Delivering on ESG has benefits In finance and beyond

In September 2021, Peter Owles and Daniel Collins sat down with Dean Spicer and Karl Nicholson from ANZ to talk about the world of sustainable finance and infrastructure in New Zealand.  Here's a snapshot of the wide ranging discussion.

The role of private finance in infrastructure in New Zealand

Q: What's your view on the role of private finance in infrastructure development in New Zealand generally?  Do we have enough tools in the toolbox to facilitate financing for infrastructure?

A: Private finance has a role.  If you look at the infrastructure that is performing well, we look at things like telecommunications and electricity - both of which are privately financed.  Clearly, you don’t want everything privately financed.  However, when you're talking about billions of dollars' worth of investment that needs to be built, it doesn’t make sense to restrict yourself to using one method of financing.  New Zealand is a small country, and we need to be utilising everything we can to close the gap.

The tools are available.  There is not anything out there that is not available in New Zealand.  It’s just the willingness to use them.

Green loans and sustainability linked loans (SLL) markets

Q: Where do you see the green loan and SLL markets developing in New Zealand?  Is there going to be such a tidal wave that is going to take over the market and create this huge incentive for corporates to go much greener than they are?

A: The trend is going to continue.  Take financing out of the picture and you see that stakeholders have driven this whole macro trend.  Businesses today realise that they need to be able to evidence the fact that they are taking these broader issues seriously; in other words, they need to be able to factor in environmental and social concerns.  This isn't going to turn around any time soon.

The interesting thing is, as a bank, when we go to capital markets and think about the questions we're being asked by investors, that bar for green finance is rising every year.  The expectations of investors, in terms of the disclosure requirements and evidence that the banks and their customers are delivering on a green strategy, has been like a blow torch.

Q: And this is having an impact on capital raising?

A: Those companies that don’t, or can't move with this trend towards green finance, are at the risk of finding capital hard to come by in the future.  If they're unable to embrace a green strategy, they'll find that capital will become more expensive over time.  But one of the things that comes up again and again is that once you complete a sustainable financing transaction, whether it’s a green bond or a sustainably linked loan, that the improved stakeholder engagement has been a big plus, and often it’s the internal stakeholders, the staff, who are the most engaged. 

Green financing is effectively bringing different parts of the business together.  The financing piece is a proof point of the whole concept being bought to life for that business. 

Today ESG is mentioned in every conversation we have with a corporate.  The exception is not talking about it.  Even the companies you wouldn’t expect to, are coming to it.  And one of the big points is that new hires are asking what is your ESG Policy?  Honestly, if you don’t have one it's harder to attract good people.

Financing 'less green' projects

Q: What does this movement towards financing of green projects mean for projects or infrastructure maybe which doesn’t tick all the green boxes, which our economy and the world's economy still need?

A: The first point is that every infrastructure project will have to be greener than it is.  The reality is that banks and investors will likely still get stuck in legacy investments like coal fired projects because there's no refinance market.

The second point is every organisation including less 'environmentally friendly' projects like new roads, which do need to be financed, will have to be procured in the greenest possible way.

Incentivising banks to lend green

Q: Do you think there's more that can be done to enable banks to provide more incentive to support low carbon infrastructure or green lending?

A: We are going to get there without the Reserve Bank of New Zealand having to do anything.  In our risk models, more and more risk is being built in for transition to a low carbon environment.  If a customer doesn’t have a transition plan, they're going to be marked down and that’s happening quickly.

From a project finance perspective, we've certainly got clients who need to put more thought into their transition plan and, as a result, they are a lot harder to get credit approvals for which is the reality.

As a bank, there is an incentive in terms of greater depth of investor if you go to markets in a green format and potentially a small pricing benefit as well.  So as markets develop that pricing deferential will increase, as investors will expect a higher return if they're going to be financing something that doesn’t meet ESG criteria.

Final comments

Q: Any final comments?

A: This is the biggest change in the industry that we've seen in the generation.  Look at industries like electricity. 

It's turning electricity on its head, which hasn’t changed for 70-80 years, and we're about to see it completely change within 10 years.  You can apply that to a lot of other industries.