Sustainable Finance/ ESG and Infrastructure Sustainability - ISCouncil

Definition of Sustainable Finance

Any type of financial service i.e. banking, insurance, investments, accounting or advisory that integrates environment social and governance considerations into the provision of that service or product to benefit clients stakeholders and society more broadly.

Sustainable Finance Overview

Sustainable finance places importance in the role of Environmental, Social, and (Corporate) Governance performance within investment decisions. Responsible investing has gained significant traction due to a combination of governmental goal setting and regulations, changing investor priorities, and ambitious corporate sustainability targets.

Sustainable Finance in Action

Financiers are earmarking capital for sustainable and green infrastructure projects through products that drive financial returns by creating social and environmental value, such as green loans, sustainability linked loans and green bonds.

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Third Party Rating Schemes & Sustainable Finance

Ratings and frameworks like IS ratings can be instrumental in measuring, improving and making transparent the impact of well managed infrastructure projects. A recent example of this is Reliance Rail’s 21-year Green Sustainability-Linked Loan (‘GSLL’) which uses IS operations ratings as a performance benchmark.

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Financing Sustainable and Impactful Infrastructure

Watch the recording of our “Financing Sustainable & Impactful Infrastructure” Session at our recent ReConnect Conference, held in Sydney on March 3, 2022. ISC is committed to enabling collaboration and learning between all sectors involved in infrastructure.  During our ReConnect conference in March, we brought together a leading panel of experts to discuss what is happening at the intersection between Sustainable Finance and Infrastructure Sustainability.

Insights: Sustainable/ESG Finance and Infrastructure Investment

When you think about infrastructure investing, they’re very capital-intensive projects that need to live for a long time. And whether you’re financing with debt or insuring or providing equity to these kind of projects, you need to know that they’ve got a long useful life in them not just in the bricks and mortar that you put in the ground, but in both the sort of social license to operate as well as just the business model that goes with them.

Adam Roberts, Senior Vice-President / Investment Director, Cerberus Capital Management

The frameworks and rating systems are critical to supporting the sustainable finance movement and markets going forward....Application of those frameworks and external ratings help provide confidence around those transactions for investors and lenders

Karl Eisenhammer, Head of Sales, AUS & NZ, Moody’s ESG Solutions

Investors bankers insurers all get involved and they’re in one way or another are involved in every project....So the fingers of the finance world are all over the place in terms of infrastructure

Rick Walters, Chief of Standards & Innovation, GRESB

The role of the private sector is becoming more necessary, more needed, so what investors think is becoming more and more important

Rick Walters, Chief of Standards and Innovation, GRESB

The majority of the global investment community are interested in supporting infrastructure projects that are driving positive long-term sustainable outcomes

Tania Smith, Director Sustainable Finance, ANZ

Sustainable Finance Question & Answer

Content prepared by Tania Smith, Director Sustainable Finance, ANZ

How important or relevant is alignment with the new EU Taxonomy Regulation going to be in Australia for climate finance ?

The EU Taxonomy has been developed with EU economic activities in mind – having said that, it is highly relevant globally as a benchmark and indicator of what is ‘green’. It will continue to be one of a number of taxonomies that are utilised within sustainable finance globally (along with the CBI taxonomy). The Australian Sustainable Finance Institute (ASFI) is currently compiling a Technical Advisory Group to consider putting together an Australian Sustainable Finance Taxonomy to align with Australia’s decarbonisation commitments and economic activities. Until such time as that is finalised, the EU Taxonomy will be highly relevant in the Australian context. Note that the Australian Taxonomy will build on work done on sustainable finance taxonomies internationally, including by the EU, the Common Ground Taxonomy, Japan and in Singapore, this project will work with experts and stakeholders across the Australian financial system to determine what a sustainable finance taxonomy should look like in Australia to ensure international credibility and inter-operability while reflecting the Australian economy and context.

With the proliferation of taxonomies, further work on enhancing comparability and interoperability will be essential. And this is reflected in the various efforts across the region in finding practical ways to support cross-border compatibility.

Other than global financial markets, what other factors influenced the interest in sustainable finance and investment?

Consumer preferences, global and local regulation (such as Director Responsibilities and local / state / federal emissions reduction targets), desire for competitive advantage and ability to have product differentiation etc.

Product innovation in the sustainable finance sector has introduced thematic investing which capitalises on opportunities that stem from priorities that are structural and transformative in nature. With greater clarity in investments (e.g. use of proceeds), investors are empowered to curate, or diversify, a portfolio that resonates closely with their values.

What new kind of opportunity areas do you see on the horizon for ESG and sustainable infrastructure specifically ?

Valuing and incorporating natural capital and ecosystem service into design and delivery of projects and impact reporting on these elements. Increased focus on social metrics is also likely to be a key theme for infrastructure. Also opportunities in new and emerging infrastructure asset sectors such as hydrogen, EV charging, off-shore floating wind etc.

It would be great to understand how sustainable finance can bring in lending requirements related to sustainability

The focus on sustainable finance and infrastructure has tended to be on equity investment into infrastructure assets, but interest from the debt/credit/lending side is increasing rapidly. There are some differences and constraints in the debt space, primarily around the degree of influence that lenders have on the assets, and it must be recognised that the hard work on setting ESG requirements needs to be done at the time of transaction (making the loan). Products like Sustainability Linked Loans (SLLs) are starting to prove quite popular as a solution.

Generally, any labelled sustainable finance transactions require transparency and disclosure along with annual reporting on assets or performance which may not have previously been required as part of normal lending requirements.

What is your take on the role played by TCFD on the investment decision making process?

Investors are looking for TCFD disclosure as evidence of appropriate risk management actions. Lenders are starting to request access to this information and using it to inform their investment decisions in managing their own climate risk exposures. Many jurisdictions globally are mandating the requirement to report in alignment with TCFD so I expect it will eventually form a common compliance piece within standard investment analysis and due diligence.

Greenwashing within sustainable finance seems to be front of the news – what is the role of financial institutions in preventing this from occurring?

Financial Institutions (FIs) play a key role in preventing greenwashing. Appropriate due diligence and appropriate structuring of transactions in line with the market principles from APLMA (Asia Pacific Loan Market Association) and ICMA (International Capital Market Association) should help to avoid this as well as development of market standards for ‘green’ investment or financial products like the EU Taxonomy. Transparency is also key – all methodologies should be open to stakeholder scrutiny.

Independent reviews like Second Party Opinions (SPO) play a vital role in providing signals of the veracity of sustainable finance products (including transition products) – it is one of the things that FIs can insist upon to improve the levels of transparency in sustainable finance products.
Another aspect is improving transparency through industry efforts and better disclosures – working with peers, through industry initiatives with both private and public groups such as the Future of Sustainable Data Alliance (FOSDA), to suggest solutions to ESG data gaps.

In addition to green bonds/loans and sustainability-linked loans, what are some of the innovative debt instruments and rating tooled that can help drive the transition of the infra sector?

Sustainability Linked Derivatives and Guarantees are starting to appear more in the market. Along with Sustainable Supply Chain products. In terms of rating tools, many proprietary tools are being developed. They can provide a more consistent and transparent ability to compare ESG performance across companies and projects. In the private infrastructure space, GRESB is the leading benchmark adopted by investors and managers.

What is driving banks to issue “green loans”?

Banks operate in global markets. Globally, some jurisdictions are requiring investors, banks and listed companies, to report the proportion of their business’ that are aligned to ‘green’ taxonomies (such as the EU Taxonomy in the EU). This is one driver. Some Bank also see green as a strategic differentiator. The biggest driver is possibly a risk driver however, as banks don’t want to be left holding stranded assets, and green assets are considered less risky than some other asset classes. In the retail banking space, customers are driving this demand.

More information

For more information about ISC’s Infrastructure sustainability ratings and how they can provide assurance for sustainable investments, please get in touch with Monique Isenheim at monique.isenheim@iscouncil.org.

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IS Ratings and GRESB assessments

GRESB Infrastructure is a portfolio-level assessment tool for asset owners like pension or superannuation funds and fund managers. GRESB and ISC are collaborating to streamline connections between IS project and asset operations ratings and GRESB assessments for companies and assets with the aim of reducing participant reporting burden, enhancing data validation processes, and maximizing value.

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Third Party Endorsement

The report “State of the Practice: Sustainability Standards for Infrastructure Investors” by Guggenheim Partners, Stanford Global Projects Center and WWF found that IS ratings provide an “Extremely comprehensive and rigorous assessment process.”

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