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Sustainability

ANZ Sustainable Finance Insights, Q1 2022

Sustainable finance

2022-05-05 04:30

Market update

  • Momentum continues in the global market for sustainable finance, albeit with quarterly issuance of USD348bn in Q1 2022 falling slightly (17%) below the stellar volume of issuance of USD421bn seen in Q1 2021. Reduced issuance comes amid the rising cost of debt and in the wake of the crisis in Ukraine and the resulting impact on investor sentiment more generally. Notwithstanding, Q1 2022 issuance represents the second highest Q1 issuance to date, 2.4 times the volume in Q1 2020. Cumulative global sustainable debt issuance now exceeds USD4.5 trillion.

  • Bond transactions continue to dominate sustainable finance, representing 75% of issuance within Q1 2022, and an average of 68% of issuance across the last 4 quarters. Sustainability-Linked Bond (SLB) issuance continues to grow and is expected to see further uplift as more sovereigns consider issuance in this format following the inaugural sovereign SLB issued by Chile earlier this quarter.

  • Increased regulation and taxonomy development will be continued focus areas in 2022. The increased focus is expected to boost demand for sustainable finance transactions, as issuers seek to highlight their ESG credentials and underlying sustainability strategies. Further regulatory developments at the national and global level are expected as regional standards become more closely aligned. The standardisation of reporting will be fundamental for both mandatory and voluntary disclosures.

  • Sustainable finance issuance is expected to increase in 2022, with Moody’s forecasting that bonds in sustainable finance format could represent 15% of total global bond issuance in 2022 compared with 11.3% in 2021.

  • The Australian sustainable bond market continued its run from 2021, with just over AUD7bn issued in the quarter. This represents 35% of the full year issuance in 2021 which was a record of AUD20.2bn

  • According to the Association for Financial Markets in Europe (AFME) 25.4% of syndicated loans in Europe were labelled as Green or Sustainability-Linked in 2021, compared with 20.2% of European total bond issuance in labelled sustainable finance format for the year. Both figures have increased markedly year on year.

  • 1Q2022 key figures:
    • USD145bn of Green Bonds, 5% (USD8bn) lower than 1Q 2021 at USD153bn, 13% (USD22bn) lower than 4Q 2021 at USD167bn
    • USD75bn of Sustainability-Linked Loans (SLLs), 22% (USD22bn) lower than 1Q 2021 at USD96bn, 48% (USD69bn) lower than 4Q 2021 at USD144bn
    • USD51bn of Sustainability Bonds, 22% (USD9bn) higher than 1Q 2021 at USD42bn, 25% (USD10bn) higher than 4Q 2021 at USD41bn
    • USD35bn of Social Bonds, 64% (USD61bn) lower than 1Q 2021 at USD96b, 48% (USD11bn) higher than 4Q 2021 at USD23bn
    • USD29bn of Sustainability-Linked Bonds (SLBs), 121% (USD16bn) higher than 1Q 2021 at 13bn, 14% (USD5bn) lower than 4Q 2021 at USD34bn
    • USD13bn of Green Loans, 38% (USD8bn) lower than 1Q 2021 at USD21bn, 54% (USD15bn) lower than 4Q 2021 at USD28bn

Global Sustainable Debt Market by Year and Product (USD billions)

{CFINFOGRAPHIC: global-sustainable-debt-market-by-year-product-2022-03.png}

Source: Bloomberg, 31 March 2022

 

Global Sustainable Debt Market by Year and Quarter (USD billions)

{CFINFOGRAPHIC: global-sustainable-debt-market-by-year-quarter-2022-03.png}

Source: Bloomberg, 31 March 2022
 

Notable transactions

  • Green Bonds continue to dominate the market for sustainable finance, making up an average 38% of issuance over the past 4 quarters, compared with Social Bonds which make up the smallest percentage of issuance of all sustainable finance bond formats, contributing an average 9% of total volume over the past 4 quarters. According to the Climate Bonds Initiative (CBI) 26% of surveyed Green Bonds issued in 2H 21 attracted a ‘greenium’ pricing within their yield curve.

  • Following Airport Authority Hong Kong (AAHK)’s quadruple-tranche USD4bn debut Green Bond in Q1, Hong Kong based China Water Affairs issued a USD200m Green Bond to finance Sustainable Water and Wastewater Management and Renewable Energy Projects under the group’s Green Finance Framework. ANZ acted as Joint Associate Sustainability Structuring Advisor, as well as Joint Lead Manager and Bookrunner for the AAHK Green Bond and Global Joint Coordinator for the China Water Affairs Green Bond.

  • Sustainability-Linked Loans (SLLs) remain the second largest format by issuance volume in the sustainable finance market, making up an average 27% of total issuance over the last four quarters. In Q1, Endeavour Energy executed a landmark AUD920m Syndicated SLL, becoming the first known Australian electricity distribution network to access Sustainability-Linked financing. Sustainability targets for the transaction focused on four areas including greenhouse gas emissions reduction, landfill waste diversion, net habitat gain and mental health and wellbeing. ANZ was Joint Sustainability Coordinator and Mandated Lead Arranger.

  • Sustainability-Linked Derivatives have taken off in New Zealand in Q1. Metlifecare executed the first Sustainability-Linked Derivative (SLD) in the country which was structured on the back of the SLL executed by Metlifecare in Q4 2021. ANZ acted as Joint Mandated Lead Arranger and Bookrunner, and Joint Sustainability Coordinator for the SLL. Additionally, Auckland Council has entered into what is believed to be the country’s first Sustainability-Linked lending for a local authority, converting an NZD200m facility into SLL format, also accompanied by a NZD120m SLD. The targets utilised for both instruments included increasing the number of low emissions buses in Auckland Transport’s bus fleet, reducing the council’s greenhouse gas emissions, and supporting Māori and Pasifika owned businesses and social enterprises in Auckland. ANZ acted as Sole Sustainability Coordinator for both the Auckland Council SLL and SLD.

  • Spark Finance issued New Zealand’s first SLB with a NZD100m issuance. The selected sustainability performance target relates to the reduction of absolute Scope 1 and Scope 2 greenhouse gas emissions, which is informed by Spark’s Science Based Target verified by the Science Based Target initiative (SBTi) to reduce emissions by 56% by FY30 from an FY20 baseline. ANZ acted as Sole Sustainability Coordinator and Sole Arranger.

  • Chile issued the world's first sovereign SLB in Q1 following the publication of its SLB Framework. The USD2bn SLB was 4.1 times oversubscribed, attracting total demand above USD8bn from investors in Europe, Asia and the Americas. The bond aligns with the Paris Agreement on climate change through the bond’s two KPI’s - that the country emit no more than 95 metric tons of carbon dioxide and equivalent by 2030, and that 60% of electricity production be derived from renewable energy by 2032. Further issuances from sovereign issuers in SLB format are expected to follow.

  • As part of the recent 2022 budget, Singapore announced plans to issue up to SGD35bn of green bonds by 2030 to fund green infrastructure projects and intends to issue its maiden sovereign green bond later in 2022.

  • The Hyundai Motor Group Innovation Centre in Singapore entered into a 3 year SGD230m Green Loan, which will finance the development of smart factory technology, electric vehicles production, and the construction of its eco-friendly facility, an open innovation lab for the Group's future mobility research and development. ANZ acted as Mandated Lead Arranger and Joint Sustainability Coordinator to develop the borrower’s first Sustainable Finance Framework which encompasses both green and social eligible asset categories and can be further leveraged for future financings.

  • The International Bank for Reconstruction and Development (IBRD) issued an innovative USD150m Sustainable Development Bond to support rhinoceros conservation in South Africa (also known as the “Rhino Bond”). The bond is a blended finance, outcome-based instrument that channels investments to achieve conservation outcomes. In lieu of a coupon, the issuer will make conservation investment payments to finance rhino conservation interventions. If successful, (as measured by the rhino growth rate), investors will receive a success payment at maturity up to a maximum USD9.17 per USD100 held, paid by the IBRD with funds provided by a performance-based grant from the Global Environment Facility (GEF). The bond structure passes project risks to capital market investors and allows donors to pay for conservation outcomes.

FinanceAsia and ANZ invite issuers and investors in APAC to take part in the 5th Annual Sustainable Finance Poll.

The survey will explore this rapidly-growing and evolving segment of the debt markets, including:

  • Appetite for green and sustainable debt
  • Impacts of green and sustainable considerations on strategies and decisions
  • Trends, challenges and opportunities in relation to buying / issuing green and sustainable debt

Go to survey

 

Broader developments

Emerging themes

  • The Taskforce on Nature-related Financial Disclosures (TNFD) released the first beta version of its nature-related risk-management and disclosure framework. The beta version of the framework includes three components: foundational guidance including key science-based concepts and definitions, disclosure recommendations aligned with the approach and language of the climate-related guidance developed by The Task Force on Climate-related Financial Disclosures (TCFD), and practical guidance on nature-related risk and opportunity analysis for companies and financial institutions to consider incorporating into their enterprise risk and portfolio management processes. The prototype framework marks the beginning of an 18-month process of consultation and development with a broad range of market players and stakeholders. Earlier in 2022, the TNFD announced partnerships with a group of leading science and industry bodies including Global Reporting Initiative, SASB Standards Reporting Team, Science Based Targets Network, UNEP World Conservation Monitoring Centre and WWF.

  • Institutional Shareholder Services’ (ISS) responsible investment arm, ISS ESG, launched the ISS ESG Water Risk Rating, aimed at helping investors identify and manage freshwater-related risks in portfolios, build freshwater-focused portfolios, funds and indices, through to supporting their water-related stewardship and engagement programs. Initially, the rating system will cover approximately 7,400 companies globally.

  • Abu Dhabi Global Market (ADGM) announced a planned launch of the first fully regulated carbon trading exchange and clearing house globally, expected later this year in partnership with AirCarbon Exchange (ACX). ADGM expects to become the first jurisdiction to regulate carbon credits and offsets and to issue licences for exchanges to operate both spot and derivative markets. ACX will be established as a recognised investment exchange and regulated by ADGM when it launches in 2022.

  • Shell and Macquarie Group have closed a second deal with a sustainable energy services provider, C-Quest Capital to fund the generation of more than 200 million carbon credits with verified Sustainable Development Contributions to the Voluntary Carbon Market over the next 10 years. The carbon credits relate to the expansion of C-Quest’s clean cookstoves portfolio in Sub-Saharan Africa. Emissions reductions will be achieved through utilising clean cookstoves that are three times more efficient than open fire cooking, reducing the amount of unsustainably harvested firewood, and switching to sustainable sources of biomass fuels such as crop residue.

Investor perspectives

Regulatory environment

  • On March 21 the U.S. Securities and Exchange Commission (SEC) proposed rule changes which would require SEC registrants to disclose their physical and transition risks related to climate change, and their greenhouse gas emissions in their registration statements and periodic reports, akin to the Taskforce on Climate-related Financial Disclosures (“TCFD”) reporting framework and the Greenhouse Gas Protocol. The proposed rule changes would require registrants to disclose information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions. The proposed rules would include a phase-in period, with an additional phase-in period for Scope 3 emissions disclosure which must be made if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.

  • New disclosure rules developed by the European Banking Authority (EBA) will require EU banks to report the volume of financing activities that are environmentally sustainable according to the EU taxonomy, as a share of their overall portfolio. The EBA’s final draft ‘technical standards’ on environmental, social and governance (ESG) risks will help make bank disclosures comparable, address shortcomings of institutions’ current ESG disclosures and will also help establish best practices at an international level. From 2024 onwards, banks must publish their green asset ratio, and a banking book taxonomy alignment ratio. The rules will apply to about 150 large banks, who will be required to comply twice-yearly.

  • The EU-mandated Platform on Sustainable Finance published its Technical Working Group Report containing recommendations to the European Commission on technical screening criteria for the four remaining environmental objectives of the EU taxonomy – water, pollution, biodiversity and a circular economy. The report also contains recommendations to improve the design of the Taxonomy and the Taxonomy criteria.

  • In March the Platform on Sustainable Finance also recommended the extension of the EU taxonomy to include all economic activities including those which cause significant harm to the environment and are therefore judged to be ‘unsustainable’, as well as intermediate activities which are neither ‘unsustainable’ or have ‘substantial contribution’ to at least one environmental objective. ‘Unsustainable’ activities would be classed as either ‘Unsustainable performance requiring an urgent transition to avoid significant harm’ or ‘Unsustainable, significantly harmful performance where urgent, managed exit/decommissioning is required’.

  • In Canada, a proposed Climate Aligned Finance Act would require financial institutions to hold capital adequate to the proportional climate risks they generate, including the consideration of a risk weight (1.25%) for any loan, bond or derivative exposure to new fossil fuel resources or infrastructure. The proposed legislation would require the alignment of the Bank of Canada’s activities with Canadian climate commitments, require financial institutions to develop action plans and targets, establish a duty of alignment with climate commitments for Directors and Officers of entities, and require the appointment of a person with climate expertise to certain Boards of Directors. Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, recently completed a pilot with the Bank of Canada and six financial institutions on climate scenario analysis to develop scenarios that will help the financial sector identify, measure and disclose climate-related risks. All scenarios showed that the transition to a low-carbon future will entail important risks for some economic sectors.

  • Indonesia published its first Green Taxonomy which has been structured based on Indonesia Standard Industrial Classification (KBLI). The criteria are divided into three categories: green (do no significant harm, apply minimum safeguard, provide positive impact to the environment and align with the environmental objective of the taxonomy), yellow (do no significant harm), and red (harmful activities). The taxonomy assesses 919 subsectors, of which 904 are not directly categorised as green.

  • The World Bank has proposed the establishment of a global independent body to support the development and assessment of sovereign SLBs. In the report- ‘Striking the Right Note: Key Performance Indicators for Sovereign SLBs’ the World Bank provides a framework which is intended to bridge the gap between what sovereign investors will view as appropriately ambitious actions and what issuing countries see as achievable targets. Other recommendations include the establishment of methods to define appropriate reporting periods noting the potential for time lags in indicator data, and the integration of biodiversity valuation into national accounting and reporting systems to allow access to better indicators for nature-related objectives.

Product guidelines

  • APLMA, LMA and LSTA jointly published their Guidance on Social Loan Principles in March 2022. The document accompanies the Social Loan Principles (SLP) which were originally published in 2021 and provide a framework to what is recognised as an increasingly important area of finance. Guidance on the SLP has been provided in order to promote the development of this product, and underpin its integrity whilst also providing market practitioners with clarity on their application and promoting a harmonised approach. The guidelines confirm the ability for loan products to be aligned to the Social Loan Principles, Green Loan Principles and/or the Sustainability-Linked Loan Principles simultaneously.

  • ICMA also published an updated version of its Guidance Handbook in January 2022. The document is a compendium of Q&A which accompanies the Sustainable Finance Principles and Guidelines documents to provide further guidance to market participants. The update provides clarity on the way in which a Green, Social or Sustainability (GSS) bond could be used to repay an existing GSS Bond.

  • In January 2022, the International Finance Corporation (IFC) published its Guidelines for Blue Finance which builds upon the Green Bond and Loan Principles and provides guidance on Blue Bonds and Blue Loans including eligible blue project categories to guide IFC’s investments to support the blue economy, primarily contributing to Goals 6 and 14 of the United Nations Sustainable Development Goals. IFC aims to follow this Guidance document to finance the blue economy and encourage best practices that can enable the growth of Blue Finance globally.

ANZ updates

  • In February 2022 ANZ announced a strategic partnership with Pollination, a leading global climate change investment and advisory firm. The partnership will see ANZ invest USD50m for a minor equity stake in Pollination and a Board seat. The agreement allows both companies to accelerate their impact by delivering solutions and support across the Asia Pacific at a volume and a scale unreachable without the partnership. For businesses staring into this change, being able to rely on this partnership will provide the depth of understanding and experience needed to navigate the transition. Pollination can see and process the risks of the green tilt that others cannot while ANZ has a track record helping customers reconstitute finance sustainably and leads the market in doing so. The strategic partnership underpins ANZ’s Environmental Sustainability strategy, which is focused on 12 key priority areas - including advisory and carbon trading - that will help support the bank’s customers’ transition to net zero.

  • In March 2022 ANZ, Qantas and INPEX announced the signing of a MoU to progress a project in Western Australia’s vast Wheatbelt region. The project concept, initiated by ANZ, looks to integrate native reforestation and carbon farming with the production of biomass for renewable biofuels. Following an initial prefeasibility study, the parties will undertake a more detailed study into the harvesting and processing of native biomass crops and selected agricultural waste residues, for the production of the renewable biofuels. Under this model, native reforestation for the purposes of carbon farming will be applied to marginal-to-low yielding land. This approach provides an opportunity for landowners to benefit from more drought-resilient cash crops, diversifying farm incomes and reducing the volatility of crop yields and cashflows. It will also provide direct exposure to the rapidly growing carbon and renewable biofuels markets while supporting scalability. The project aligns with ANZ’s focus on supporting its customers in their transition to net zero, which is core to ANZ’s environmental sustainability strategy.

  • ANZ Sustainable Finance welcomes Jonathan Bloch who joins us as an Executive Director in Perth from ANZ’s Resources, Energy and Infrastructure team, Jenny Fan who joins us as a Director in Hong Kong from ANZ’s Debt Capital Markets Team and Sarah Foley who joins us as an Analyst in Melbourne after spending time working within ANZ’s Syndications, Structured Asset Finance and Resources, Energy and Infrastructure teams.
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ANZ Sustainable Finance Insights, Q1 2022
ANZ experts
Sustainable finance
2022-05-05
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ANZ contacts

ANZ has a global Sustainable Finance Team with presence in Sydney, Melbourne, Perth, Singapore, Hong Kong, London, Auckland and Wellington.

Feedback and enquiries can be directed to sustainablefinance@anz.com.

 

Australia 

Katharine Tapley

Head of Sustainable Finance
T: +61 2 8937 6092
E: Katharine.Tapley@anz.com
Based in Sydney

Jo White

Head of Portfolio, Sustainable Finance
T: +61 2 8937 6062
E: Jo.White@anz.com
Based in Sydney

Emily Tonkin

Executive Director, Sustainable Finance
T: +61 2 8937 8454
E: Emily.Tonkin@anz.com
Based in Sydney

Bronwyn Corbet

Executive Director, Sustainable Finance
T: +61 4 1941 5343
E: Bronwyn.Corbet@anz.com
Based in Melbourne

Jonathan Bloch
Executive Director, Sustainable Finance
T: +61 8 6298 3169
E: Jonathan.Bloch@anz.com
Based in Perth

Tessa Dann

Director, Sustainable Finance
T: +61 2 8037 0602
E: Tessa.Dann@anz.com
Based in Sydney

Tania Smith

Director, Sustainable Finance
T: +61 3 8655 1655
E: Tania.Smith@anz.com
Based in Melbourne

Katie Wood

Associate Director, Sustainable Finance
T: +61 4 5994 9710
E: Katie.Wood@anz.com
Based in Melbourne

Kate Cheeseman

Senior Manager, Sustainable Finance
T: +61 2 8937 6590
E: Kate.Cheeseman@anz.com

Based in Sydney

Ivan Ng

Senior Manager, Sustainable Finance
T: +61 4 8146 1415
E: Ivan.Ng@anz.com
Based in Melbourne

Jessica Liu

Manager, Sustainable Finance
T: +61 4 3492 4546
E: Jessica.Liu@anz.com
Based in Sydney

Sarah Foley

Analyst, Sustainable Finance
T: +61 4 8106 1079
E: Sarah.Foley@anz.com
Based in Melbourne

New Zealand

Dean Spicer

Head of Sustainable Finance, New Zealand
T: +64 4 381 9884
E: Dean.Spicer@anz.com
Based in Wellington

Kate Gunthorp

Director, Sustainable Finance
T: +64 9 252 6122
E: Kate.Gunthorp@anz.com
Based in Auckland

Caroline Poujol

Director, Sustainable Finance
T: +64 2 161 9532
E: Caroline.Poujol@anz.com
Based in Auckland

Monique Wilson

Manager, Sustainable Finance
T: +64 9 252 6354
E: Monique.Wilson@anz.com
Based in Auckland

Poppy Brinsley

Analyst, Sustainable Finance
T: +64 2 7844 7095
E: Poppy.Brinsley@anz.com
Based in Auckland

 

International

Stella Saris Chow

Head of Sustainable Finance, International
T: +65 6708 2896
E: Stella.Saris@anz.com
Based in Singapore

Stephanie Vallance

Director, Sustainable Finance
T: +65 6708 2839
E: Stephanie.Vallance@anz.com
Based in Singapore

Mara Chiorean

Director, Sustainable Finance
T: +65 8328 1532
E: Mara.Chiorean@anz.com
Based in Singapore

Nancy Wang

Director, Sustainable Finance
T: +852 6595 3762
E: Nancy.Wang3@anz.com
Based in Hong Kong

Jenny Fan

Director, Sustainable Finance
T: +852 6030 7985
E: jenny.fan2@anz.com
Based in Hong Kong

Kaitlin Edwards

Senior Manager, Sustainable Finance
T: +44 2032 292601
E: Kaitlin.Edwards@anz.com
Based in London

Prash Odhavji

Senior Manager, Sustainable Finance
T: +852 3917 7307
E: Prash.Odhavji@anz.com
Based in Hong Kong

Shaina Tan

Manager, Sustainable Finance
T: +65 9117 9694
E: Shaina.Tan@anz.com
Based in Singapore

 

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