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How sustainable finance helps Australia's green economy bloom

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In just a short 10 years, sustainable finance has ballooned. Once viewed by boards as an outlier, it is now central to investment and strategy discussions in boardrooms globally.

The environmental, social and governance (ESG) market globally will be worth $US53 trillion by 2025, according to figures from Bloomberg. This means roughly a third of all assets under management will be viewed through the prism of at least one facet of ESG.

 Sustainable financing HSBC Australia

Investors are now overwhelmingly concerned about where their money goes.

According to the Responsible Investment Association Australasia (RIAA), just over four out of five Australians (83 per cent) expect their bank account and their super to be invested responsibly and ethically, and 80 per cent expect their savings to have a positive impact on the world.

“The challenge now rests firmly with providers to respond with investment products, reporting and advice that meet consumer expectations,” the RIAA said in a recent report. “Those who don’t, stand a high chance of losing business, while those who do look set to thrive.”

For Andrew Duncan, managing director, head of debt capital markets for HSBC Australia, sustainable finance instruments such as sustainability-linked loans and bonds are now set to be a driving force for energy transition in Australia.

When we started broaching green, social, sustainability and sustainability-linked (GSSS) finance with our clients a decade ago, it’s safe to say there was a fair amount of scepticism. For the majority of issuers and investors, it was a pretty fringe concept. But in a very short space of time, it’s become central to almost everyone’s investor engagement strategy.

Andrew Duncan | Managing Director, Head of Debt Capital Markets, HSBC Australia

Green loans and bonds that link the loan proceeds to a clearly identified green spend are not always suitable, as not all companies have a specific transitional capex requirement.

Sustainability-linked loans (SLL) have been at the vanguard of GSSS mostly because of the frequency with which companies use general-purpose corporate debt facilities.

This gives an SLL broad application across borrowers and can contribute to ESG goals that encompass a range of issues that are generally inclusive of an emissions-related KPI, leaving borrowers to seek out energy solutions.

Recently, says Duncan, the bond space in Australia is starting to mature.

“The Aussie dollar space has been catching up very quickly when compared with Europe, which is traditionally at the vanguard of anything ESG related.”

As these markets develop, he says, it is already affecting Australia’s approach to commodities — including investment options and how they are extracted.

“It’s changing the focus of opportunity for a lot of boards,” he says.

“Multiple companies have come out and publicly stated that they’re pivoting towards renewables or they’re branching out, into some of the adjacent spaces that go with renewables, such as rare earth extraction, engineering, mining services, data capture and analytics.”

These decisions may be incremental, but the tide of capital is now flowing ever more strongly in the direction of ESG and GSSS outcomes.

“It’s not really a case of switching off some industries and switching on to others. It’s more the fact that smart companies are changing their business models and making investment decisions based on the ecosystem they’re expecting to see in five to 10 years’ time,” Duncan says.

Amanda Taylor, managing director and head of large corporates and sustainable finance for HSBC Australia, says sustainable finance instruments such as sustainability-linked loans and bonds are a financial tool par excellence for accelerating the energy transition.

We continue to see significant growth in renewable deals such as solar and wind farm financing, which will help to contribute to the decarbonisation or ‘greening’ of the grid.

Amanda Taylor | Managing Director, Head of Large Corporates and Sustainable Finance, HSBC Australia

Companies that are looking for ways to meet their emissions reduction targets are driving this demand for renewables.

“This will have an impact on companies, particularly those with significant Scope 2 emissions (those that arise from a company’s own operations), who are heavily reliant on electricity through their production processes.”

Duncan says Australia’s super funds, meanwhile, are set to help drive the growth of sustainable finance.

“Australia is the fourth-largest superannuation market in the world, and it is tipped to become the third largest through an increase in compulsory super as we head towards 2030,” he says.

“In terms of transparency of reporting, super funds want to know the CO2 emissions footprint of their investments, and they’re having to report this to their underlying constituents - in this case, mum and dad Australians who are demanding lower emissions and equitable outcomes.”

Increasingly investors such as super funds are driving ESG behaviour change through controlling access to capital, by calling the shots on whom they will and will not work with.

“Super funds are saying this is the gold standard that we expect, these are the levels of information flow that we expect and these are the reporting standards that we expect you to adhere to,” Duncan says.

According to Taylor, the recent publishing of the International Sustainability Standards Board (ISSB) first global sustainability-related financial reporting standards is also recognition that sustainability is now here to stay in the finance industry.

“While the ISSB global sustainability-related financial standards are initially voluntary, Australia has already expressed its intention to adopt the standards, including entering into two consultations related to sustainability standards and climate-related disclosures,” says Taylor.

“This shows how far we have come in the last few years.”

As appeared in the Australian Financial Review.

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