(3 September 2021 – Australia) NAB is seeking to offer new sustainability-linked derivatives (SLDs) in Australia, expanding on products developed in Europe and the United Kingdom in the wake of a similar move by ANZ to offer SLDs to Australian and Asian clients.
The new SLDs include swaps, forwards, cross currency swaps, interest rate and foreign exchange (FX) options executed alongside sustainability linked bonds or sustainability linked loans. An SLD has a pricing component tied to the sustainability targets of the underlying bond or loan.
NAB has transacted environmental, social and governance (ESG) linked interest rate swaps, cross-currency swaps and inflation linked swaps in separate markets previously. Developing the SLD market is not straightforward by any means, with NAB highlighting the need to have strict standards when selecting key performance indicators (KPIs) that match company ambition as opposed to rewarding inadequate action.
“The ESG derivatives are an additional incentive to organisations to set and meet ambitious sustainability improvement targets. The financial incentive can be more material than it would be in the loan context by virtue of the fact that if you think about how derivatives work, the longer the tenor of the derivative, the more price sensitive price fluctuations are” stated NAB Global Head of Sustainable Finance, David Jenkins.
“By reducing the credit spread, that can have a significant impact on the cost that is being borne or the marked to market value of a derivative. The challenge will be ensuring that when it's done, it's done credibly because there are no explicit market standards for SLDs. What we've done to date is follow the lead of best practice guidelines for SLLs using the Asia Pacific Loan Market Association's sustainability linked loan principles” Jenkins added.
“We are cognisant of sustainability washing, and this is something that we're very supportive of when customers are credible and ambitious in their sustainability improvements and willing to be transparent and support that ambition with a second party position in terms of the targets, their materiality and the reporting that's provided” Jenkins said.