GBCA’s TRANSFORM: A mix of employee pressure and world events means that social – and biodiversity – targets are increasingly included in green loans, the Commonwealth Bank’s sustainable finance chief says.  

According to the Commonwealth Bank’s director of sustainable finance and ESG, Bláthnaid Byrne, the growing focus on social outcomes and biodiversity in sustainable finance is a trend that property developers and investors in particular will need to be aware of as they plan their future projects.

The perspectives from the bank are particularly interesting, given it had a business loan book of $127 billion as of February 2021. This means the bank is second only to NAB in the business lending market.

Ms Byrne told the audience at the Green Building Council of Australia’s Transform conference, in Sydney last week that over the past three years, the Commonwealth Bank has seen greater interest in sustainability-linked product overlays, and that this had informed the bank’s loan format.

Dual labelling on the way

“I think primarily the reason is because green [loans] are quite restrictive, there’s criteria that you need to meet to be eligible for the green label,” Ms Byrne said. “Sustainability linked [loans] are much more about improving the performance against set [environmental, social and governance] targets. 

“We’re seeing now, the start of dual labelling, so green and sustainability-linked [loans]. So, it’s a green project, but they’re actually going to be improving against various different targets. And we’re also seeing a growing focus on biodiversity.”

This desire by the bank’s clients to add social targets to green or sustainable loans isn’t being led by regulations, Ms Byrne said. 

Instead, businesses see it as part of their “social licence” to operate. 

Pressure on clients to have discussions around social overlays is typically driven by customers and employees. “And [the clients] can see the engagement that they get when they actually put these targets in place.

“A lot of companies are looking [at social targets,] and I think COVID is a big part of that. But even talking to a European investor last night, the conflict in Ukraine is also putting more of a focus on the social angle as well.” 

In the property sector, the targets associated with green loans tend to look at the full lifecycle of a building, rather than just the construction phase of a project.

“We did a transaction last week where we were looking at reducing the emissions in the construction phase, so the embedded carbon. 

“But it also looked at the end [of the project], the total product emissions. [That includes] the end of the building lifecycle, in terms of the disposal of those materials. So I think that [holistic approach is] going to become more important as well.”

Biodiversity is taking shape with loans

The long-term shape of loans linked to biodiversity will be decided over the next 18 months, during the consultation process for the Taskforce on Nature-related Financial Disclosures.

The TNFD released the first draft of its disclosure framework for managing nature-related risks and opportunities on 15 March.

The taskforce consists of 34 senior executives from major financial institutions, businesses and market service providers around the world. The companies it represents have a combined market capitalisation of $US3.1 trillion, manage over $US18.3 trillion in assets and have a footprint in over 180 countries.

“We’re already looking at what targets could look like for biodiversity in terms of the resources, water and emissions,” Ms Byrne said. “But it’s a much broader sphere –  I suppose all of our potential targets are linked to biodiversity events.”

Review of loan mid term

Looking to the future, Ms Byrne said she would like to ensure that there is the option for a review in the middle of the loan period for sustainability performance-linked loans. 

This could be triggered changes within a company, from a mergers and acquisitions, or if the market has changed in a certain ways.

“That would give us the opportunity to come back to the table to look at the metrics that might be one of the metrics to ask: ‘Does this still make sense?’”

“[The market is] not perfect at the moment. It’s still an evolving space. And you have to recognise that.”

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