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Banks blending dollars and sensitivity

Those with sustainability agenda look beyond environmental concerns to societal needs

Westpac's Ms Cobley and Mr Correa. Banks such as Westpac have been able to provide innovative financing to give ESG efforts a boost, they say.


PROTECTING children from distressed family situations is among the key priorities of social services around the world. Banks such as Australia's Westpac have been able to provide innovative financing to give such efforts a boost, said Westpac senior executives in an interview with The Business Times.

Aligning financing structures to societal needs is one way for banks with a sustainability agenda to advance the cause beyond just addressing environmental concerns.

Climate change is commonly a greater focus for banks than other issues that make up the environmental, social, and governance (ESG) factors that measure the sustainability impact of a lender.

Still, in 2013, Westpac broke new ground by structuring a A$10 million (S$9.83 million) social benefit bond on behalf of an Australian charity, The Benevolent Society, and the New South Wales government.

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The bond was structured to have investors earn a return from helping to keep at-risk families together. Research showed that children do better staying with at home, even if there are distressed situations, rather than being taken out of the family.

The alternative would be foster care, said Lyn Cobley, group executive for Westpac Institutional Bank. So rather than take children away from their families, The Benevolent Society sends in counsellors to train the parents.

"If they can reduce the number of children that end up in foster care, then whatever the difference is between the cost of that programme, and what it would cost for us to have out-of-home care, they (the government) will return that amount of money to investors," said Ms Cobley.

This has proven to be successful for private and institutional investors who have subscribed to the five-year bond.

As at June 30, 2017, the investors are projected to receive returns of between 7 and 15 per cent - depending on their investor class - by late this year.

Meanwhile, between July 1, 2016, and June 30, 2017, 59 per cent more families have been able to stay safely together compared to a matched control group of similar families.

Data from Impact Investing Australia showed impact investing is forecast to hit A$32 billion in Australia by 2024.

"The exciting thing about it is there's so much demand," said Ms Cobley. "I think it's social conscience, and it's not a millennial thing."

Westpac followed up in 2015 with another social benefit bond with the Queensland government that helped youths who were homeless, or at risk of having no roof over their heads.

The A$5 million bond issue similarly delivers returns based on measures of success of social outcomes and that also reduces overall costs for governments that are funding such charity.

Other banks have offered similar bonds with a social impact. DBS, for example, in 2017 structured an US$8 million social sustainability bond - the first in the world to be listed - that goes towards loans for social enterprises and microfinance institutions that offer financial independence for more than 385,000 women in Cambodia, the Philippines and Vietnam.

The four-year bond offers a coupon rate of 5.65 per cent per annum and is listed on the Singapore Exchange.

Asian investors took up more than 60 per cent of the issue, with the majority being high-net-worth clients of DBS.

Westpac has also looked more closely at how it can prevent modern slavery that may emerge through the supply chain of businesses that it finances, said Michael Correa, the Singapore-based general manager for Westpac's Asia-Pacific operations.

Westpac requires suppliers with a medium or high risk of such potential abuses to outline the steps they have taken to manage the risks.

The bank then scores the companies' performance accordingly, and in some cases, requires the companies to undergo an independent audit.

As part of its broader sustainability agenda, Westpac is also on track to reach a A$10 billion target for lending to climate change solutions by 2020, said Mr Correa. Among other projects, the bank supports one of the largest solar farms in Australia.

In fiscal 2017, it committed to fund renewable energy projects that are due to produce more than 2,100 megawatts of energy.

With the key focus that China has on the Australian market, Westpac is expanding its support of Chinese companies with renewable energy projects.

It is working with Beijing-based wind company Goldwind, which has several wind projects under development in Australia.

Westpac is also working with one of the big four power companies in China, China Power International Development, to finance a solar farm.

Mr Correa acknowledged that there are uncertainties in the renewables space.

For example, the electric car has 60 per cent fewer moving parts than the average car. The assumption then, is that such assets should have a longer lifespan, and therefore should have higher value.

"We can take an assumption, by the use of this technology, that the assets that we're financing are better assets ... (But this) hasn't been proven," said Mr Correa. "The conflict we have with the new forms of technology is this: we agree in principle that this is a better asset. (But) we need a bit of time to get the experience behind it."

Still, as banks such as Westpac also have climate change targets, loan tenures for green projects in Australia are stretching out beyond the typical seven years, to eight years, Mr Correa observed.

"It's more to do with the competition to access the projects. We've all got targets now, so there is a self-fulfilling prophesy at work."

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