Business research

FX Innovation Fuels Sustainability Goals

NAB’s first sustainability-linked foreign exchange (FX) derivative aligns environmental, social and governance (ESG) objectives with financial risk management for a leading London-listed infrastructure investment firm.

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For a UK-listed company investing in long-term renewable energy projects, the spirit of sustainability is embedded in its very purpose.

But now, The Renewables Infrastructure Group (TRIG) has taken an innovative step further with NAB by linking its currency hedging to sustainability performance metrics in a deal intended to deliver valuable returns to more than just its shareholders.

The new FX derivative product developed with NAB Markets links financial incentives to the achievement of environmental, social and governance goals, with TRIG reinvesting the proceeds into important community projects where the portfolio’s renewable assets are located.

TRIG fund manager Richard Crawford is head of energy income funds at InfraRed Capital Partners and says the deal represents an important alignment to put communities at the heart of its sustainable infrastructure investments.

“Infrastructure assets can be very important within the communities in which we operate,” says Crawford. “It is therefore very important that we consider all our stakeholders, including our non-financial stakeholders.

“We talk to the communities about what they need in the long term. The more ESG goals we achieve with this arrangement, the better it is financially for us and the more we can reinvest in our communities.

Make a difference

Ratcheting ESG goals for TRIG cover environmental goals, measured by the number of homes powered by clean energy in the portfolio, social progress on the number of community funds developed, and important workplace safety indicators for the governance.

Crawford says that with many of the portfolio’s wind farms and solar farms located in remote parts of the UK and EU, this extra help to fund social projects for schools, swimming pools, mental health – and even programs to reduce electricity bills as inflation bites – can really make a difference.

“You can actually see a direct benefit flowing back to our communities from this,” he says. “It’s a great way to work and a great way to do business. You have to go that extra distance to really get extra value and to pass it on.

The deal marks NAB’s first ESG-related FX derivatives transaction on the market. It follows earlier agreements related to interest rate swaps, as more companies today seek to place sustainability throughout their financial risk management structures.

Kate McKeon, Head of Sustainability at InfraRed, said working with NAB’s new ESG-related FX derivatives capability has helped reinforce InfraRed’s commitment to measuring performance and developing appropriate KPIs in all aspects of ESG for the company.

“This arrangement embodies what we’re trying to accomplish at InfraRed by really making sure that we’re pushing sustainability into all aspects of our business,” McKeon said. “We review specific metrics and targets and are held accountable for that performance in a transparent manner with our stakeholders.”

Shared goals

For Crawford, working with NAB Markets on FX product innovation which he describes as “pretty forward-thinking”, highlights the value of the banking relationship and shared sustainability goals.

“We have a great long-term relationship with NAB,” he says. “This product underscores the overall mindset and our aspirations for sustainability to make it key to what we do at TRIG and InfraRed.”

NAB Executive, Markets, Drew Bradford, says specialist products such as the ESG-linked FX derivatives deal with TRIG offer the opportunity to embed sustainability goals into each funding area, rather than using a small number of specific instruments such as bonds.

“NAB has worked closely with InfraRed to structure a mechanism for TRIG that not only promotes the achievement of KPIs, but also reduces the overall cost of hedging through a sustainability-linked payment when TRIG achieves its established ESG objectives,” says Bradford.

“It’s great to bring this new product capability to market to deliver positive results for our customers.

“Simply put, these products derive their value from financial markets as well as from the ESG performance of a counterparty. They can be traded when a client has entered into a sustainability-related loan or bond or on a stand-alone basis.

Bradford says there is growing recognition that companies that focus on improving their ESG metrics are able to attract new sources of capital and potentially better pricing outcomes.

In addition to this first ESG-linked FX derivative, NAB has now closed six ESG-linked derivatives in the European market and one in Australia1.

“The market for ESG-related derivatives continues to grow around the world,” says Bradford. “KPIs often span three years or more, so it’s a long game and it’s about putting sustainability at the heart of business strategy.”

NAB is Australia’s leading bank for renewable energy lending. Renewables represent 75% of our total energy loans. Since 2003, we have completed more than 150 revolving finance transactions and lent more than $11.5 billion2.

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1 NAB offers new ESG financial innovation – NAB News
2 NAB gets strong support for latest green bond – NAB News