In our first look at businesses leading out in the climate space, we hear from Foundation Sponsor Westpac NZ, and explore how their sustainability-linked loans are enabling wider climate action.

Most Kiwi businesses these days are on board with the need to act on environmental and social issues, but turning that talk into action is still a challenge. Even with the best of intentions, other priorities can get in the way of taking meaningful steps to fight climate change and preserve our natural surroundings while also looking after our communities.

But what if taking action meant boosting your bottom line as well?

That’s the principle of Sustainability-Linked Loans (SLLs); an innovative form of business lending that directly links an organisation’s sustainability performance with its interest rate. Already well-established overseas, they’re increasingly catching on here.

“Sustainability-Linked Loans are a great way we can work together with businesses, combining our strength as a lender with their power to deliver projects and initiatives that benefit our environment and our communities,” says Westpac NZ Head of Sustainable Finance Joanna Silver.

“We expect this type of lending to keep rising in popularity as more businesses look to show they’re serious about their sustainability commitments to stakeholders and the public.”

Discounts for doing the right thing

SLLs differ from regular loans in one fundamental way – their interest rate varies depending on the borrowers’ sustainability performance.  If they meet or exceed rigorous sustainability targets set and verified by an independent third party, the borrower gets a discount on the agreed rate.  If they fail to meet those sustainability targets, they pay a higher rate, and therefore their loan costs them more.

“The size of the discount or penalty will vary from loan to loan. But it is meaningful and given the size of these loans, you’re looking at meaningful savings over the life of the loan for doing the right thing, or material costs for not doing so. So, borrowers have skin in the game.

“These sustainability targets are agreed by Westpac and the borrower, then independently and rigorously assessed by highly-respected third parties like assurance providers. We insist on material and ambitious targets tailored to each borrower – they have to go well beyond business as usual and show the borrower is taking a comprehensive and holistic view to improving its practices across the board on really important issues for the business and its stakeholders.”

Westpac signed its first SLL in late 2019, a $50m deal with Contact Energy. It was the first New Zealand bank to set up a dedicated locally-based Sustainable Finance team, and ramped up activity in late 2021 with a string of SLL deals totalling over $2 billion including with Spark, Christchurch Airport, Genesis Energy, The Warehouse Group and Metlifecare.

Ms Silver is especially proud of another recent deal with Pāmu (also known as Landcorp, the large government-owned farming business); the largest SLL in the agricultural sector and the first involving a state-owned enterprise.

The future of SLLs

As well as steadily reducing its own carbon footprint, Westpac is on track to meet its goal of facilitating $10b in sustainable finance by 2025 – in the form of $6b of sustainable lending to customers for things like renewable energy and low carbon transport, and a further $4b in sustainable bonds. And Ms Silver expects SLLs to become the industry standard in coming years.

“It’s about doing the right thing for the business and for our customers,” she explains.

“From grassroots to big business, New Zealanders are becoming increasingly vocal about the need for organisations to take action on issues that matter to them.  Preserving the environment and improving the wellbeing of our communities are top of that list.

“Our goal is to continue to increase funding material investment in clean energy, low emissions transport, green buildings, water infrastructure, waste reduction, land use, conservation and climate change adaptation. Aligning financial flows with low-emission, resilient development pathways is now more critical than ever to set Aotearoa up for a prosperous future.

“We’re pleased to be working together with big businesses to help make that happen.”