markets for green bonds, green loans and securitisations, and ethical equity funds. It noted that “Further development of these markets, along with Australia’s sustainable finance framework, will be important for the transition to a lower emissions economy”. Green and Sustainable Finance in Australia | Bulletin – September 2023 | RBA
Commonwealth to disclose Climate risks in Sovereign Bonds
It was reported by The Guardian that the Australian government agreed to settle what has been described as a world-first court case that accused it of misleading investors by failing to disclose the financial risk caused by the climate crisis. In 2020, a university student launched a class action accusing the then Morrison government of breaching a legal duty and deceiving investors in sovereign bonds by not informing them upfront of the climate risk they faced. The Albanese government agreed to publish a statement on a Treasury website acknowledging that climate change was a systemic risk that may affect bond value. Source: The Guardian
New Zealand’s greenhouse gas emissions at a historic low
New Zealand is set to announce its lowest emissions this century based on latest emissions date from the Ministry of Business, Innovation and Employment (MBIE). Contributing to this was the 12-month renewable share of electricity topped 90% for the first time since December 1981 and emissions from burning fossil fuels are now at their lowest level since June 1999. Source Carbon News Sept 2023.
Change in New Zealand Government could lead to changes in climate policy
The National Party won the largest number of seats in Parliament in the October 2023 General Election in New Zealand Due to the MMP electoral system, in order to secure a majority, the National Party is still in negotiations with the Act party and New Zealand First party. National has acknowledged it wants to take a bi-partisan approach to climate change and stated it intends to maintain the Zero Carbon legislative targets and international climate pledges, with a focus on super-charging renewable energy and EV charging infrastructure. This differs to ACT which campaigned on repealing the Zero Carbon legislation, albeit without making it a coalition negotiation bottom line. National also campaigned on a policy to remove the Clean Car Discount and remove the Climate Emergency Response Fund (which diverts revenue from ETS auctions on policies to reduce emissions) and instead use the revenue from the ETS for tax cuts. Methane targets and pricing continues to be up for debate. RNZ Oct 2023.
KangaNews Sustainable Finance H2 2023
Coverage in the H2 2023 edition includes perspectives on the next phase of Australian energy transition, efforts to incorporate biodiversity and social considerations, investor preferences in Australian ESG fixed income, and the scale and impact of Australian EV uptake. KangaNews Sustainable Finance H2 2023
International
Investors call for mandatory reporting of climate transition plans
The Australian Government recently announced they will be setting climate targets and pathways for the biggest sectors in the economy, which means that many Australian businesses will transform their operations, will need to tell investors and other stakeholders how they’re planning to do so, and what capital support they need. Three networks of investors who manage more than $150 trillion, Investor Group on Climate Change, UN-supported Principles for Responsible Investment, and Carbon Disclosure Project, have issued a joint statement saying that the current lack of standardisation and regulatory guidance means most companies’ disclosure of their plans for managing the transition to net zero is incomplete or inadequate for investor needs. IGCC Sep 2023
Hottest months ever recorded
July – September 2023 were recorded as the hottest months ever on record with September being equivalent of 1.8 degrees warmer than pre-industrial levels and 0.5 degrees hotter than the previous record for that month - the largest jump in temperature ever seen. Scientists predict that 2023 will be the hottest on record and 2024 may even exceed that. Guardian Oct 2023.
International Energy Agency (IEA) publish the Net Zero Roadmap – A Global Pathway to Keep the 1.5 degree Goal in Reach, 2023 Update
The 2023 update draws on the latest data and analysis to map out what the global energy sector would need to do, especially in the crucial period between now and 2030, to play its part in keeping the 1.5 °C goal in reach. The IEA state that while the global pathway to net zero by 2050 mapped out previously in the 2021 report has narrowed, it is still achievable. The report also emphasises that net zero by 2050 globally doesn’t mean net zero by 2050 for every country. In the proposed pathway, advanced economies reach net zero sooner to allow emerging and developing economies more time. IEA Sept 2023.
ICMA publish Market Integrity and Greenwashing Risks in Sustainable Finance paper
The ICMA has released a new paper on market integrity and greenwashing risks in sustainable finance to promote constructive conversation between key stakeholders regarding the issue of greenwashing. This aims to strike a balance between addressing the problem without leading to market complacency or excessive regulatory measures. In addition the paper includes recommendations to policymakers and regulators to support the mitigation of greenwashing. ICMA Oct 2023.
ICMA Sustainability-Linked Bond (SLB) Principles, Q&A and Blue Bonds Guidance
The ICMA published the Q&As related to SLBs to complement the SLB Principles. The Q&As are designed to support issuers to understand how to embrace SLBs and look at ways of demonstrating their ambition and increase their accountability, while strengthening the credibility of the SLB market. ICMA Sept 2023.
Additionally, ICMA, together with the International Finance Corporation and the Asian Development Bank, developed a global practitioners guide for Blue Bonds to support issuers and investors with guidance on the key components involved in launching a credible blue bond for the protection and conservation of marine ecosystems. ICMA Sept 2023.
Westpac publications and media
Westpac Head of Energy, Infrastructure & Resources David Scrivener – Pressure testing Australia’s hydrogen dream Oct 2023
Westpac IQ Thought Leadership covering biodiversity, hydrogen, reimagining power stations, and offshore wind.
Westpac Wire Promoting wellbeing is good business at this modern mutual Sep 2023
Westpac hosted a Sustainable finance roundtable in partnership with KangaNews on how Social linkage shakes the foundations – and validity – of ESG
Contact our sustainable finance team
Australia: Eliza Mathews - Head of Sustainable Finance, Australia
New Zealand: Joanna Silver - Head of Sustainable Finance, New Zealand
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