LISTEN: the next stage of green finance

The advancing sustainable finance market is moving to its next stage of development, and could do so at an increasing rate over the course of 2022, according to Jimmy Choi, Head of Capital Markets at ANZ Institutional.

Speaking ahead of ANZ’s Debt Conference in June, Choi told ANZ Institutional On Air that even amid a volatile period for global markets, the focus on sustainable finance remains high as investors become more educated and demanding on green issues.

“This development is now in the kind of ‘second innings’, I would say,” he said. “The first stage was the last few years - everyone was just getting up to speed.

“But we’ve now moved to a stronger development of frameworks [and] understanding. There’s a lot more sophistication, and I think that's good for the market.

“Despite the volatility, a lot of discussions are being had, and I think you'll see a lot of development in the next 12 months.”

Choi was joined in conversation with Tessa Dann, Director, Sustainable Finance at ANZ Institutional. You can listen to an edited version of the conversation below.

Dann was bullish on the prospects of the market over the next 12 months, while noting some players had parked plans to pursue sustainable finance until later in 2022.

“It's fair to say that the outlook is still pretty strong for sustainable finance globally,” she said. “But we maybe won't see the same extent of growth that we saw last year.

“We had over $US1.7 trillion worth of sustainable debt activity globally last year alone, which for context was just over double the volume of activity in 2020.”

Dann said the Australian dollar sustainable bond market has started the year very strongly, with $A7 billion in issuance seen the first quarter, compared to “just under $A4 billion of issuance” in the previous corresponding period.

In addition, as the market matures, specific transition-focussed instruments were likely to play a greater role in the future, Dann said.

“The good news is awareness of the transition [to net-zero carbon] - broader than just sustainable finance products, but the elements of the transition - has really increased across the market,” she said, noting there was still work to be done.

“We haven't seen this come through into more transition-labelled instruments - the issuance of transition bonds or transition loans is still pretty muted. But overall awareness has definitely increased and that will translate into more products that incorporate elements of transition”,

Examples of this include sustainability-linked bonds which can embed decarbonisation targets, Dann said.

Key area of growth

Sustainable finance has been a key area of growth in the market recently, and Choi is confident that trend will continue.

“We definitely do see a growth in liquidity for that product,” he said, noting ANZ had seen any deal could be “one or two times oversubscribed more than a regular, plain vanilla bond format”.

“That's because there is extra demand and liquidity coming out from fund managers, real money, insurers that are targeting ESG formatted bonds,” he said.

Choi said sustainable volumes globally have fallen in 2022 alongside everything else – but targets from the investor side in asset allocation have risen.

“What we are seeing is multiple oversubscriptions [compared to] plain vanilla bonds, which is a good sign, which then leads to - in certain in certain deals - better pricing outcomes,” he said.

It also highlights the tangible sustainable expectations and targets investors have, according to Choi.

“I think that's a very positive sign, what we're seeing in pricing - and that will play into the secondary market as liquidity picks up,” he said.

Dann said there were no signs of a slowdown in customers wanting to discuss sustainable finance and understand what their options are.

“These companies are being pushed,” she said. “They're being asked questions whether they do a sustainable finance transaction or not.”

Unprecedented

Choi said current conditions in debt markets, with rising rates impacting sentiment and volume, were almost unprecedented in a modern context.

“It's a very interesting time,” he said. “Volatility has been the theme. The correlation risk of all assets and what we're seeing with inflationary concerns has really impacted asset prices across the board.

“But having said that, we had a record volume [in 2021]. On the financial institution side this year, volumes are out significantly as banks have come back to fund.”

The experts also touched on growing interest in the ‘social’ aspect of sustainable finance, how the market is addressing greenwashing concerns, and the key questions customers will be asking bankers about sustainable finance over the next year.

Listen to the podcast above to find out more.