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NAB extends offering of ESG derivatives to Australian business – Finextra

NAB today launched specialist derivative products tied to environmental, social and governance (ESG) targets.

These products will encourage Australian businesses to consider sustainability across their financial risk management.

NAB is extending this product to the Australian market, having already arranged six ESG-linked derivatives for European and UK-based customers.

Group Executive – Corporate & Institutional Banking David Gall said NAB first offered ESG-linked derivatives in 2020. This was in response to growth in European sustainability-linked loan and bond markets. Despite the relatively big size in Europe, ESG-linked derivatives are relatively unknown in Australia.

“Climate action is everyone’s job. We need to be part of the solution and support our customers as they take action too,” Mr Gall said.

“It is our responsibility to keep innovating and broadening our products for customers, linking sustainability to all forms of finance. We are seeing growing demand for ESG-related products across many industries and sectors, including higher education, emerging tech and agriculture.”

“Globally, NAB has arranged over A$20 billion[1] in sustainability-linked loans. ESG-linked derivatives naturally flow on from these facilities. Customers can hedge the interest rate, inflation and even FX risks tied to these transactions. ESG-linked derivatives provide the same benefits (i.e. reduction of risks) while at the same time fostering sustainability goals or managing ESG-related risks.”

Global bank loans with terms tied to environmental, social and governance targets jumped to about $52 billion in volume this year (as at May 2021), a 292 per cent increase compared with all of 2020. Global ESG assets are valued at over $30 trillion, with more growth ahead.[2]

Customer Case-Study: ESG-linked derivatives in social housing (United Kingdom)

• Anchor Hanover is England’s largest not-for-profit provider of housing and care to older people. Anchor Hanover serves around 60,000 residents in 54,000 properties.

• Anchor Hanover announced a £300m unsecured syndicated Sustainability Linked Revolving Credit Facility (RCF) in 2021.

• This was the first syndicated Sustainability-Linked Loan in the UK housing association sector. It was partially hedged by a Sustainability-Linked Swap provided by NAB. The unsecured Sustainability-Linked Loan and the Sustainability-Linked Swap incentivise improved sustainability performance across five material areas for Anchor Hanover: number of additional homes, proportion of rented homes at affordable rent, energy efficiency of new homes, resident wellbeing initiatives and initiatives to improve workforce diversity.

• As Sustainability Co-ordinator, NAB worked closely with Anchor Hanover to develop a broad sustainability financing framework.

• “As England’s largest not-for-profit provider of housing and care for older people, Anchor Hanover play an important role in meeting the needs of an ageing population. This transaction supports the group’s consolidation and simplification, including the largest sustainability driven refinancing seen in the UK housing association sector to date. The ESG component underlines our commitment to sustainability for our current and future residents, colleagues, and the communities in which they live. We partnered with NAB who played a role as arranger, active bookrunner and sustainability co-ordinator in this community-changing transaction. It’s yet another big investment idea to support sustainable communities in England.” Sarah Jones, CFO, Anchor Hanover

What are ESG-linked derivatives?

• The ESG-linked derivatives market is still developing.

• An ESG-linked derivative is a risk management product that derives its value from both financial markets as well as a counterparty’s ESG performance. They can be used to hedge interest rate, inflation or FX risk. They can be transacted when a client has entered into a sustainability-linked loan or bond or on a stand-alone basis.

• In the case of an ESG-linked derivative that hedges interest rate risk, the credit spread charged by the arranger (for example, NAB) decreases by an agreed amount if the client meets pre-determined sustainability performance targets (SPTs).

• SPTs include improvements in decarbonisation, energy efficiency, diversity of workforce or the electrification of infrastructure.

• If a client achieves its SPTs, the overall cost of the transaction to the client will be reduced.

• An ESG-linked derivative that hedges FX or inflation risk can be tailored to specific preferences.