Green Loans Australia & New Zealand - Prepared by the Climate Bonds Initiative - Macquarie ...
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Green Loans Australia & New Zealand Prepared by the Climate Bonds Initiative Sponsors
Introduction
Report Highlights Contents
2 Introduction
Australia and New Zealand are
endowed with key ingredients to grow 3 Green corporate loans
a green loan market 7 How to label a green loan
8 Green consumer loans
Significant boosts to supply of credit
for green lending 10 Sustainability-linked loans
12 Actions to catalyse growth
Impetus to label loans from corporates
demonstrating ESG credentials and
accessing ‘green’ lending
About Climate Bonds
Initiative
Corporate benefits of labelled loans are broad
Climate Bonds Initiative is an investor
focused not-for-profit, promoting
investment in the low-carbon
Global green loans and sustainability- Both countries are endowed with favourable
economy. Climate Bonds undertakes
linked loans have grown rapidly in the factors to significantly grow a climate/green
advocacy and outreach to inform and
past two years. The Australia and New labelled loan market:
stimulate the market, provides policy
Zealand market is at early stages with
• corporate loan and residential mortgage models, market data and analysis, and
potential for growth
markets are dominant forms of funding, administers the international Climate
Australia and New Zealand require much larger than corporate bond markets; Bonds Standard and Certification
significant investments in green Scheme. Climate Bonds’ Green Bond
• financial markets are highly sophisticated;
infrastructure and assets to transition to Database is based on alignment with
a low carbon economy in line with their • corporate sector is actively engaged in the Climate Bonds Taxonomy.
international commitments. The private climate change and transitioning to a net
Climate Bonds Certification is a labelling
sector, with one of the largest savings zero emissions economy;
scheme. Rigorous scientific criteria
pools in the world as well as one of the
• developed and diversified green and ensure that it is consistent with the 2˚C
largest bank balance sheets per capita, has
sustainable finance sectors; and warming limit of the Paris Agreement.
the means to support public spending to
Certification requires initial and ongoing
provide the required funding. Sustainable • strongly growing ESG agenda among local
third-party verification to ensure the
finance will play an important role in asset owners, asset managers, and banks.
assets meet the metrics of Sector
transitioning economies to a low carbon
Additionally, New Zealand’s central Criteria.
basis and promoting social, financial and
government is pushing forward aggressively
economic resilience for a future in line with
on decarbonising its economy and
environmental and societal objectives.
mandating climate risk disclosure.
About this report
What is a Green Loan? Benefits of the green label
This paper covers the labelled green
Green loans are any type of loan Benefits for borrowers include: corporate loan market in Australia and New
instrument used to finance or re-finance Zealand. It explores what has happened so
• Broaden the lender / investor base and
projects, assets and activities with far, best practice in labelling a green loan,
offer new engagement opportunities
environmental benefits. Green loans and what should be done to channel loan
are based on ‘use of proceeds’ (UoP) • Enhance external reputation and visibility markets for climate change investment.
with borrowing proceeds transparently Additionally, we provide commentary
• Strengthen internal visibility of green
earmarked for eligible ‘green’ assets. It on sustainability-linked loans and green
issues e.g. with Board
is global best practice for green loans to consumer loans.
be arranged in line with the Green Loan • Build competitive advantage,
Principles (GLP), the Climate Bonds demonstrate sector leadership and
Standard (to the extent of available encourage better standards
criteria), as well as a number of country-
• Support risk management and future
specific guidelines.
proofing of the business
Green Loans Australia and New Zealand 2A growing Green corporate loan market
Early stage market seeing growth Global labelled bond and loan issuance rapid growth
The labelled corporate loan market in 400
Australia and New Zealand has emerged in
recent years and seen strong growth, with
14 labelled Green loans locally since the first
ones in 2018. 300
The global labelled loan market has seen
broadly two types emerge. ‘Green loans’
are proceeds based while ‘Sustainability-
200
linked loans’ (SLL) are target or performance
Amount issued (USDbn)
based (see box on page 10). Both types have
developed, with the younger SLL exceeding
Green loan volumes globally. This is in
100
contrast to the more developed green, social
and sustainability labelled bond market,
where the vast majority of issuances have
been on a ‘use of proceeds’ basis. 0
2014 2015 2016 2017 2018 2019 2020H1
Loan market is larger, bonds
leading the way on labelling Pandemic bonds Social bonds Sustainability bonds
The loan market in Australia and New Green loans Green bonds
Zealand is much larger than the local bond
market, yet far more green and other labelled Note: includes ‘use of proceeds’ bonds/loans only.
bonds have been issued locally compared
to labelled loans. Australia’s loan market is
over AUD 3 trillion compared to a domestic
Significant boosts to supply Banks globally are keen to tap into strong
bond market of AUD 1.8 trillion, with non-
of credit for green lending to institutional investor demand for green
financial corporate loans at AUD 1.0 trillion
support growth of green loans bonds with their own issuances. Some
banks will prioritise green loans (both
compared to bonds of AUD 240 billion.1 New Bank green lending targets, risk-adjusting
labelled and unlabelled) as they seek
Zealand has NZD 150 billion of corporate of ESG factors by lenders, and strong
eligible assets to earmark against the issue
loans.2 Loans apply to a far wider group of stakeholder and institutional investor
of their own green bonds. This will lead to
corporate borrowers than can participate in demand for green products all increase the
increased allocation of credit for green loans.
green bonds. supply of credit for green projects. This will
Furthermore, some institutional investors,
lead to more competitive pricing from banks
The labelled bond market has led the way, such as large superannuation funds, are
for green loans (labelled and unlabelled),
in part, due to global precedent with larger increasingly looking to invest directly into
to the benefit of borrowers. Early borrowers
volumes of labelled bonds globally, and green loans.
of green loans have been looking to tap
earlier developments in market infrastructure
into this growing pool of green credit, some
such as global principles, than loans.
supported by labelling.
The local green loan market is at a similar
The four major Australian and New
“New Zealand continues to
nascent stage to the green bond market
Zealand banks have declared targets for
work towards an effective
several years ago with a handful of early
green lending portfolios. These targets will
transition to a low carbon
pioneer borrowers. Green and other labelled
boost credit supply for green loans and are
economy. We are delighted to
bond issuance in Australia has seen strong
expected to increase over time. The green
support this ambition, and we
annual growth since the first ones in 2014,
lending criteria for some banks is regardless
see the growth of the labelled
and from a diverse range of issuer types.
of product type, so can apply to either a
loan within the green finance
This growth has largely been driven by
green loan or SLL.
market as an important
strong investor demand for green products development toward meeting
along with a number of contributing Investors and lenders are increasingly our climate goals.”
factors, such as improved understanding including environmental, social and
Jason Patrick, Chief Investment Officer,
of green definitions, a common language governance factors in their credit
New Zealand Green Investment Finance
among market participants, and simplicity, assessments. This is typically at the
transparency and credibility of products. corporate level of the borrower. Some banks,
An increase in ESG awareness of issuers particularly in Europe, are risk-adjusting
and ESG agendas of asset owners has also for ESG factors in determining pricing.
driven greater market activity. Green loans This will increase demand of labelled (and
(and SLL) have similar ingredients to suggest unlabelled) structures issued by companies
potential for growth. demonstrating their ESG credentials.
Green Loans Australia and New Zealand 3Corporates provide impetus to Development of Principles The GLP and SLLP were both
label loans and Guidelines developed by a working party,
consisting of representatives from
Corporates seeking to demonstrate their Principles for both green loans and
leading financial institutions active in
ESG credentials through sustainable finance sustainability-linked loans have been
the sustainable lending market, with
markets are, in part, driving demand for published in the past couple of years to
the support of the International Capital
labelling of green loans. These loans are support the development of both these
Market Association (ICMA).
complementing their ESG agenda, which markets. The Green Loan Principles (GLP)
are often driven by increasing stakeholder were published in March 2018 by the Loan Some national and regional institutions
demands, particularly from shareholders, Markets Association (LMA), together with have also provided guidelines and
consumers and the wider community. As the Asia Pacific Loan Market Association taxonomies for sustainable finance, for
investors have driven demand for growth (APLMA) and the Loan Syndications example the People’s Republic of China,
in green bonds, so corporates are providing and Trading Association (LSTA).3 The the European Union (see box below)
impetus for green loans. Sustainability Linked Loan Principles and Japan. Several other countries
(SLLP) were issued in March 2019, similarly are expressing interest in sustainable
Labelling to support access to new lenders
by LMA, together with APLMA and LSTA.4 finance taxonomies.
and/or loan markets is also a driver for
some borrowers, particularly as pools of
green funding are increasing in different
parts of the world. The green label can Green loans impacting
provide lenders with surety over the ‘green’ EU taxonomy on sustainable finance
Green loans can shift corporate behaviour,
credentials of the loan, more so where a new
improve risk management and future proof The Taxonomy Regulation, effective
lender does not have a close relationship
business. Green loans (and bonds) can since July 2020, will require large
with the borrower.
encourage corporate prioritisation of companies, issuers of securities and
Strong expertise to guide labelling can green projects and assets over non-green financial market participants in the EU
sustain growth and reduce reputational ones. Green loans for many borrowers to analyse their economic activities
risks. Banks have supported the growth of accelerate an internal push to integrate and report publicly on the extent to
the broader sustainable finance markets in green into the borrowers’ other investment which they are ‘sustainable’ as defined
Australia and New Zealand, through their strategy as well as internal corporate by the EU Taxonomy.5 It is intended
own balance sheet, with both issuances and strategy. This internal cultural shift arises for phased application in 2021-22. The
lending, as well as underwriting and arranging as wider areas of the business, especially reach of these regulations is expected
labelled bonds and loans for clients. The local treasury, through the labelling of green loans to be further than the EU and have flow
banking sector boasts strong credentials in become more educated about the green through effects for Australia and New
sustainable finance compared to its global agenda and more supportive as they see Zealand. For example, European banks
peers with deep expertise, diverse product associated business benefits. will be disclosing their global lending
offerings, a high level of best practice, and a of green and sustainable products
As climate risks translate into financial risks,
strong appetite to enable and drive customer according to the EU Taxonomy. For
companies, particularly those with a low
ESG ambitions. The local advisory ecosystem green loans, this means to be disclosed
level of integration, must start preparing and
of second party opinion providers, verifiers as such (by a European lender), they
managing these risks in a structured manner
and lawyers is also developing well. will need to comply with the EU
to protect both revenues and reputation.
Taxonomy, i.e. loan proceeds can only
Green loans and bonds are well understood,
be directed to ‘eligible’ assets.
transparent instruments, that can help to
“Transition pathways are fund this transition and catalyse this process.
critical for companies from
high-emitting sectors if Loans support a broader development More sectors and enterprises can access
Australia and New Zealand spectrum of green projects compared sustainable finance markets with green
are to meet their international to bonds. Green loans can be used as loans, as certain sectors and companies have
climate obligations. Support direct financing in developmental stages limited access to the bond market due to the
from markets and institutional of new green projects and assets, with scale typically required to enter that market.
investors, increased adoption greater capacity to absorb higher project To date most green bond issuance have been
of green bonds, loan and development risk and with flexibility over from sovereigns, financial institutions, and
sustainability-linked finance cash drawdowns. This is distinct from large scale property and energy companies.
can play a significant bonds, which are largely refinancing tools Most assets underpinning these green bonds
role in accelerating the for developed projects. An active green loan are from energy, transport and buildings
decarbonisation of hard-to- market enables green projects to access sectors. While energy and buildings are also
abate sectors.” critical early stage finance, which can be key sectors for green loans, other sectors,
refinanced at more developed stages into a such as transport, agriculture and waste, are
Didier Van Not, General Manager,
longer-term bond or loan. well placed to access the loan market.
Corporate & Institutional Banking,
Westpac Institutional Bank
Green Loans Australia and New Zealand 4Local labelled green loans
emerge in past two years Australian labelled loan recent growth
There have been 14 labelled green corporate 30
loans in Australia, from ten borrowers, and
two in New Zealand. Of these, nine are
25
Certified under the Climate Bonds Standard.
All the green loans since the publication of GLP
in 2018 have been in line with those principles 20
and supported by a second party opinion. In
this paper we focus on loans that are labelled
Number of bonds/loans issued
publicly as ‘green’ or similar, although we 15
note that loans have been used to finance
green projects such as renewable energy for 10
decades without being labelled as such.
Australasia’s first green loan was agreed
5
in August 2017 by Contact Energy, a
New Zealand power utility. A world first
certification of an entire ‘Green Borrowing 0
Programme’ was launched to fund existing
2014 2015 2016 2017 2018 2019 2020H1
and future geothermal power generation
assets, certified under the Geothermal Sustainability-linked loans Social bonds Sustainability bonds
Criteria of the Climate Bonds Standard.
Green loans Green bonds
The programme included existing and
future debt, with eligible debt at the time
Investa Commercial Property Fund (ICPF)
amounting to NZD 1.8 billion (USD 1.4
billion). Certifying an entire programme
agreed Australia’s first Certified green loan “Green and sustainability-
provides flexibility to Contact Energy,
under the Climate Bonds Standard and the linked loans are the next
allowing it to refinance and raise new debt at
GLP in January 2019, a AUD 170 million stage in financing to help
any time, using a variety of debt instruments.
bilateral loan with ANZ, where proceeds companies promote their
are used for eligible property assets. ICPF environmental, social and
Macquarie Group agreed Australia’s has since made a series of green bilateral governance strategies. These
first labelled green loan in June 2018 as a loans of AUD 100 million with HSBC in late emerging loan formats are
borrower, a GBP 500 million green tranches 2019, and AUD 100 million each with CBA, part of an expanding suite
of a loan facility. The loan is the first globally Westpac and NAB in 2020. All these green of financing mechanisms
by a financial institution under the GLP, which loans are Certified under the Climate Bonds to drive investment
was published in March 2018. The green Standard. ICPF’s entire property portfolio of decision making and capital
tranches are used to support renewable AUD 5.1 billion has been reviewed as eligible allocation around building
energy projects, and energy efficiency, waste assets under the Climate Bonds Standard to low carbon and sustainable
management, green buildings and clean support green loan or bond certification. infrastructure, business
transportation projects in the future. In March
Frasers Property Australia, a subsidiary of a
practices and operating
2020, Macquarie Group also agreed a USD
Singapore-based group, secured a syndicated
models.”
150 million green tranche of a Samurai loan
green loan for AUD 600 million for a five-year Christina Tonkin, Managing Director,
facility under the GLP, the first green loan
term refinancing in March 2019 under the Corporate Finance, ANZ
made by an Australian financial institution
GLP. The green loan has a reducing pricing
into the Japanese market.
structure with interest cost savings from
the second year onwards if the borrower’s
senior loan tranche (AUD 175 million) is
Global Case Study: Calpine USD 1.1 five-star Global Real Estate Sustainability
Certified under the Climate Bonds Standard.
billion Green Loan Benchmark ratings are maintained.
The first green loan for Australia’s
Calpine Corporation agreed a USD In June 2019, Brookfield Properties agreed a
superannuation sector was agreed in March
1.1 billion Climate Bonds Certified AUD 880 million, five-year, Certified green loan
2020 by Local Government Property Fund,
green financing on 10 June 2020 to refinance existing debt relating to Brookfield
managed by Local Government Super (LGS)
against geothermal power plants at Place Perth Tower 1 and 2, the largest single
for AUD 65 million. The loan was Certified
the Geysers, which is the largest such asset syndicated green loan in Australia.
under the Climate Bonds Standard under
complex in the US and provides almost
Elliot Green Power engaged a green loan facility, its Buildings Criteria. LGS has received a
one-tenth of the annual renewable
with AUD 260 million drawn in July 2019, to 5-Star Green Star Performance rating from
power for California.6 The syndicated
finance three new solar projects in Australia, the Green Building Council of Australia for its
financing consists of a USD 900 million
Certified under the Climate Bonds Standard. entire property portfolio.
senior unsecured green loan and a USD
200 million letter of credit facility. The Genex Power agreed a AUD 192 million In July 2020, Salt Lake Potash agreed
green loan bears interest at 2.00% per 20-year green loan facility in December 2019 a green loan to develop its fertilisation
annum, increasing by 0.125% every to finance 50MW Jemalong Solar Project production at its Lake Way project. The
three years, maturing in 2027. and refinance its existing debt facility for loan follows the GLP, verified by a second
the 50MW Kidston Solar One Project. The party opinion.
Green Loans Australia and New Zealand 5The latest Australian green loan in August Energy sector show huge potential for green loan growth7
2020 is a financing of the stage two,
development to construction, of Murra 12
Warra II wind farm in Victoria. The first
project finance green loan to a wind farm
in Australia follows the GLP, supported
by a second party opinion, and was to a
consortium of six international bank lenders. 9
In August 2020, Meridian Energy, a
New Zealand electricity generator of fully
renewable energy, green labelled its entire
debt of NZD 1.8 billion (comprising bonds
and loans). Its wind assets are allocated to 6
existing retail bonds and a smaller credit
facility, all Certified under the Climate Bonds
Standard’s Wind Criteria. Its hydro assets are
allocated to its other bonds and loans, which
are aligned to the GBP and GLP supported by 3
a second party opinion.
USD Billions
Loans without any specific label or
designation have been used to finance
green projects for decades. As both
0
Australia and New Zealand grow their green
project pipeline to meet their international 2014 2015 2016 2017 2018 2019
climate commitments, all green loans,
labelled or not, will increase. There are Large-scale solar Large-scale wind Other renewable
estimated to be over 100 loans to green Generation, transmission and distribution
projects in Australia, aggregating over
AUD 12 billion of outstanding amounts,
largely consisting of project loans to solar
and wind farms. Similarly in New Zealand
National Sustainable The roadmaps will recommend policies
there are numerous loans to green projects
Finance Initiatives and frameworks to enable the financial
services sector to contribute more
without labelling. For example, CentrePort The Australian Sustainable Finance
systematically to the transition
Wellington recently agreed a green credit Initiative (ASFI) was established in
to a more resilient and sustainable
facility with New Zealand Green Investment 2019 and the New Zealand Sustainable
economy. They are intended to be
Finance (NZGIF) to fund low carbon Finance Forum (SFF) in the same year.
consistent with global goals such as the
projects. As with the early days of the green Both set out to align the finance sector to
UN Sustainable Development Goals and
bond market, unlabelled loans significantly support greater social, environmental and
the Paris Agreement on climate change.
outnumber labelled green loans, and can be economic outcomes for their respective
The ASFI and SFF roadmaps will be
expected to continue to do so for some time countries. They bring together leaders
launched in 2020/21.
while green loans become established as a from banks, superannuation funds,
wider market and asset class. insurance companies, financial sector
peak bodies, NGOs and academia
Green loans have featured in labelled asset-
with the aim of developing a
backed securities (ABS) in Australia. Flexi
Sustainable Finance Roadmap.
Group has issued Certified green tranches in
four ABS to refinance solar consumer loans.
NAB Trust Services vehicle issued AUD 200
million Certified green notes, backed by a
pool of loans to finance wind and large-scale
solar projects. Pepper Group has securitised
mortgage loans in three green RMBS
deals and National RMBS Trust in one. In
September 2020, Brighte Capital announced
Australia’s first 100% Green Certified ABS,
comprising unsecured green Certified loans
to households for residential solar and
battery installations.
Green Loans Australia and New Zealand 6How to label a green loan
Who can enter into a green loan?
Any entity which has suitable green assets to finance can enter into a green loan. The key aspect of green finance
is that the borrower commits to investing the funds borrowed in green assets. These include renewable power
generation, low carbon transport, low carbon buildings, sustainable water management, sustainable waste
management, sustainable land use and/or climate change adaptation or resilience measures such as flood
defences. An overview of the Climate Bonds Taxonomy of sectors is provided on page 13.
1 Develop a green loan
framework
The first step for any private or public
sector entity looking to finance a green
and APLMA provide useful guidance on
four key aspects:
project and enter into a green loan is
1. setting eligibility criteria,
• Define eligibility criteria for to develop a green investment strategy
projects/assets and define a Framework laying out the 2. asset / project screening,
selection process and eligibility criteria for
• Create selection process 3. management of proceeds and
identifying the projects to be financed.
• Set up tracking & reporting 4. post-issuance reporting.
The entity needs to define procedures for
the tracking and reporting of allocated and The Climate Bonds Taxonomy builds upon
unallocated funds. Further, a greater trend the GLP and provides definitions for asset
in impact reporting means it is advisable and project types compliant with the Paris
to identify suitable metrics and initiate a Agreement, i.e. decarbonisation by 2050
monitoring and reporting process. and limiting global warming to 2˚C.
Is there guidance available? Country and regional specific guidelines
and frameworks should also be taken into
When pursuing green loans, the Green
account.
Loan Principles (GLP) published by LMA
Best practice: Arrange
2 • Second Party Opinion: an external A Certified Climate Loan confirms that
an external review assessment of the issuer’s green the loan is aligned to the Paris Agreement
loan/ bond framework, confirming and to keeping global warming under 2°C.
GLP compliance and analysing the
In order to receive a Certified Climate Loan,
‘greenness’ of eligible categories.
a prospective borrower must appoint a
• Green rating: an evaluation of the green Climate Bonds’ Approved Verifier, who will
bond or related framework against a assess the assets and issue a verification
third-party rating methodology, which report to confirm that the loan meets the
considers the environmental aspects Climate Bonds Standard. Certification of a
of the investments. These include loan prior to closing enables the borrower
External reviews
products developed by international to use the Climate Bonds Certification
External reviews from an independent and domestic rating agencies, e.g. Mark in the loan marketing efforts. After
party, which confirm alignment with Green Moody’s, S&P. the loan has been agreed and allocation of
Loan Principles and/or compliance with the loan proceeds has begun, the borrower
• Verification reports for Certified
the Climate Bonds Standard, have become must confirm the Certification by obtaining
Climate Loans: third party verification,
common practice. The most common a post agreement verification report at least
pre- and post-issuance, which confirms
forms of review are: once to maintain its Certified status. The
that the loan adheres to the Climate
borrower must report annually while the
• Assurance report: an external party Bonds Standard and Sector Criteria.
loan is outstanding.
confirmation of compliance with GLP.
3 Execute the loan 4 Post-execution reporting
Report annually to confirm that the funds are allocated
to green projects / assets
Best practice: Disclose environmental impacts of financed
projects in absolute terms and relative to an appropriate benchmark
Green Loans Australia and New Zealand 7Labelling of green consumer loans expanding
Green consumer loan products have the standard fixed home loan rate and 1 per double glazed windows, external awnings or
expanded in Australia and New Zealand cent off the standard variable home loan rainwater tanks.14
in recent years as lenders have sought to rate, in addition to fee waivers across a range
While we have covered labelled green
provide differentiated products to meet of accounts. These options are offered to
residential mortgage loans, there are
consumer demand for climate supportive houses that are built or upgraded to achieve
numerous cases of unlabelled loans and other
borrowings, some with preferential pricing. a rating of 6 or more stars against the New
forms of funding to support energy efficient
These have largely been self-labelled by Zealand Green Building Council’s ‘Homestar’
homes. Green mortgages though can and
lenders, in contrast to labelled corporate rating tool, which is independently verified.
should take a leading role in transforming the
green loans that are typically done so by
In August 2019, CBA offered existing residential market by creating conditions for
borrowers. While there are currently no
mortgagees a AUD 500 cash back offer for new and existing homes to move towards a
global or local principles for labelling of
having installed, or having the intention to net zero carbon future.
green consumer loans, as with GLP for
install, a solar system with an output size of
corporate loans, there are established local
equal to or greater than five kilowatts. The
ratings schemes for mortgages, such as for
example NatHERS and Green Star, and some
green home loans are verified as eligible “As a committed investor in
loans have been verified as eligible assets
assets under the Climate Bonds Standard. the development of Australia’s
under the Climate Bonds Standard. The Bank Australia Clean Energy Home
green bond market and now
Loan was launched in January 2020, drawing
in the emerging green loan
Need to develop a green home on up to AUD 60 million in finance from the
market, the CEFC welcomes
loan market locally Clean Energy Finance Corporation (CEFC).
the continuing development
The Bank Australia Clean Energy Home Loan
of labelled loan products. We
Our homes are an essential part of our
features a range of discounts starting at 0.4
see significant potential for
lives, they are also major contributors to
per cent per annum over a maximum of five
the development of new green
carbon emissions, with homes in Australia
years, for new homes and for energy efficient
loan investment products
contributing 13% of the nation’s total. A
upgrades to existing homes.13 The current
across corporate, residential
2019 New Zealand study found the need to
loan program has had early success with the
and consumer markets to
shrink the carbon footprint of their homes by
AUD 60 million of origination now projected
satisfy growing demand from
80% for the country to meet its international
to be completed within nine months, well
investors for sustainable
climate commitments. There are 9 million
ahead of the original projection of 18 months.
investment options. These
existing homes in Australia, and 1.8 million markets and products must
in New Zealand, many of them built below Banks such as, for example, Bendigo be robust, ambitious and
current building code regulations, hence an Bank, Regional Australia Bank and Hunter transparent to maintain
integral part of driving net zero outcomes United Employee Credit Union in Australia, integrity and growth potential.”
requires energy efficiency improvements and ANZ in New Zealand, provide lower
Richard Lovell, Executive Director
to existing homes. New homes energy interest loans when customers commit to
Investment, Clean Energy Finance
efficiency is important too, as by 2050 at undertaking energy and water efficiency
Corporation
least half of all homes in Australia will have home improvements such as installing solar,
been constructed after 2019.
In Australia, mortgages are valued at
AUD1.82 trillion9 and in New Zealand this is Personal green loans
valued at NZD272 billion.10 Australian banks
There are different types of green
have amongst the highest proportion of
consumer loans in the Australian and
residential mortgage assets in the developed
New Zealand markets, offered by a
world [insert any comparable stats].11 The
range of lenders from credit unions to
risk to the finance sector is significant. Most
online lenders and international banks.
home loan contracts are in place for up to 30
These loans provide a range of customer
years, a timeframe during which climate risk
incentives such as interest rate discounts
exposure will become more pronounced.
and fee waivers. Different types of
Governments and some banks locally have equipment currently qualify for these
been exploring the use of green home loans green consumer loans, the most
to drive energy efficiency improvements in common being electric vehicles, rooftop
the residential sector for some time, however solar panels and batteries, as well as
only a couple of initiatives have come water tanks.
through.
Introduced in April 2019, ANZ ‘Heathy
Home Loan Package’ in New Zealand
offers home loan interest rate discounts to
customers who build their home or property
to ‘good sustainable standards’.12 The
available discounts include 0.7 per cent off
Green Loans Australia and New Zealand 8International models to scale The European Energy Efficient Mortgages to purchase and guarantee favourable loans
green mortgages Initiative (EeMAP) was launched as a of houses and apartment blocks where
pilot involving 37 banks in 2017. The there is a commitment to energy and water
Internationally, different finance approaches
intent of the EeMAP initiative is to create actions.17 A unique feature of the program is
have been used to drive the uptake of
a standardised ‘energy efficient mortgage’ its approach to rental properties, where they
green mortgages to support energy
based on a private bank financing have integrated consideration of additional
efficient homes, or to fund home efficiency
mechanism with preferential interest rates lending to a tenant’s saving in utility bills. This
improvement upgrades.
for energy efficient homes and/or additional allows an owner to take out a larger loan,
In the United States, the Federal Housing funds for retrofitting homes at the time of while ensuring improvements made through
Administration (FHA), an agency which purchase.16 This initiative seeks to bring the loan benefit the tenants financially.
insures mortgages of approved lenders together the Capital Market Union and
Lenders under the program are able to
meeting specific requirements, has had energy efficiency goals by using mortgage
provide their customers with lower interest
in place the Energy Efficient Mortgage and bond industries to ease the initial
rates, the ability to borrow more and
program since 1980. This program allows financial burden of efficiency upgrades to
underwritten cash flow based on projected
home-owners to access finance for home mortgage holders.
energy and water savings. One criticism of
efficiency upgrades by providing insurance
Fannie Mae Green Financing is the most the program is that these hurdles are not
for the additional funds sought.15 Under
important program of its kind around the sufficiently ambitious. In the medium term,
this arrangement, the mortgagee is able
world, particularly with large scale and ease these will need to be made more ambitious
to access enough finance for the principle
of accessibility. Fannie Mae is also the world’s to target net-zero emissions by 2050.
loan and additional funds which must
largest green bond issuer, with over USD 75
be directed towards energy efficiency
billion in green mortgage backed securities.
upgrades. In this case, their principle loan is
They have accessed debt capital markets
assessed by the financial institution and the
through their Green Financing Business to
additional funds are insured by the FHA in
offer multi-unit buildings and cooperatives
case of a default. This is in recognition that
finance to upgrade for water and energy
energy efficient homes have reduced utility
efficiency, focussing on sectors of affordable
bills and therefore will have lower ongoing
housing, retirement living and the build to
costs, thus are lower risk investments
rent sector. The uptake in their green loan
because they reduce the financial burden on
products has been facilitated by their ability
home-owners.
Green guidelines for apartment), size of the building (number
consumer loans of bedrooms), presence of natural gas
supply, presence of a swimming pool, the
The Climate Bonds Sector Criteria can be
location within Australia (postcode, and
applied to consumer loans as guidance for
hence climate zone and solar intensity),
determining green labelling. The proceeds
as well as the installed capacity of any
of the loan must be matched with ‘eligible’
rooftop solar system (kW).
assets that meet the available Sector
Criteria, in a similar manner to corporate The Low Carbon Transport criteria can
loans. While the consumer loans are not be applied to consumer loans for electric
certified as such, they can be verified vehicles. Fully electric or hydrogen fueled
as qualifying under the Climate Bonds passenger vehicles are automatically
Standards by lenders. eligible within the criteria. Hybrid fossil fuel
/ electric passenger vehicles are eligible
The Building Criteria has been applied
above certain CO2 emissions thresholds.
in Australia for green home loans, for
homes with solar panels in all States In the absence of globally recognised
except Western Australia. Location principles for green consumer loans, the
specific Criteria for Residential Buildings, Climate Bonds Standards provide lenders
the Australian residential rooftop solar of consumer loans with credible guidelines
proxies for the Certification of houses in certain sectors. The lenders can in turn
or apartments using solar rooftop use the consumer loans as qualifying
installations was published in 2019. The assets to match against their own green
Criteria proxy looks at variables such bond issuances, that would be eligible for
as type of residential building (house or Climate Bonds Certification.
Green Loans Australia and New Zealand 9Sustainability-linked loans emerging
The rapid rise in the global SLL market A new paradigm for impact
has been extraordinary in its first couple “The progress we’ve seen to
Assessing the impact of an SLL is different
of years. In 2019, the SLL market was over
to that of a Green loan. With SLL, there
date in the emerging green
USD150 billion globally, which is nearly half
is greater emphasis on the corporate
loan market in Australia
of the 2019 issuance amount of the more
level sustainability strategy, as well as on
and New Zealand can be
established green, social and sustainability
improvement of sustainability performance
attributed to transparency
bonds, and significantly larger than green
over time. This improvement is rewarded
between issuers and investors
loan activity. This growth has been driven
with an interest margin benefit on the loan,
and robust certification,
by the flexibility of the instrument and the
and, conversely, worsening performance
as well as the diversity of
nature of the loan market where a closer
can lead to a higher interest cost. With
issuers and product offering.
relationship between lenders and borrowers
green loans, the emphasis is more on the
We look forward to further
enables lenders to have more ability to
size of the borrowings and the nature of
innovation in sustainability-
provide incentives for ESG/sustainability
the financed or earmarked eligible asset,
linked loans to help increase
performance and to absorb a variation in the
particularly with regard to its environmental
investor confidence in the
margin on a loan.
impacts. While the two instruments are
environmental impact issuers
European market leads growth with more different, both can and are assessed
are making and to maintain
than 80% of global SLL activity, with for their impact on sustainability and/
growth in this developing
activity focussed mostly on Spain, France or environmental goals, which should be
market.”
and Italy. Many of the larger transactions material, measurable and credible (see box Stuart Green, Group Treasurer,
outside of this region have been for on climate transition). Macquarie Group
subsidiaries of European companies that
Goals relating to climate should be aligned
have entered into SLL in their own right
to Paris agreement objectives of 1.5 / 2° C,
already. The United States has seen only a
with clear quantitative transition trajectories
handful of borrowers of SLL. Asia has seen What is a Sustainability-Linked Loan?
to net zero by 2050. Whereas, social and
activity largely in Singapore with some in
broader sustainability targets can look to the Sustainability-linked loans (SLL) are a
Hong Kong and China. Australia has seen
United Nations Sustainable Development type of loan instrument which incentivise
five, and New Zealand two, SLL to date.
Goals as a useful starting point for assessing the borrower’s achievement of
The emergence of SLL provides an asset their global impact. ambitious, predetermined sustainability
class with broader application. SLL are a performance objectives. These loans are
While not current market practice, partly
welcome development of the sustainable ‘target based’ or ‘performance based’
due to the private nature of loan markets, it
finance markets. They provide a financial where the interest margin on the loan
is our view that greater public disclosure and
tool to suit certain borrowers and work well varies depending on the borrower’s
transparency of SLL targets and performance
in the bank lending markets. The instrument performance against predetermined
parameters along with external verification in
provides an opportunity for borrowers to environmental, social and/or governance
line with established principles will support
demonstrate their sustainability ambitions (ESG) targets. Such parameters are
longer term growth of this asset class.
and promote positive change. Borrowers can usually set at an entity level, and can
align financing costs with their sustainability Increasing supply of credit for green also be at or above the borrower’s own
agenda, which in turn enhances internal apply to SLL ESG targets. It is global best practice
support and dialogues for changing for SLLs to be arranged in line with the
As previously discussed, bank lending
corporate behaviour. Sustainability Linked Loans Principles
targets, ESG risk adjusting, lender ESG
(SLLP). There is no constraint on the use
SLL can apply to a wider range of borrowers impact reporting and investor demand for
of proceeds, they are typically used for
than for green loans or bonds, which are green products are increasing supply of
general corporate purposes.
limited to those that have eligible green credit for green lending. This largely applies
assets. The instrument is also used by for SLL too, and will support growth of this Sustainability Linked Loan Principles
borrowers that have eligible assets or have market.
The SLLP set out the core
green loans, such as for example Contact
The strong demand from institutional characteristics of a SLL based on the
Energy, as it provides another financing tool
investors in labelled bonds may not translate following four core components:
to demonstrate their ESG credentials and
to the SLL market, in the same manner as
connect with stakeholders. 1. Relationship to Borrower’s Overall
for green loans. SLL are typically not eligible
Sustainability Strategy (material to the
The benefits for borrowers are typically assets to be matched against a labelled bond
business)
beyond pricing, as with green loans. The issuance.18 This is unlikely to be a material
variation of the interest margin on most SLL factor in the current market, as other 2. Target Setting – Measuring the
in Australia and New Zealand is between aforementioned factors are expected to grow Sustainability of the Borrower
5 to 15 bps (i.e. 2.5 to 7.5bps in either the supply of credit for SLL.
3. Reporting
direction). With a very low interest rate
environment, low credit margins for large 4. Review
corporates and a competitive lending market
the scope for margin variations is limited.
Green Loans Australia and New Zealand 10Early shoots of local activity Global Case Study: Enel USD 1.5 billion Sustainability-Linked Bond
Five companies have borrowed in Australia The Italian energy group Enel issued a USD1.5 billion five-year bond with a 2.650%
with SLL, and two in New Zealand, of which coupon for general corporate purposes.19 This rate is subject to the company’s strategy
Contact Energy also has a green loan. of having at least 55% of its installed capacity in renewable energy sources by 2021. If
this goal is not reached by 31 December 2021, the coupon will be increased by 25bps
Adelaide Airport agreed Australia’s first SLL
until the bond matures.
in December 2018, a 7-year AUD 50 million
bilateral loan. The margin varies depending
on the borrower’s performance against a set
of ESG criteria.
Sydney Airport borrowed the largest SLL in
Climate Transition Principles for climate transition finance
Climate Bonds Initiative has produced a
Asia-Pacific and the largest globally for an SLL can be an important tool for
report, ‘Financing credible transitions’,20
airport, with a AUD 1,400 million syndicated companies in ‘high emission’ or ‘hard-
that provide key principles on climate
loan in May 2019. The loan was agreed in to-abate’ sectors to transition to low
transition. These may be useful for SLL,
three tranches with maturities from 3-5 carbon basis
and include the following:
years. While not an SLL, Sydney Airport
While SLL can have much broader
issued in February 2020 a AUD 100 million • In line with a 1.5°C global trajectory
application than for climate change,
sustainability linked bond into the US – all goals and pathways need to align
the instrument can work well for
Private Placement market with a two-way with zero carbon by 2050 and nearly
companies that are in transition to a
variable margin, the first such bond globally. halving emissions by 2030.
low carbon basis regardless of whether
In July 2019, Queensland Airport Limited they have suitable assets to earmark • Established by science – all goals
borrowed for its Gold Coast Airport against a green loan (or bond). This and pathways must be led by
development, a AUD 100 million bilateral SLL. is particularly relevant for companies scientific experts and are not entity -
transitioning in high emissions or country-specific.
AGL agreed a AUD 600 million SLL in
or hard-to-abate sectors where
September 2019, becoming the first energy • Action not pledges – a credible
investors are increasingly seeking
company to do so in the Asia Pacific region. transition is backed by operating
sustainability labels to demonstrate
The SLL has two KPI metrics, one relating metrics that a pathway is being followed
a wider strategic shift within the
to emissions intensity and the other to rather than a commitment/pledge to
company, whereas green bonds linked
renewable energy and storage capacity. follow a transition pathway at some
to single green assets might not be
point in the future. In other words, this
Wesfarmers entered the latest SLL with ambitious enough. Lenders too are
is not a transition to a transition.
a AUD 400 million bilateral in March increasingly seeking to work with
2020. The loan is linked to progress on their customers in these sectors to Implications for climate-related SLL
environmental and social targets, the former encourage and assist with transition.
For investors to understand targets,
relating to carbon emissions relating to the
Sustainability-linked loans (or bonds) they need to be transparent and clearly
production of ammonium nitrate.
can be used as an important tool to demonstrate what actions the company
New Zealand has seen two SLL so far. The demonstrate wider strategic changes is committed to taking to improve
first by Synlait in September 2019, a 4-year as long as the targets are transparent, performance against a KPI and how these
NZD 50m bilateral credit facility. The second ambitious and credible. relate to a broader global climate transition.
by Contact Energy in January 2020, also a
4-year NZD 50m bilateral loan.
Global Case Study: Sustainability-
Linked Loan
In July 2020, Norwegian shipping group
Klaveness Combination Carriers (KCC)
agreed a sustainability-linked term
loan and revolving credit facility for the
financing of vessels with delivery in
2021. The credit margin on the loans will
be adjusted, up or down, based on the
company’s sustainability performance
with reference to its goal of reducing CO2
emissions per ton of transported cargo
per nautical mile (EEOI) and reducing
absolute CO2 emissions per vessel. The
company wide target is to be carbon
neutral by 2030. KCC’s sustainability
performance/KPIs will be disclosed on
a quarterly basis and main KPIs will be
subject to an annual external audit.
Green Loans Australia and New Zealand 11Actions to catalyse growth
The green loan (and SLL) market 2. Tap into strong institutional 4. Education, education!
in Australia and New Zealand is demand for green products to The sustainable finance
poised for growth. Here are five expand investor base market is fast changing
actions that can support, and Institutional investors are with new regulations and
accelerate, its development. showing strong demand guidelines, new products
for green products, and and labels, market
1. Regulators can tilt the playing have driven the growth practices, and investor expectations. The
field towards green in green bonds. They are complexity too is growing. New issuers,
Regulators could potentially a meaningful pool of investors borrowers, investors and lenders have a
incentivise green lending for green loans and SLL, which to date have steep learning curve to understand the
by recognising that loans mainly been invested in by banks. In the US, products and process. The supporting
made to fund green private placements are a notable portion ecosystem of bankers, lawyers, verifiers
assets are less exposed of the debt market where US institutional and regulators need to be up to date with
to climate risks, thereby requiring less investors invest directly into non listed debt the latest developments. This all requires
capital for these loans. Central banks and instruments. Australian and New Zealand education of the market actors at a rate that
regulators can also ask banks and insurers issuers of green debt, such as Contact keeps up with the pace of this market.
to disclose the climate riskiness of their Energy and Monash University, have issued
balance sheets identifying green and brown into the USPP market. 5. Widening of labels,
assets. Increasingly central banks are asking
As both confidence and scale increases, so
Narrowing of language
supervised banks to undertake stress tests,
too will opportunities for direct investing The loan market, as well as
to recommended scenarios to see how
by institutional investors. This will include bond, has seen an expansion
loans perform under high carbon prices, or
green loans as well as SLL. This variety of labels in recent years with
physical climate change impacts like higher
of opportunities is important given that several different themed
temperatures or sea-levels.21 We would
some institutional investors may be less financial instruments
also like to see regulators and supervisors
comfortable with the coupon variation of developing. Loans with a purpose, whether
exclude the use of assets with high climate
SLLs, as pricing of these can be challenging social, environmental, governance or other,
risks from their collateral framework, or their
and transferability can be important. have been largely welcomed by investors,
use in asset purchase programmes.
whose demand for such instruments have
Local institutional investors are at early
In Hungary, the central bank has undertaken underpinned the growth of this market. The
stages of allocating funds into direct lending
analysis to confirming that energy efficient various labelling of these loans requires
with high profile announcements in the
homes are less liable to become delinquent. education and clarity to market participants.
past year. This is expected to grow and will
It has reduced the capital adequacy A clarity of labelling along with a narrowing
support greater lending capacity for green
requirement for pools of green mortgages of language with a common understanding
loans and SLL.
to sufficiently energy efficient homes, and of these labels will help in growing a labelled
has asked banks to transfer some of this loans market. In May 2020, ICMA published
benefit to borrowers by reducing interest
3. More corporate frameworks high level definitions of sustainable finance,
rates by 0.3%.22
and ESG strategies required including green, social and sustainable
Many companies are finance.24 This will support a common
There are also opportunities for government
not geared to set up long understanding and usage of language as the
and regulators to make use of fiscal
term ESG strategies, sustainable finance market develops.
incentives to encourage green loans.
targets, and green asset
For instance, the tax authorities could
provide certified green loans funding green
identification and ‘tagging’ Conclusion
processes that are needed in order to enter
investment to benefit from accelerated Green and sustainable finance is growing and
into a green loan or SLL.
depreciation allowances to reduce early changing rapidly, with green loans playing a
year’s tax liability. This is particularly Some companies are increasing their major part in this growth. Local and global
important for green loans which are often capacity to identify, record and disclose developments will shape this market in the
applied to future costs (as opposed to green climate risks and ESG performance as coming years and ultimately support growth.
bonds which are frequently used for re- their shareholders, customers, suppliers, The local sustainable finance initiatives, ASFI
financing completed projects). The German regulators and other stakeholders demand and NZSFF, will announce their Roadmaps
government’s stimulus package includes tax more information. TCFD requirements will later this year. The EU Green Taxonomy
incentives for energy-efficient retrofits and accelerate this process. This change will will come into effect on a voluntary basis,
low-emission vehicles, further incentivising lead to more companies with the ability and with implications expected to extend much
the latter with a EUR 6,000 “eco-bonus” for frameworks to issue green loans and SLLs. further afield than the EU. Green loan
EV purchase.23 markets are poised for growth in the coming
Similarly, greater information technology
decade as lenders and borrowers cooperate
capabilities to record green assets are
and leverage market development to support
required to expand ‘tagging’ of larger volumes.
local economies to transition to become net
zero and climate resilient.
Green Loans Australia and New Zealand 12Climate Bonds Taxonomy
The Climate Bonds Taxonomy identifies the assets and projects needed to deliver a low
carbon economy and gives GHG emissions screening criteria consistent with the 2-degree
global warming target set by the COP 21 Paris Agreement. More information is available at
https://www.climatebonds.net/standard/taxonomy.
LAND USE &
ENERGY TRANSPORT WATER BUILDINGS MARINE INDUSTRY WASTE ICT
RESOURCES
Solar Private transport Water monitoring Residential Agriculture Cement Preparation Broadband
production networks
Wind Public passenger Water storage Commercial Commercial Steel, iron & Reuse Telecommuting
transport Forestry aluminium software and
production service
Geothermal Freight rail Water treatment Products & Ecosystem Glass Recycling Data hubs
systems for conservation production
efficiency & restoration
Bioenergy Aviation Water distribution Urban Fisheries & Chemical Biological Power
development aquaculture production treatment management
Hydropower Water-borne Flood defence Supply chain Fuel production Waste to energy
management
Marine Nature-based Landfill
Renewables solutions
Transmission & Radioactive waste
distribution Certification Criteria approved management
Criteria under development
Storage
Due to commence
Nuclear
06/2020
Endnotes
1. https://www.rba.gov.au/statistics/tables/
2. https://www.rbnz.govt.nz/statistics/s31-banks-assets-loans-by-purpose
Acknowledgements
3. https://www.lma.eu.com/application/files/9115/4452/5458/741_LM_
Green_Loan_Principles_Booklet_V8.pdf This report is prepared by the Climate
4. https://www.lsta.org/content/sustainability-linked-loan-principles-sllp/
5. https://ec.europa.eu/commission/presscorner/detail/en/ip_20_1112 Bonds Initiative. We would like to thank all
6. https://www.calpine.com/about-us/news/climate-bonds-certified-
financing-for-the-geysers-power-company contributors to this report. In particular,
7. https://www.rba.gov.au/publications/bulletin/2020/mar/renewable-
energy-investment-in-australia.html
the report Sponsors, ANZ, Macquarie
8. https://www.rba.gov.au/publications/bulletin/2020/mar/renewable-
energy-investment-in-australia.html
Group, Westpac and New Zealand Green
9. https://www.spglobal.com/_assets/documents/ratings/191114-an-overview- Investment Finance, and the report Partners,
of-australia-s-housing-market-and-residential-mortgage-backed-securities.pdf
10. https://www.rbnz.govt.nz/statistics/s31-banks-assets-loans-by-purpose the Clean Energy Finance Corporation,
11. https://www.ibisworld.com.au/industry-trends/market-research-reports/
thematic-reports/mortgages.html Green Building Council of Australia, and
12. https://news.anz.com/new-zealand/articles/2019/04/anz-incentivises-
kiwis-to-build-healthy-homes
New Zealand Green Building Council.
13. For information on discounts and the criteria please visit the Bank
Australia website. Source data is from the Climate Bonds Green
14. https://www.regionalaustraliabank.com.au/personal/products/home-
loans/sustainable-home-loan Bond Database as well as Thomson Reuters
15. https://www.hud.gov/program_offices/housing/sfh/eem/energy-r
16. https://eemap.energyefficientmortgages.eu/wp-content/ Eikon. All figures are rounded.
uploads/2018/04/Emerging-Analysis-1.pdf
17. https://www.environmental-finance.com/content/the-green-bond-hub/
bringing-billions-and-housing-to-the-green-bond-market.html
18. Green, social and sustainability bonds are UoP based under relevant global
principles. Sustainability-linked bonds (SLB) are not UoP based, however, they are
typically based on ESG targets and performance of the issuer rather than any SLL
that the issuer might be holding. ICMA published the Sustainability Linked
Bond Principles in June 2020 providing voluntary guidance to SLB issuers.
19. https://www.enel.com/content/dam/enel-common/press/en/2019-
September/SDG%20bond%20ENG%20(003).pdf
20. https://www.climatebonds.net/files/reports/cbi-fin-cred-transitions-
092020-report-page.pdf
21. https://www.ngfs.net/sites/default/files/medias/documents/ngfs_
climate_scenarios_final.pdf
22. https://www.climatebonds.net/2020/01/how-hungarian-central-bank-
could-help-solve-energy-efficiency-puzzle-mnb-goes-green-housing
23. https://www.bundesfinanzministerium.de/Content/EN/Standardartikel/Topics/
Priority-Issues/Climate-Action/2020-06-22-climate-action-is-a-priority.html)
24. https://www.icmagroup.org/assets/documents/Regulatory/Green-
Bonds/Sustainable-Finance-High-Level-Definitions-May-2020-110520v4.pdf
Green Loans Australia and New Zealand 13You can also read
