How financial innovation helps bring ESG to life
The following opinion editorial from NAB Global Head of Sustainable Finance David Jenkins appeared in The Australian Financial Review on September 24 2021.
Australian corporates hoping to access private or public capital need to provide tangible proof of how they are addressing sustainability if they want a ticket to play.
Individuals and organisations understand we’re all responsible for climate action, especially as the economy transitions to net zero emissions.
However, having an ESG focus goes well beyond just addressing environmental issues.
Certainly, there is no doubt that the focus is squarely on the environment at the moment, particularly in the lead-up to COP26 in Glasgow and with the rising impacts of climate change on our communities and customers.
At NAB, we’ve been carbon neutral for over a decade and continue to cut emissions across our business.
We believe climate action is everyone’s job.
We need to be part of the solution and support our customers across the economy as they take action too.
We’re making progress on our goals of net zero emissions through our lending by 2050 and providing $70 billion in environmental financing by 2025.
Australia’s financial institutions are already playing a major role in the transition through a range of innovative financial products designed to support businesses achieve their sustainability goals.
These take many formats from the use of proceeds of debt instruments such as green, social and sustainability loans, bonds or deposits, to sustainability-linked loans, bonds and derivatives as well as project financing for clean energy and sustainable infrastructure.
We’ve been on this journey for almost 20 years.
As for the industries these initiatives are supporting, a good example is the agriculture sector.
The continuing rise of Asia’s middle classes presents an enormous opportunity for the sector to become the food bowl of south-east Asia but there are also risks involved.
The potential catastrophic effects of natural disasters exacerbated by climate change and the degradation of natural capital loom as threats to the opportunities.
Bearing this in mind, managing the land in a sustainable way is vitally important, and as farming practices have changed and farmers have focussed more on nature-based solutions to some of their challenges, the land has become more productive and valuable from a natural capital perspective.
Put simply, it’s more lucrative to adopt sustainable farming practices.
Initiatives such as reforestation, improved conservation of biodiversity, or carbon sequestration opportunities on farmland provide farmers with not only new revenue streams but improve the natural capital of their land.
Many farmers are now looking to achieve carbon neutrality within their own operations and attach the value of carbon-neutral certification to their produce, and then look towards the additional benefits of carbon offset income from trading in any remaining excess credits.
Their long-term thinking is about first reducing their own emissions, then offsetting remaining emissions for themselves and their industry, and then taking the opportunity to help offset other Australian and international emitters with any excess carbon credits.
Moreover, the benefits go beyond the agricultural sector as heavy-emitting industries that have made long-term commitments to net-zero goals are investing or partnering with the sector to help achieve their own transition to a low-carbon future.
How do they do that?
By working with the agriculture sector and securing a carbon offset stream.
An example is Shell Australia, who acquired Western Australia-based Select Carbon who engage with farmers to find carbon farming projects to generate credits to support emissions offsetting.
Beyond addressing environmental issues, we have worked closely with our customers to develop innovative financial solutions that address both environmental and social issues such as our work with England’s largest not-for-profit provider of housing and care to older people, Anchor Hanover.
This brings the “S” in “ESG” to life.
Earlier this year, NAB worked closely as sustainability co-ordinator with Anchor Hanover to initially develop a broad sustainability financing framework, then arranged a £300m unsecured syndicated sustainability-linked Revolving Credit Facility (RCF) that was the first syndicated sustainability-linked loan in the UK housing association sector.
This was followed by NAB leading their inaugural £350m sustainability bond issuance to finance additional sustainable homes, then finally providing a first for the sector sustainability-linked derivative for Anchor Hanover.
We also developed the first social bond Residential Mortgage Backed Security (RMBS) issuance with UK specialist mortgage provider, Kensington Mortgage Company.
This has yet to be done in Australia but there’s enormous interest in the space.
Both of these innovative deals address major social issues as well as environmental concerns by incentivising homeowners to be more energy-efficient and build beyond minimum energy efficiency requirements under current building codes.
And at NAB, we continue to develop tailored products and services designed to assist our customers evolve their businesses so they can reap the rewards of Australia becoming a global leader in our sustainable economic future.