Institutional investors’ appetite for backing sustainability-linked loans is growing, with the Commonwealth Bank raising $1.5 billion in funding through its environmental, social and governance term deposit (ESG TD) product in just six months.

The investment figure is significant, because there’s a world of difference between a bank or a financial institution launching a new sustainable finance product, and actually transacting in it.

By revealing that $1.5 billion has been deposited to date, the bank has demonstrated to the market that there’s a huge amount of liquidity that is looking for ways to support the transition to a more sustainable economy.

The bank has transacted the term deposits with a wide range of wholesale customers to date, including local councils, super funds, investment managers and corporate clients.

Launched in December 2021, the ESG TD is exclusively an institutional banking product, meaning it’s not available to retail customers. 

Similar to traditional term deposits, the ESG TDs offers institutional depositors a fixed rate of return, with a commitment from the bank to only allocate those funds to sustainability-linked loans (SLLs). 

The borrower can use the proceeds from SLL for their general business purposes, with their cost of funding tied to predetermined sustainability targets, such as reducing greenhouse gas emissions, waste or water use.

If the borrower achieves the targets, they can get a financial benefit, along with potential financial penalties if those targets aren’t met.

It’s important to note that sustainability linked loans are different to green-labelled or “use-of-proceeds” loans, where the proceeds of the loan can only be used for the purchase (or development) of a particular green asset or building.

The term deposits are certified by the Responsible Investment Association Australasia.

“Exceptional inflows for our ESG TD product in just six months demonstrate the strong appetite among our clients to support Australia’s sustainability journey. It has created a significant new source of funding for our SLLs portfolio, extending our ability to finance new opportunities for clients,” CBA’s group executive of institutional banking and markets, Andrew Hinchliff, said.

ESG term deposits go global

The strong interest to date has led to the bank expanding its ESG TD product into global markets by offering deposits denominated in foreign currencies, including US dollars and euros.

The potential market for foreign currency deposits includes overseas institutions looking for an ESG term deposit, as well as Australian organisations that have operations overseas and need to manage cash that’s denominated in other currencies. 

Regardless of the currency denomination of the deposit, the funds raised under the ESG TDs are allocated across CBA’s pool of SLLs, rather than just SLLs denominated in that particular currency.  

“This new foreign currency capability expands the appeal of our ESG TDs to international customers managing multi-currency portfolios,” CBA’s executive general manager global markets, Chris McLachlan, said.

CBA brings sustainability to the derivatives market

The bank is also continuing to push forward with its innovations in sustainable finance, having recently transacted its first sustainability-linked derivative.

The AUD/USD cross-currency swap will help Treasury Wine Estates to hedge its balance sheet exposure to foreign exchange risk.

The derivative will link the currency swap’s coupon rate to TWE’s sustainability commitments on water stewardship, use of renewable power, female representation in senior leadership roles and emissions reduction targets.

“This is an exciting innovation as it supports our clients with their sustainability ambitions. It extends what we do in sustainable finance to include risk management, in addition to financing,” CBA’s managing director of client risk solutions, Hope Gatis, said.

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  1. Whether it’s greenwashing or blah blah blah I can’t get excited about the Commwealth Bank’s ESG innovations. These people have lent $7 billion to fossil mining corporations in the last 5 years, and their next move may be to help Santos ramp up its gas projects. Please ask them to get serious and stop financing the trampling First Nations rights and heritage and the destruction of water resources and the environment.