Financing the future with sustainability front and centre
Joanna Silver, Head of Sustainable Finance for Westpac NZ, discusses why businesses in New Zealand should look at taking a sustainable finance approach to their funding, what’s involved, how they can build sustainability strategies, and how they can benefit from doing so.
Companies and governments around the world are experiencing mounting investor and stakeholder pressure to play their part in addressing material environmental and social challenges.
Companies are starting to feel the heat (from a range of stakeholders, including lenders) to play their part in mitigating their organisational and supply chain impacts. Whether these impacts relate to climate change, energy efficiency, waste, financial inequality, diversity or health and safety, ESG risks touch every sector. In response, many organisations are now putting in place robust sustainability plans and in turn, adopting sustainable finance structures to support and encourage them to address these issues.
Sustainable finance: what it is and how to use it
Ms Silver says that sustainable finance means money borrowed specifically to help a company achieve its sustainability goals.
“Debt can be called sustainable when either (a) the funds borrowed are tagged to certain environmental or social assets (e.g. a green bond), or (b) the cost of borrowing that debt is linked to material and ambitious sustainability outcomes (e.g. a Sustainability-Linked Loan).”
Going further, she adds that funds connected with a sustainability strategy must meet certain international principles that govern those sustainable finance structures.
“The International Capital Markets Association, and the Loan Markets Associations have set out principles relating to bonds and loans respectively, and the documents dovetail well together. There are also numerous examples of sustainable finance transactions in the global market so we have a lot of precedent transactions to help inform and guide the development of the local market here in New Zealand.”
A recent example is the NZD125 million Social Loan that Westpac New Zealand and Te Pūkenga signed, where the funds are to be used for social activities that meet the “Social Loan Principles”. This was the first Social Loan in Australasia and potentially the first in the world.
“It is about linking borrowing directly to sustainability activities and goals.”
Joanna Silver, Westpac New Zealand
Getting strategy set first
Before engaging in sustainable finance, Westpac NZ encourages customers to seek help from trusted advisers in putting together a sustainability strategy that addresses the needs of stakeholders based on their sector, the products and services they sell, and their sustainability risks and opportunities.
“Start with your stakeholders: reach out to them and ask what matters to them most. This is called a “Materiality Assessment” and once completed can help companies build a credible sustainability strategy. The strategy needs to contain meaningful and ambitious short and medium-term measurable targets and have full Board buy-in and Executive team ownership.
“Sustainability is increasingly becoming integrated into corporate strategy. And when you develop and commit to a robust sustainability strategy, you can align your financing with it. A range of borrowers are approaching Westpac to express an interest in aligning their organisations’ sustainability strategies with funding because they see the many benefits in doing this,” Ms Silver says.
Sustainable finance is a way to hold corporates to account for their sustainability ambition, and sometimes to ramp that up a little to meet stakeholder expectations. And it’s no longer about the traditional focus on shareholders. Instead, we are seeing a shift in focus to all stakeholders including customers, team members, lenders, staff, suppliers, regulators, communities, and so on,” Ms Silver says.
"Sustainable finance is a way to hold corporates to account for their sustainability ambition, and sometimes to ramp that up a little to meet stakeholder expectations.”
Engaging in sustainable finance also helps to mainstream sustainability into risk management and corporate governance processes, and foster a long-term focus to grow a more future-focussed and resilient business, she says.
“It also helps create new investment opportunities and competitive advantage – both for issuers and investors. A lot of institutional investors say they’re doing it because it’s the right thing to do, and it provides them with an edge. Many of the investors we have spoken to want to see more ambition from issuers so that thematic will play out in the next 24 months also,” says Ms Silver.
Every sector will need to transition
New Zealand is not immune to needing capital from domestic and international sources to fund its transition. Ms Silver highlights that every business sector will need to transition to address environmental and societal challenges, particularly on the climate side – and this will require material amounts of capital.
“The Emissions Trading Scheme is already a core lever for change, and the Climate Change Commission’s recommended budgets are forging a new path towards a low-emissions, resource-efficient, just and inclusive economy. Given the role that banks play in capital provision in our market, the onus really is on us to help align our balance sheet and our customers’ balance sheets towards sustainability.
“Access to capital is going to be key, and banks, investors and issuers acknowledge that the flow of capital is going to change as we learn more about future-oriented risks.”
The biggest sustainability challenges facing New Zealand’s finance sector
“Often organisations have big, bold and long-term (i.e. 5–10 year) future-bound targets but haven’t worked out the annual milestones to get there. By working with our customers to help them set those all-important annual stepping stones, we are helping them accelerate their strategic planning and increasing the likelihood of achieving those ambitious targets that they’ve told their stakeholders they’re committed to.”
When asked why more companies aren’t doing this, Ms Silver comments that it is isn’t for lack of ambition.
"The flow of capital is going to change as we learn more about future-oriented risks and our requirements to disclose them.”
“It is more about strategic integration and execution. And it is about the data they are working with.”
“Companies need to treat their nonfinancial data with the same integrity, auditability and transparency as they do their financial data.
“By telling your stakeholders you know your greenhouse gas emissions inventory is accurate, and your science-based target has been validated this provides for a more robust dialogue with your stakeholders. Increasingly, these things will directly connect to your ability to access capital from banks and the capital markets.”
She concludes by saying that the need is now pressing for companies to put strategic goals and ambitions in place, with funding linked to sustainability planning to achieve those ambitions.
“For organisations looking to the future, the structures, principles, lenders and investors are all there, willing and waiting to help you on your sustainability journey.”