For global fund manager IFM Investors, the long-term health of the planet and society aligns with its core purpose to grow and protect retirement savings on behalf of institutional clients like major Australian super funds.

But it’s IFM’s long-standing relationship with NAB that has helped bring financial innovation to this strategy across IFM’s infrastructure portfolio.

IFM and the NAB Markets business have executed a sustainability-linked agreement aimed at encouraging improvements in the sustainability profile of IFM’s global infrastructure portfolio with a sustainability-linked incentive payment for foreign exchange (FX) hedging.

“The agreement reflects IFM’s broad commitment to using a variety of levers to incentivise meeting decarbonisation and other sustainability targets,” says IFM’s Executive Director, Treasury Services, Darren Pasco.

“The innovation is in using derivatives at a fund level and linking the incentive payment for those derivatives to structures which incentivise behaviour aligned with extending our sustainable investment approach. This is still relatively new in the Australian market, and indeed globally, and is an extension of our broad-based and ongoing commitment to achieving these goals.”

Strong foundations

The new deal builds on earlier work with NAB in the lead role on a sustainability-linked loan facility for IFM’s global infrastructure investments which had incorporated a number of annual sustainability-linked improvement targets. The next step has been to apply a similar sustainability-linked payment for the derivative products used in FX hedging.

The deal means the relevant IFM fund, at point of trade execution, can nominate the FX trades it wants to be included in the portfolio assessed for the sustainability-linked payment, determined against the suite of annual sustainability targets. These include targets which incentivise installation of greater renewables generation capacity within IFM’s infrastructure asset class, implementation of carbon reduction targets for IFM global infrastructure portfolio companies as well as increasing diversity and inclusion reporting of those companies.

Provided sustainability targets are met over a set period, the fund receives an incentive payment which can be used to reduce the costs, including the hedging costs associated with running the portfolio.

“We feel as though this agreement will lead the market in terms of demonstrating that sustainably-linked outcomes in finance are not limited to debt-related products, but can also be effectively applied to other specialty financial instruments as well,” Pasco says.

Investing for the transition

IFM invests on behalf of more than 665 institutional investors globally, including many of the largest Australian superannuation funds, offshore pension funds and sovereign wealth funds.

IFM manages $A108 billion in infrastructure[i] investments across a broad range of sectors including transport, energy, digital, social infrastructure and utilities, including core assets such as Sydney Airport.

Ashwin Mathur is IFM’s Director, Portfolio Management, Infrastructure, and says while the fund invests internationally, many of the direct financial beneficiaries of the FX derivative deal and the earlier sustainability-linked loan facility are in Australia.

“There are many investors who have the potential to benefit from the reduction to their costs, which could in turn improve returns for their members,” Mathur says. “This is a great example of how we can continue to leverage the work NAB and IFM have done together to come up with new and innovative ways to deliver sustainability outcomes.”

Mathur says while the agreement itself is executed at the fund level, the individual projects within the portfolio offer benefits at a community level, through carbon reduction and increased economic activity, including local jobs.

^{Image: Manchester Airport Group (Credit: IFM Investors)}

Some of IFM’s portfolio companies that have a focus on decarbonisation and the energy transition are: Manchester Airport Group (MAG) which owns and operates London Stansted; Manchester and East Midlands airports in the UK; Vienna Airport; and VTTI, a global energy storage and terminal infrastructure business based in the Netherlands pivoting to opportunities in clean fuels.

Mathur says the biggest challenge involved setting the specific details of the sustainability targets credibly to account for stretch targets beyond existing baseline commitments to the climate transition. He says drawing on the long-standing, trusted relationship with the NAB Markets team was integral to achieving the balance they needed.

IFM has a commitment to target a net zero goal by 2050 for Scope 1 and 2 emissions across the different asset classes it invests in and has a 2030 emission reduction target for the infrastructure portfolio for Scope 1 and 2 emissions[ii].

“Meeting the goals of the Paris Agreement 1.5 degree trajectory to net zero needs existing infrastructure to be decarbonised at the same time as we increase our stock in clean energy,” Mathur says. “It’s essential that we focus on both.”

Sustainable value

NAB Executive Markets, Corporate and Institutional Sales, John Bennett says this latest FX derivative product innovation shows how the Markets business adds value by working closely with long-term customers of the bank’s core lending businesses.

“The sustainability-linked incentive payment for NAB’s derivative offering is a part of the broad relationship NAB has with IFM,” Bennett says. “It’s been fantastic to be able to build on the work done already with a product to support sustainability goals through the risk management solutions we offer.

“This is about looking at all the different angles and drawing on the expertise within the wider Markets team to achieve the best outcomes for our customers.”

Bennett says the product helps to protect Australian investments from a currency risk perspective while also bringing both NAB and IFM’s broader sustainability objectives to the hedging activity.

It builds on similar work on derivative portfolios NAB has developed and executed in the UK and EU in this developing part of sustainable finance.

NAB is a signatory to the Net Zero Banking Alliance (NZBA) which is the industry-led and United Nations-convened project committed to the alignment of lending and investment portfolios with net-zero emissions by 2050.

The most recent NAB Climate Report 2023[iii] shows progress including that about 70% of the bank’s financed emissions attributable to emissions-intensive sectors are now covered by sector decarbonisation targets.

Climate change is a significant risk to the planet and a major challenge for society to address. At the same time, opportunities are emerging as the transition to net zero occurs.

NAB is supporting customers to decarbonise, build their climate resilience and help achieve the goals of the Paris Agreement.

For more insights: Net zero transition | Business Research and Insights (nab.com.au)

Disclaimer:

This article is provided for informational purposes only. It does not constitute an investment recommendation, offer or solicitation and should not be relied upon as investment advice or as the basis for any contract or commitment. This information does not constitute investment, legal, accounting, regulatory, taxation or other advice. IFM Investors Pty Ltd (“IFM Investors”) recommends that before making an investment decision, each prospective investor should consult a financial advisor and should consider whether any investments are appropriate considering their particular investment needs, objectives, and financial circumstances. Tax treatment depends on each prospective investor’s individual circumstances and may be subject to change in the future. This information should not be reproduced without the written consent of IFM Investors.

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[i] Our infrastructure asset portfolio | IFM Investors

[ii] Environment | IFM Investors | IFM Investors

[iii] 2023 Climate Report (nab.com.au)