Sustainable finance may have slowed in 2020, but the long-term trendline for the property industry is pointing in one direction, says Ashurst’s senior finance partner, Martin Coleman.
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Three key takeaways:
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The volume of green finance expanded by 2.5 times in 2019, but the story will be very different in 2020.
Influenced by a profound market slowdown, the number of green bonds and loans is expected to decline this year, but Ashurst says it will prove to be a good news story as the market recovers.
While COVID-19 may cause short-term disruption, “sustainable finance is here to stay and is gaining momentum,” Coleman says.
“There’s real pressure and a greater awareness of the need to put ESG – environmental, social and governance – at the core of the boardroom”.
Sustainable finance integrates ESG criteria into business or investment decisions. The most common sustainable financial instruments are green bonds, which come from the investor market. More recently, there has been a significant rise in green and sustainability-linked loans, which predominantly come from the bank market.
Investa Commercial Property Fund has almost $500 million in green loans, with green debt from Commonwealth Bank, Westpac and HSBC making up an increasing proportion of the fund’s total debt pool.
Frasers Property Australia has been tapping into green finance since 2018. In February, the developer established a sustainable finance framework, backed with $2 billion in loans, to maintain its GRESB portfolio rating.
Better performance, better pricing
“The critical feature of a green loan or bond is that the proceeds must be used for a green purpose, like a green building or other energy efficient construction,” Coleman explains.
But sustainability-linked loans have an “even wider application”, and do not need to be used for a specific green project.
“Rather, a sustainability-linked loan can be used for general corporate purposes, and therefore the pool of borrowers to which it is available is a lot larger.
“Importantly, pricing is tied to a borrower’s performance against ambitious, pre-determined KPIs, called sustainability performance targets. If a borrower achieves those targets it receives a pricing discount. If it does not, a small pricing premium may be added.”
These new loans “motivate, encourage and incentivise better performance which in turn can lead to better pricing,” Coleman adds.
“They are perfect for a REIT, large developer, superfund or investor … They are a real win-win for everyone, and not just the corporate but all stakeholders including employees, management, investors and financiers as well as the environment.”
Green bonds grow
Meanwhile, the green bond market continues to mature. Five years ago, alternative energy was by far the largest category of funding, according to the Global Green Bond Index. But funding has since increased for a variety of purposes, and nearly $92 billion was issued last year for green building alone.
Stockland launched Australia’s first green bond, for roughly $480 million, in 2014. The proceeds were used to fund Green Star-rated retail, commercial, residential and retirement living projects.
In 2017, Investa Office Fund closed its first $150 million green bond issuance oversubscribed, with plans to spend the proceeds on low carbon buildings.
And last year, QIC Global Real Estate attracted investor demand amounting to $1.5 billion for a $300 million green bond designed to help finance shopping centre upgrades.
Ashurst partner and debt capital lawyer Caroline Smart says activity in the green bonds space has “slowed down” over the last three months, but she expects a resurgence in the long term.
“Investor demand is still very much on the increase. Without a doubt, green and sustainability bond issuance will continue to grow because investor demand for green and sustainable bonds in their portfolios is growing.”
Billions from the banks
Coleman agrees that sustainable finance has slowed in Australia this year, but he expects this to be only temporary. Longer-term, Coleman expects a post-pandemic “shift to social KPIs” and more loans in the property sector to be linked to WELL ratings, for example.
“Banks like ANZ, NAB, CBA, Westpac and HSBC, who are playing leading roles in the region in sustainability finance, have set aside billions to support customers who want to play in this space,” he says.
“Those developers, REITs, super funds and investors who embrace the sustainability challenge are likely to win out – not just financially – but to secure the long-term future of their assets and investments.”