Kate Archer is Westpac's director of sustainable finance for institutional and business banking. Her team works alongside corporate relationship managers at Westpac to help facilitate transitions to sustainable lending and offer advice on how to make finance more sustainable. She was part of the team that helped Britomart restructure its lending with Westpac and several other banks into a Green Loan Agreement.

MELINDA WILLIAMS As a starting point, could you share how Westpac defines sustainable finance?

KATE ARCHER The way we look at it, sustainable finance is structuring or enabling lending that either funds more sustainable assets – environmental or social – or incentivises customers to improve their sustainable performance. The Green Loan is one of our sustainable finance structures that encourages borrowers to invest in environmentally beneficial assets and activities. Green building's a very clear example of that, where the building meets certain criteria, such as being built to a high Green Star level, five stars and above, or a high NABERSNZ rated level, which means they have strong energy efficiency performance. As a bank, we are trying to accelerate more lending towards those types of activities. There’s also another category of sustainable finance, which is called sustainability-linked loans. With that, it's not focused on the assets or how you use the money, it's just based on setting targets for customers to hit so that they perform more sustainably.

MW From Westpac's point of view, why is it important to encourage companies to move to sustainable finance?

KA As a bank, for the last few years, we've been looking at our own emissions profile and our corporate emissions. But that's just our operating emissions. Our real impact is in what we lend and who we lend to. Last month, we announced that we're committing to the Net Zero Banking Alliance. That sets the target of trying to measure the emissions of our entire lending book and reduce that on a 1.5 degree trajectory [the maximum acceptable global warming increase] by 2030. Obviously, the property sector has a relatively high portion of emissions – it’s 20% of New Zealand's profile. So that's a key sector we want to engage with. We really want to align with companies that are building to a high Green Star standard. We think there are a whole lot of benefits to that.

One, we're making sure we're doing business with the right people. Two, the leadership of these companies and these Green Loan structures are going to incentivise other companies to move forward and we want to be part of that leadership. Then, three, we can communicate to our own stakeholders that we are aligning our lending book with companies that are taking action on sustainability.

For the other side, why borrowers and companies are doing this, I think corporates are more and more aware of the stakeholder pressure on sustainability. Some of them have reporting processes and commitments underway, but a Green Loan pulls that all together. To qualify for a Green Loan, you need to align to certain market standards, such as the Green Loan principles. It really does require a high standard of certifications to be in a position to do that, and not many companies can do these types of green loan structures. That's why the commitment is impactful and credible – because it has that verification, and a third-party alignment aspect as well.

MW Britomart’s Green Loan Agreement came about because Westpac identified Britomart as a good prospect for moving to a green loan and approached the team about it. Could you talk about how that happened?

KA Westpac's had a long relationship with Britomart Group and we've known that you’ve been doing all the right things for years, just as part of normal business and operating processes. So you were perfectly positioned to do a Green Loan because you’re doing all these steps already. It made sense that there was that natural alignment in terms of your existing sustainability strategy.

MW What are the main steps in setting up a Green Loan Agreement?

KA First, you're looking at what the key assets or buildings are and whether they meet a high standard of third-party ratings or market standards. New Zealand Green Building Council has very clear guidance as to what impact level has to be met, which is 5 Green Stars. There are also four-star NABERSNZ ratings, which, I think, nearly 70 percent of your property portfolio met, which is very high. Most property companies we talk to have a few new buildings, which they'll get a Green Star rating for, and then the rest of the ratings drop off. This loan stood out to me because a lot of property companies just build new green buildings and say, 'Yep, it's built to Green Star', and then don't look at the energy efficiency performance. Whereas Britomart has an ongoing commitment to look at energy efficiency and maintain it at a high level. That was a point of difference.

The second step is that the borrower pulls together a sustainable finance framework. That’s a document that sets out what your strategy is and the kind of governance you have in place to manage the Green Loan and what your reporting commitment is on an ongoing basis. Then, our role is in sustainable loan structuring. If there's a broader lending group, we coordinate with them for any questions they have on the structure of the framework and the documents, and then we ensure the financing documents align to the Green Loan principles and embed those commitments.

MW Is credibility the main incentive for corporations to transition to sustainable loans? Green Loans don’t necessarily have better interest rates, do they?

KA That’s right. In Green Loan products, there's not a consistent approach for pricing discounts. We're starting to see pricing discounts play out in the Green Bond market, which is the traditional sustainable finance product, particularly overseas. In the future, I think, that will translate through to sustainable loan pricing. But the key benefit for companies isn't pricing reductions by any means. It's the broader stakeholder and lender peace of mind. For key stakeholders, it's a way for them to know that they're aligned at the top. Your internal employees, they're another stakeholder. Your tenants. For all these other stakeholders, it's a clear signal that you've got your house in order. I think that's the key driver, the stakeholder piece, and what it embeds in your company in terms of reporting verification and credibility.

MW From Westpac's perspective, what share of your lending is going towards these sustainable finance products and do you have goals for how that will change over time?

KA Yes. It's a good question. Probably for eight or so years, we've been tracking internally what our lending is to climate change solutions, to companies like Britomart Group that have a portion of portfolio that is Green Star rated. We used to have a target for $2 billion in lending to that. Then, we increased that in 2020 to say, 'By 2025, we want to have $10 billion in sustainable finance'. That was a pretty chunky and ambitious target, which we are making good progress towards hitting. 

MW And the ultimate target is for everything to be sustainable?

K A Totally. I think we will get there, say, in five or 10 years. It won't be a green label, and it won't be a social label. It'll just be, 'This is financing and the cost of your sustainability performance will be reflected in the pricing because that is your credit, and the financial risk will integrate the sustainability risk.' But we are not quite there yet. I think these are probably transitional financing instruments to help get us there.

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