(12 October 2021 – Australia) NAB has executed its inaugural Australian environmental, social and governance (ESG) linked interest rate swap derivative with a large corporate.
ESG-linked derivatives are specialist products tied to environmental, social and governance (ESG) targets. They encourage Australian businesses to consider sustainability across their financial risk management.
The group had only recently announced its new sustainability-linked (SLD) derivatives offering, expanding on products developed in Europe and the United Kingdom and follows a similar SLD product release move by ANZ in Australia and Asia.
ESG-linked derivatives are relatively new to Australia and provide an opportunity for CFOs and corporate treasurers to incorporate green objectives into every facet of their borrowing needs as opposed to limited scope offered by alternative inflexible debt instruments such as bonds.
“Many of our clients are reaching out to us asking questions about how the product works. Put simply, the product 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” commented NAB Markets Executive Drew Bradford.
“In this specific case, the client was undertaking vanilla debt hedging with a panel of banks. They had considered ESG-linked derivatives for some time, but a workable solution to integrate an ESG-linked derivative within their broader sustainability objectives wasn’t clear.”
“Our team worked together with the client to achieve a stand-alone ESG-linked swap. This manages their interest rate exposure and enables them to financially benefit should they deliver on their sustainability objectives for their shareholders and communities.”
“For both corporates and investors, ESG considerations are becoming a key focal point of their operations. There is an increasing acknowledgement that companies who focus on improving their ESG metrics are able to attract new sources of capital and potentially better pricing outcomes.”
“The ESG-linked derivatives market is still developing right across the world. The KPIs often go out to three or more years, so this is a long game and all about making sustainability core to business strategy” Mr Bradford added.