Businesses are taking advantage of a broad array of sustainability-themed financial products and investors are keen to be involved, according to Commonwealth Bank experts.

Footprint spoke to the bank's Bláthnaid Byrne (director of sustainable finance and ESG), Anthony Kritikides (head of institutional sales, global markets), and Jessie Xiao (senior associate ESG solutions, global markets) about the surging corporate and investor interest in sustainable finance options.

The range of offerings available to companies is large, and includes green loans and bonds (used to finance environmental projects), and sustainability-linked loans and bonds (used for general business purposes, but with the financial terms tied to sustainability performance targets), they noted.

There are also more nascent forms of financial products, such as transition loans for hard-to-abate industries, and sustainability-linked derivatives, in which the financial terms for products that help companies hedge interest rate or currency risks are linked to agreed sustainability targets.

The latter can even be designed so that, if a company falls short of its targets, the penalty takes the form of a payment to an environment group or other third party, Xiao noted.

Strong interest in sustainability-linked products

According to Byrne, there has been a "massive increase" in corporate interest in these sorts of products in the last few years, particularly in "sustainability-linked" products, in which companies receive more favourable terms if they meet agreed sustainability targets.

Byrne recommended that companies keen to explore these products consult broadly in-house, as a first step.

"Treasurers and CFOs need to be getting a lot closer to their sustainability teams," she advised.

"Those are the people who know what their key ESG risks are, they know what programs and initiatives are underway, and they will also be the ones doing most of the work after the deal is done in terms of reporting on performance."

Businesses should also talk earlier with their financiers.

Ideally, companies will come to those discussions with proposed ESG performance criteria in mind, but it's not essential, Byrne added.

Sometimes companies make contact "who – excuse the pun – start off very green in this space, and we take them along the journey", she said.

Byrne also recommended that treasurers involve their boards early on when investigating these options, to get them comfortable with the concept.

Greater scrutiny

While Byrne works mainly with the companies that are seeking access to sustainability-themed products, Kritikides and Xiao are responsible for bringing investors to the table.

Investor demand for sustainability-themed products is strong, Kritikides told Footprint.

However, he cautioned that they are subjecting businesses, and prospective deals, to an increasing amount of scrutiny to ensure their investments will lead to substantive sustainability improvements.

Fixed income investors want to know that companies are going to deliver on their commitments, especially given ESG-tagged bonds are more expensive than standard bonds, he said.

"Our analysis suggests that the so-called 'greenium', the price that a green bond trades over its non-green equivalent, can be somewhere between two and 20 basis points," Kritikides said.

Consequently, investor ESG teams "are getting a lot more selective", and are asking tougher questions about the proposed sustainability KPIs, monitoring and reporting, and the robustness of the penalty provisions if companies fall short, he said.

Kritikides expects there will be greater scrutiny on bond issuers over the next year or so, as they come under pressure to demonstrate they will make significant improvements.

Xiao agreed, telling Footprint that, while "there is a lot more growth potential" for sustainability-themed bonds, investors are now placing "a real focus on impact", and want to see a lot more data before they commit.

Growing interest in bonds

Kritikides said the market for green bonds and sustainability bonds (in which finance must be directed to environmental and social impact activities) has really taken off in the last two years in Australia.

More recently, investors are showing huge amount interest in sustainability-linked bonds, which have the advantage for issuers that the proceeds can be used for any business purpose, he said.

In a similar vein to a sustainability-linked loan, a company agrees to a set of sustainability performance targets – usually no more than two in order to keep the bond structure simple for investors.

If the company falls short of the targets, there is "a step up" in the bond's coupon, generally applied in the last few years of its term.

First of their kind transactions

Kritikides noted that the bank last December launched Australia's first ESG-labelled term deposit certified by the Responsible Investments Association of Australasia, involving $200 million deposited by global fund manager IFM Investors.

IFM receives a fixed interest rate on its deposit, and the $200 million is allocated entirely to the bank's portfolio of sustainability-linked loans.

Kritikides added that the bank last December also completed Australia's first Climate Bonds Initiative-certified "green repurchase agreement".

It involved a temporary exchange of government bonds and cash between the bank and US-based institutional investor Northern Trust, which has assets worth US$1.6 trillion under management.

The end result of the transaction was an extra $50 million temporarily becoming available for assets within the bank's certified green loan portfolio, which supports projects such as wind and solar farms, as well as energy efficiency upgrades.