Companies are increasingly shifting their focus from creating value for shareholders to value creation for their broader stakeholder base, including communities and the environment in which they operate.

As part of Contact Energy’s commitment to playing a leading role in New Zealand’s transition to a low-carbon economy, it took up a sustainable finance solution that has made it a leader among its peers.

In January 2020, it entered into a NZ$50 million, four-year sustainability-linked loan facility with Westpac NZ.

The amount of interest Contact Energy will pay depends on whether it meets ambitious targets linked to its environmental, social and governance ratings, which are themselves set by an independent ratings agency.

If Contact Energy meets or exceeds the targets, it will receive a discounted interest rate. If it doesn’t, it will pay higher interest costs. It was the first loan of its kind to be issued by Westpac NZ, and one of the first in New Zealand.

The benefits of swapping vanilla for green

Picture: Westpac NZ’s Head of Sustainable Finance, Joanna Silver.

Westpac NZ’s Head of Sustainable Finance, Joanna Silver, says a growing number of companies want to help bring about positive change on issues such as climate change and poverty, and have discovered that sustainable finance can help them achieve these goals together with a raft of other tangible benefits.

“We’re increasingly seeing an awareness among CEOs and CFOs that a corporate strategy can no longer be distinct from a sustainability strategy,” she says. “Aligning them shows a public commitment to building resilience into business models and creating a better future for all.”

“A corporate strategy can no longer be distinct from a sustainability strategy.”

This kind of commitment also helps organisations create stronger relationships with all their stakeholders – shareholders, employees, customers and local communities – as the relationship is based on shared values. Other benefits of sustainable finance include improved strategic resilience, investor diversification, competitive advantage and customer loyalty – all of which contributes to a better bottom line.

Westpac NZ paves the way

In sustainable finance, sustainability considerations become part of financial decision-making through tagging funds to sustainable assets or outcomes. Loan and bond structures are being developed that commit borrowers to invest in environmental or social activities, or achieve certain ESG (environmental, social and governance) targets with their financing.

A sustainability-linked loan is a relatively new form of sustainable finance, but the market is expanding rapidly. From US$5 billion in 2017, it has grown to US$122 billion in 2019 (which was a 168% jump in volumes from 2018).

Westpac NZ was the first bank to establish a Sustainable Finance team in New Zealand in 2019.

“We saw a local team as key to building out the bank’s strategic priority of working with customers across all sectors of the New Zealand economy to raise awareness of how to access sustainable finance and drive capital into climate change and sustainability outcomes,” explains Silver.

That same year, Westpac NZ became the first New Zealand bank to raise funding through the issuance of a green bond and the first New Zealand issuer to access green bond funding from European investors.

New Zealand’s sustainable debt market (including bonds and loans) is just over NZ$3 billion (US$1.9 billion) – small relative to the global figure of US$465 billion – but fast growing. Westpac NZ’s local team is very busy presenting to a range of business customers on this topic and structuring sustainable finance transactions for its borrowers.

As Silver says, “Articulating your sustainability strategy and aligning your financing to it is a powerful way of demonstrating that you understand the challenges coming your way.”

Now, more than ever, she adds, a well-articulated sustainability strategy is crucial to competitive positioning and building trust across all of your stakeholders.

With increasingly challenging financial conditions as a result of the COVID-19 pandemic, a company’s ability to adapt its business model in a carbon-constrained economy will be critical. Sustainable finance can help organisations align their sustainability strategy with their financing needs to achieve powerful outcomes.

_Disclaimer

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Find out more:

Westpac is committed to helping its customers move towards more sustainable business models and building a better future for all New Zealanders. Find out how they can help you by contacting Westpac New Zealand’s Sustainable Finance team at [email protected]