CommBank recently brought together two leading participants in the sustainable finance market to discuss the role institutional investment could play in accelerating the transition to a sustainable and net-zero economy.
Lisa Story, head of corporate planning and treasury at Investa Property Group, represented the issuers’ side in the discussion while Damian Graham, chief investment officer at First State Super (soon to be known as Aware Super), spoke from an investor’s perspective. Mark Peacock, director, sustainable finance at CommBank, was also on the panel, which was moderated by KangaNews’ head of operations, Helen Craig.
The consensus was that institutional investment has a significant role to play and importantly, has the capacity to help the transition to a sustainable economy. The panellists said capital is available to be deployed to support issuers or borrowers to set and meet environmental, social and governance (ESG) targets but the challenge now is to provide the right structure to incentivise stakeholders to make that journey.
A green label is not enough, investors seek holistic commitment
Peacock cited a recent survey of over 40 of Australia’s largest funds and investment managers conducted by CommBank in partnership with KangaNews which found that more than 80 per cent of respondents said issuers would struggle to access capital if they were poor ESG performers. Over the next five years they expect a premium to be applied to credit or the borrower may even be locked out of the capital markets.
Peacock said investors were not just looking at the issuance in isolation but were assessing the overall portfolio and credentials of the issuer – simply having a green label on a particular instrument was not enough. Graham agreed, noting that First State Super considers the issuer’s entire portfolio not just the debt. “We want to be investing in companies that are strong from an ESG perspective,” he said.
Investa Property Group is considered a market leader in sustainability for the property industry and in greening its portfolio.
“We adopted an approved science-based target of net zero emissions by 2040 and our base data is certified by third parties … our investors are happy with that approach,” said treasury head Story.
Graham said independent verification of green credentials was essential and that green washing was a real risk. “We want to make sure what we’re investing in is true to label.”
Story added that investors need to ask for evidence and will feed back to issuers if they don’t think the product is true to label.
Selecting the right product construct
Peacock suggests sustainability-linked structures are emerging as a flexible alternative to green-labelled issuances and would broaden the opportunity for issuers or borrowers to participate in the green, social, sustainability (GSS) market.
A sustainability-linked structure requires the issuer to agree up front to ambitious and measurable ESG metrics and a pricing incentive or disincentive is embedded in the instrument to ensure the borrower strives to achieve those metrics.
From an investor’s perspective, Graham notes that a two-way pricing mechanism was not as attractive because it held increased risk. “We invest in bonds for a certain outcome. We favour the structures where you get an upside potential. The penalty (lower coupon if environmental targets aren’t achieved) can make bonds a riskier investment,” he explains.
Using capital to build a better Australia
The panel discussed the vast opportunity for institutional capital to support the economy out of Covid-19 and more broadly thereafter.
“Through Covid there has been a sharpened focus on social impacts of how capital can be deployed. There is heightened awareness for the need to support those who are vulnerable in the community, particularly job maintenance and job creation,” said Peacock.
He said there’s an important role for capital to play in supporting those outcomes and while there was no shortage of capital there were some structural challenges to be resolved.
First State Super is keen to support those economic imperatives and has been assessing how best to invest in jobs growth and key worker affordable housing. Graham said these were challenging spaces in which to invest, and that the accommodation space could benefit from regulatory change.
“We’d like to have an impact on affordable housing. We want to put billions in that space, not millions … we’d like imposts to institutional investors to be addressed,” he said.
Complexity of the market
The panel agreed this is a complicated market and standardisation of terms and clarity on issuers’ and investors’ expectations would be helpful – it would make it easier for investors to access and compare.
The Australian Sustainable Finance Initiative may be able to provide clarity. It has been established to create a roadmap for realigning the finance sector to support better social, environmental and economic outcomes for Australia. Training and education requirements will be considered plus the role regulators can play to incentivise banks to lend to projects that a have a clear and measureable impact.
“All parts of the economy need to have a broad approach to ESG. Everyone has to be on the journey and thinking about what’s right for their business,” said Story.