Banking on net zero

• Several NZ banks have pledged to ensure their investment and lending portfolios align to net-zero greenhouse gas emissions by 2050
• Banks are helping business customers reach for net zero with lower interest rates for hitting sustainability targets, and by helping firms with transition plans
• This needs to be decade of decisive action on climate, and board-level leadership is the best way to drive

Globally, finance opportunities are opening up to firms that can show they’re on a credible long term path to transition and meeting environmental and social targets.

In New Zealand, banks are gearing up to work with clients and customers to establish and deliver on their plans and offering new sustainability-linked loans with lower interest rates.

These are some of the insights that came out of ‘Banking on Net Zero’, a panel discussion convened by Toitū Tahua: Centre for Sustainable Finance and the British High Commission.

The session was focused on investor and bank commitments to reach net zero emissions by 2050 across their portfolios. 

It featured spokespeople from ANZ, BNZ, HSBC, RBNZ, along with Fonterra COO Fraser Whineray, Metlifecare deputy COO Christine Lee and Dr Ben Abraham from the British High Commission.

The frank discussion built on a wider conversation that Toitū Tahua is helping to drive, around the role banks can play in Aotearoa New Zealand’s transition to a net zero emissions economy.

Watch the session on demand or read on for key takeaways. 

Key points for directors

• Start the conversation now about transition finance with your banks.
• Work out the big items to disclose and explain first.
• Directors and firms that see sustainability as an investment rather than a cost will be best poised to leverage sustainable finance from banks and investors.
• Access to international capital will become much harder for firms that don’t have a credible, long term transition plan.
• Climate change will increasingly impact businesses’ performance and risk profile, increasing vulnerability to other pressures like high inflation.
• Even – especially – in the midst of high inflation and supply chain disruption, directors have a crucial role in leading organisations to manage climate risks and implement long term, low emissions strategies.
• Managing climate risk and curbing future impacts is critical to maintaining economic stability and resilience in the face of inevitable, ongoing disruption.
• Unlike many any other business decisions, the net zero transition requires high collaboration with external stakeholders – including suppliers, customers, bankers, investors.
• Effective climate governance and leadership means ‘taking people with you’. Views within organisations will often lag behind what’s needed to take effective climate action.

What is the Net-Zero Banking Alliance?

Internationally, banks can help channel the massive amounts of capital needed to decarbonise the world economy.  They are recognising that they can do this by measuring, accounting for and reducing financed emissions, and by helping their business customers get to net zero. Another key role banks have is in pricing climate-related risk.

So far, 111 banks globally – including BNZ, ANZ Australia, and the HSBC group - have joined the Net-Zero Banking Alliance, which launched April 2021. Together, member banks are responsible for about 40% of global banking assets.

Members pledge to align their lending and investment portfolios with net zero emissions by 2050, and to set an intermediate target for 2030 or sooner. They must use robust, science-based guidelines, and focus first on the most emissions-intensive sectors.

Sustainable finance

It’s early days, but banks are accelerating the creation of new sustainability-linked loans and other sustainable finance products.

Some examples: HSBC has a global target of US$750 billion to US$1 trillion in lending by 2030 to support clients’ shift to net zero, and plans to turn sustainable infrastructure into a new asset class.

ANZ has allocated $50b over the next three years for transition finance through a partnership with advisory firm Pollination. It’s designed to meet the transition needs of the bank’s customers globally in sustainable finance, project and export finance, carbon markets and corporate advisory, including mergers & acquisitions.

Westpac has pledged to enable $10b in sustainable finance by 2025 - $6b of sustainable lending to customers (for example, for renewable energy, education, low carbon transport) and $4b of sustainable bonds.

Westpac also issued a $125m social loan – one of the first of its kind in the world – to Te Pūkenga, the body that brings together New Zealand’s 16 institutes of technology and polytechnics. Te Pūkenga will be independently assessed by EY to verify that the funds are being used for agreed social projects and activities, which are around equitable access to vocational education and job opportunities.

In April, BNZ launched Aotearoa New Zealand’s first sustainability-linked loan available to all farmers and growers. It offers lower interest rates to clients who meet environmental and social targets including emissions reduction; better management of water, waste, pollution and ecosystem; and improvements in long-term resilience.

ASB has also launched sustainable finance products including a loan targeted at the rural sector to support on-farm projects, and sustainability-focused lending for corporate clients to embed sustainability targets.

Decade of decisive action

Work is underway by XRB to develop NZ-specific guidelines for developing sector-based scenarios and making climate-related disclosures. The Insurance Council of New Zealand Te Kāhui Inihua o Aotearoa has already developed sector-based scenarios, and the New Zealand Bankers’ Association is developing some, too (scenarios are tools to test the climate resilience of an organisation’s strategy).

Banks acknowledge that a lot of the local data needed to do the planning and reporting is not yet available.

Dean Schmidt from BNZ: “We do have some real heavy lifting to do over the next couple of years around gathering the data that we need for both the mandatory reporting … but also so we can get a clearer understanding of what's in our books, and more importantly, what our customers are doing.” 

But we don’t have time to wait for perfect data and metrics.

“When it comes to climate change, winning slowly is losing… the 2020s must be the decade of decisive action,” Dr Ben Abraham from the British High Commission said in the webinar.

Right now, directors can learn from companies that are front-footing this: voluntary reporters in this country and overseas.

What counts as sustainable?

The EU and China are among jurisdictions that have already developed ‘green taxonomies’, which, despite the name, have nothing to do with tax.

Instead, a green taxonomy gives objective definitions of economic activities classified as sustainable in a given region. An analogy is safety ratings for cars. Taxonomies don’t outlaw activities or equate to ‘picking winners’.

They do offer a credible set of baseline metrics for investors who are looking to invest in line with net zero commitments or other sustainability objectives. They also help to prevent greenwashing.

There is work afoot in Aotearoa New Zealand to develop greater coordination and visibility over local sustainable finance approaches and how they align with international taxonomies, standards and frameworks.

One local initiative already in use is the Sustainable Agricultural Finance Initiative (SAFI), which underpins BNZ’s agribusiness sustainability-linked loan. 

What’s a credible, long term transition plan?

There is no official taxonomy or set of guidelines yet in Aotearoa New Zealand, but the Investor Group on Climate Change (IGCC) has released guidance that sums up what investors are seeking:

• comprehensive, science-based targets across all material emission scopes
• a strategy to deliver targets that identifies enablers and quantifiable impacts
• sector-specific commitments and actions in line with 1.5 °C decarbonisation pathways
• capex lines up with targets
• annual disclosure and monitoring that’s externally verified

Meanwhile, in April the UK set up a transition plan taskforce to develop a gold standard for transition plans. In coming months, there will be more tools and guidelines for NZ firms to draw on when making transition plans.

Follow Toitū Tahua: Centre for Sustainable Finance on its website or LinkedIn for updates.

Case study: Metlifecare

By Nicola Shepheard, communications senior advisor, Toitū Tahua: Centre for Sustainable Finance

In the Toitū Tahua ‘Banking on Net Zero’ webinar, Metlifecare deputy CFO Christine Lee was asked what’s changed in the sustainability conversations that the retirement village company has with its banks in the past 12 months, following its purchase by Swiss-based private equity firm EQT Partners.

Lee said EQT sustainability co-ordinators have been working with Metlifecare to integrate sustainability – climate action, diversity, equity and inclusion – into the company strategy and everyday decisions.

“While our sustainability journey has been relatively short, the reason we were able to get going really quickly and really seriously is because we had a clear mandate from our owner, which cascaded down to the board level, and the CEO level. So, that tone at the top,” Christine said.

Metlifecare completed NZ’s largest sustainability-linked loan in December. Pricing for the $1.25 billion loan is tied to achieving science-based targets for emissions reduction, 6 Green Star standards for construction of new villages, and increasing its number of dementia care beds six-fold.

“I think this is a really good example of how the banks can work with their customers to incentivise their transition to net zero, and raise collective ambition towards bigger sustainability targets.”

Doing the work to shift to more sustainable business practices has brought home how much this is a collective effort involving the whole ecosystem around a firm.

“If you think about a company that's trying to reduce its carbon emissions, they'll have to collaborate with the suppliers to reduce, potentially, the upstream emissions to change the nature of the inputs they use,” said Christine.

“And if you're looking to adjust your downstream emissions, you'll have to make a clear case to your customers why a green product is better... if you're to make investments in physical assets, you'll need to engage with your banks and investors.”