Green loans in "nascent" stage: Climate Bonds Initiative

Australian and New Zealand are at a "nascent" stage in the development of its green loans sector, according to new research from the Climate Bonds Initiative.

Climate Bonds has released the inaugural Australia and New Zealand Green Loans report,  analysing  the labelled green corporate loan market in both countries.  o date there have been fourteen (14) labelled green corporate loans in Australia, from nine borrowers, and two green loans from borrowers in New Zealand.

Of the combined 16, ten are certified under the Climate Bonds Standard.

The report explores progress to date, best practice labelling, sustainability linked loans (SLL), green consumer loans and provides recommendations on developing the sector.

"The green loans market in Australia and New Zealand is following a similar development path to that of the green bond market," said Sean Kidney, chief executive officer, Climate Bonds Initiative. "Early involvement of major banks, adherence to market best practice and commitment to innovation. Acceleration in the corporate sector can be expected on both sides of the Tasman as net zero targets and transition strategies come to the fore from institutional investors and are increasingly embedded in company business models and capex plans."

The first green loan in the region came from New Zealand's power utility Contact Energy, in August 2017 followed by Macquarie Group in mid-2018 and Investa Commercial Property Fund (ICPF) in early 2019.

The report notes that other green loans have followed involving major banks, property and clean energy developers including a green loan from Australia's superannuation sector, a Climate Bonds Certified transaction agreed in March 2020 by Local Government Property Fund, managed by Local Government Super (LGS).

According to the report, Australia's loan market is over AU$3 trillion compared to a domestic bond market of AU$1.8 trillion, with nonfinancial corporate loans at AU$1.0 trillion compared to bonds of AU$240 billion. New Zealand has NZ$ 150 billion of corporate loans. Yet the green bond market outstrips the green loan market at the moment.

The four major Australian and New Zealand banks have set targets for green lending portfolios, which will

boost credit supply for green. The green lending criteria for some banks is regardless of product type, so can apply to either a green loan or SLL.

"Green and sustainability linked loans are the next stage in financing to help companies promote their environmental, social and governance strategies," said Christina Tonkin, managing director, corporate finance, ANZ. "These emerging loan formats are part of an expanding suite of financing mechanisms to drive investment decision making and capital allocation around building low carbon and sustainable infrastructure, business practices and operating models."

The report also notes that investors and lenders are increasingly including ESG factors in their credit assessments, typically at the corporate level of the borrower. This will increase demand of labelled (and unlabelled) products issued by companies demonstrating their ESG credentials.

The report suggests some banks will prioritise green loans, both labelled and unlabelled, as they seek eligible assets to earmark against the issue of their own green bond. This will lead to increased allocation of credit for green loans. Furthermore, some institutional investors, such as large superannuation funds, are increasingly looking to invest directly into green loans.

"Transition pathways are critical for companies from high-emitting sectors if Australia and New Zealand are to meet their international climate obligations," said Didier Van Not, general manager, corporate and institutional banking, Westpac Institutional Bank. "Support from markets and institutional investors, increased adoption of green bonds, loan and sustainability-linked finance can play a significant role in accelerating the decarbonisation of hard-to abate sectors."

The report recommends that regulators "tilt the playing field towards green," and that providers tap into strong institutional demand for green products to expand the investor base.

"The progress we've seen to date in the emerging green loan market in Australia and New Zealand can be attributed to transparency between issuers and investors and robust certification, as well as the diversity of issuers and product offering," said Stuart Green, group treasurer, Macquarie Group. "We look forward to further innovation in sustainability linked loans to help increase investor confidence in the environmental impact issuers are making and to maintain growth in this developing market."

Read more: Climate Bonds InitiativeMacquarie GroupANZChristina TonkinDidier Van NotSean KidneyStuart GreenWestpac Institutional Bank
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