Setting a road map for sustainable finance

Globally, the finance sector is directing ever-greater amounts of capital to address social and environmental challenges. Australia has more work to do on this front.

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It’s fantastic to see that sustainable finance is becoming the norm internationally. But for Australia to fully embrace a model where capital markets help to address social and environmental challenges, more work needs to be done.

That’s why I’m delighted this week to co-host with IAG the first meeting in Australia held under the umbrella of the United Nations Environment Finance Initiative (UNEP FI).

The Sydney UN EP FI conference brings together all the major banks and a wide range of institutions across the financial sector including investors and insurers, together with regulators, ratings agencies and academics.

NAB has been a member of the UNEP FI since 2002 because we believe in the importance of working to develop a sustainable global finance sector. As a member of the UNEP FI Global Steering Committee, I’ve seen the progress the initiative has made.

UNEP FI’s activities are divided into three streams — investment, insurance and banking. The investor and insurance members have developed the Principles for Responsible Investing (PRI) and the Principles for Sustainable Insurance (PSI) respectively, which represent best practice for organisations and have been widely adopted.

Now NAB has joined 27 other member banks, including Westpac in Australia, to develop Principles for Responsible Banking.

New sources of growth

Economic regions and countries are aligning policy signals and setting frameworks to enable the finance sector to underpin the new engines of green and socially responsible growth, to boost jobs and align with the UN’s Sustainable Development Goals – the SDGs.

Trillions of dollars need to be deployed to achieve objectives of the Paris Agreement and SDGs every year, and much of this will need to come from financial and capital markets.

Globally the finance sector is directing ever-greater amounts of capital – through lending, insuring and investing – to address pressing social and environmental challenges.

In 2017 alone, US$200 billion was issued globally in green bonds¹, over $255 billion was invested in renewable energy², and $35 billion was invested into impact investments³.

More than $22 trillion of capital has been committed to investing with a responsible investment mandate, which is more than a quarter of the world’s professionally managed assets.

Momentum is growing

Momentum in responsible investing and finance is building in our region too.

Much of this is coming from the investment community – our green finance teams often report back that demand is outstripping supply for green debt products.

There are other factors too – rising consumer demand for finance to play a role in delivering social outcomes, as well as the consistently strong performance of responsible investments.

Since 2015, Australian public and private institutions have issued over $4 billion in green bonds across at least 13 issues.

All four of the major banks have issued certified green bonds, with NAB leading the first domestic green bond issue in 2014, and more recently, Sustainability Bonds.

Green and sustainable debt

In fact, the speed of innovation in the capital markets since those first green bonds has been dramatic.

We’ve been developing other new products, such as asset-backed and mortgage-backed securities that have a green tranche, and social impact investments that support outcomes such as improving gender diversity and reducing the rates of re-offending by parolees released from prison.

In the renewable energy space, NAB recently financed our 100th green loan backing wind and solar farms.

In the loan market, new Green Loan Principles were issued by the Loan Market Association in March. NAB was part of the committee that drafted the principles.

The Principles aim to standardise and codify what qualifies as green bank lending, helping to make sustainable finance relevant to a wider cohort of borrowers.

And we’re already seeing innovation following the issue of these loan principles. Just last month, one of the UK’s largest water utilities, Pennon Group, agreed a loan where it will pay a lower rate of interest if certain ESG objectives are met.

These are the sort of concrete examples of shared value that delivers both for financial institutions and for the community at large.

In addition to the finance sector, both the Queensland and Victorian Treasuries and Monash University and several corporates have issued green bonds. Australian Catholic University has issued the world’s first Sustainability Bond.

Financial stability

Banks globally recognise the demand for finance of green and sustainable assets. We, the financial sector, have a large and growing role to play in the green-social-and-sustainable debt and capital markets.

A finance sector that is working to build social, natural and economic capital will help to reconnect finance with its purpose – building a world our citizens want to live in and pass on to their children.

More broadly across the economy, a more sustainable finance system in Australia and New Zealand will deliver:

  • Greater financial stability from managing shocks and strains, such as climate change impacts;
  • Enhanced financial returns through explicit consideration of environmental, social, corporate governance (ESG) risks and opportunities;
  • Better alignment with what consumers want – that their savings and investments are being invested responsibly and ethically.

The need for a road map

As Erik Solheim, the head of UN Environment has said, the financial sector has enormous transformative power.

UN Environment has been working with task forces in various countries, including the UK, Canada, Norway and the EU, to develop national action plans or road maps to enable the finance sector to do the heavy lifting required to deliver a more resilient and sustainable economies.

UN Environment and the World Bank agree a road map needs to be consistent with national and global objectives including the Paris Agreement and the United Nations’ Sustainable Development Goals.

A road map will set out clearly who needs to do what, and when, to enable the transition to a low-carbon and sustainable economy.

That’s why developing a road map for Australia and New Zealand – the top priority of this conference – is so important. A road map will –

  • draw on leading global thinking on how to align our financial markets with the goals of sustainability;
  • improve company disclosure and clarify directors’ duties;
  • continue to ensure good governance practices;
  • and help identify products and services that can help support the UN Sustainable Development Goals

At NAB, we’re looking forward to working together with other organisations to collaborate on concrete steps of where we go next to develop a sustainable financial sector.

Speak to a specialist

¹ https://www.climatebonds.net/files/reports/cbi-green-bonds-highlights-2017.pdf

² http://fs-unep-centre.org/publications/global-trends-renewable-energy-investment-report-2018

³ https://thegiin.org/assets/2018_GIIN_AnnualSurvey_ExecutiveSummary_webfile.pdf