From Greta Thunberg crowd sourcing her boat trip across the Atlantic for the United Nations Climate Change Conference (COP 25); to climate protestors declaring a ‘Planet-wide Rebellion’; and over 60 nations adopting ‘net-zero’ carbon emissions targets, the protection of the planet has never been higher on the public agenda.
“There is a growing concern about the physical risks of climate change and how these translate to financial risks.”
Climate concern is shifting consumer behaviour and preferences. Research from the Centre for Sustainable Business found sales of sustainability-marketed products grew almost six times faster than conventionally-marketed products in 2019. In the world of finance, consumers are increasingly interested in the impact of their savings, investments and financial products.
Through shareholder action such as Climate Action 100+, to the divestment movement, customers are looking for products aligned with their values.
Polling from UK-based Good Money Week found that, for the first time ever, respondents are more likely to be equally concerned about whether their investments make money or make a positive difference. Historically investors were only concerned about financial return. We expect this trend to translate to Asia.
Companies are making pledges to reduce emissions and high carbon emitters are implementing decarbonisation strategies through a combination of new technologies - such as renewable energy - and through natural capital. Banks are increasingly focused on sustainable returns and ANZ is one of the signatories to the Principles for Responsible Banking, representing more than $US47 trillion in assets.
There is growing concern about the physical risks of climate change and how these translate to financial risks. Banks are increasingly having active discussions on companies’ transition plans to reduce their carbon footprint. This transition trend is driving investment in new technologies and development of financial products which reward companies for being green or improving sustainability.
More than green bonds
Three years ago, sustainable finance was dominated by green bonds, which consisted of 95 per cent of the sustainable finance market - driven mainly by European markets.
Green bonds and loans are backed by eligible green assets, a ‘use of proceeds’ approach. Now sustainable finance is more diverse, both geographically and by product. Asia Pacific is approximately a third of the total sustainable finance market with products comprising green loans, sustainability linked loans and sustainable supply chain financing. Singapore is also increasingly becoming a hub for sustainable finance in South East Asia.
Companies’ initial concerns on issuing sustainable finance is often related to the additional time or cost required. There is a level of additional due diligence and structuring required for sustainable finance. However, these costs can be managed and there are mechanisms in place to encourage more issuance and reduce costs.
Central banks like the Monetary Authority of Singapore are encouraging the sustainable finance market through the Sustainable Bond Grant Scheme by providing incentives to issuers by offsetting eligible due diligence costs (which include second party opinion or assurance reports).
In the last three years, sustainability linked loans (SLL) have been increasing in frequency. ANZ expects to see significant volume growth in this product across Asia in 2020. Currently the highest growing sustainable finance product, sustainability-linked loans, are appealing because proceeds of the loan can be used for general corporate purposes, making it more accessible to a greater number of companies. This type of loan also ties loan pricing to achieving sustainability related key performance indicators and rewards outperformance with a reduction in loan margin.