NAB today announced it has closed its first Australian ESG-linked derivative with an ASX50 listed company.
As part of the transaction, the client traded an ESG-linked interest rate swap exclusively with NAB.
ESG-linked derivatives are specialist products tied to environmental, social and governance (ESG) targets. They encourage Australian businesses to consider sustainability across their financial risk management.
NAB Executive – Markets Drew Bradford said speciality products such as ESG-linked derivatives were new to the Australian market and provided an opportunity to incorporate sustainability objectives into every area of clients’ financing, rather than a small number of specific instruments such as bonds.
“Many of our clients are reaching out to us asking questions about how the product works. Put simply, the product derives its value from both financial markets as well as a counterparty’s ESG performance. They can be used to hedge interest rate, inflation or FX risk. They can be transacted when a client has entered into a sustainability-linked loan or bond or on a stand-alone basis,” Mr Bradford said.
“In this specific case, the client was undertaking vanilla debt hedging with a panel of banks. They had considered ESG-linked derivatives for some time, but a workable solution to integrate an ESG-linked derivative within their broader sustainability objectives wasn’t clear.
“Our team worked together with the client to achieve a stand-alone ESG-linked swap. This manages their interest rate exposure and enables them to financially benefit should they deliver on their sustainability objectives for their shareholders and communities”.
For both corporates and investors, ESG considerations are becoming a key focal point of their operations. There is an increasing acknowledgement that companies who focus on improving their ESG metrics are able to attract new sources of capital and potentially better pricing outcomes.
“The ESG-linked derivatives market is still developing right across the world. The KPIs often go out to three or more years, so this is a long game and all about making sustainability core to business strategy,” Mr Bradford said.
- NAB is committed to delivering $70 billion in environmental financing by 2025.
- NAB is working closely with 100 of its largest greenhouse gas emitting customers to support them in developing or improving their low carbon transition plans by 2023.
- NAB is the only Australian bank that has signed the United Nations Environment Programme Finance Initiative’s Collective Commitment to Climate Action, working towards aligning business operations and lending portfolios to achieve net zero carbon emissions by 2050.
- NAB has closed six ESG-linked derivatives in the European market. This transaction marks the first Australian ESG-linked derivative for the bank.