Season 3, Episode 4 – Game Changers: Banking on a more sustainable future

Elena Lambros
Hello and welcome to ESG Matters @ Ashurst. I'm Elena Lambros, an Ashurst Risk Advisory Partner specialising in climate change and sustainability. You're listening to season three of Game Changers.

From innovators at the cutting edge of technology to impact investors funding a cleaner energy future, each and every one of our guests is changing the game in their field.

In today's episode, you'll hear my conversation with Sarah Lalor, General Manager ESG and Sustainable Finance at Commonwealth Bank Australia (CBA).

Let's jump in and hear the discussion.

Hi Sarah, welcome to the podcast. We're so happy to have you on here today.

Sarah Lalor
Thanks, Elena. It is fabulous to be here.

Elena Lambros
I thought it might be really helpful for our listeners, if you just start by sharing a little bit about yourself and your role at CBA.

Sarah Lalor
I'm a sustainability professional in the banking industry. I've been with the bank for over 15 years in a range of commercial and strategic roles. I currently lead a national team supporting business customers to manage ESG risks and capitalise on the opportunities in the transition to a more sustainable economy.

I'm very passionate about supporting customers at all stages of their sustainability journey, even if they're just starting. Sustainability is that trifecta of positive economic, environmental and social outcomes, and regardless of the size and nature of your business, sustainability matters in some way. So I love working in the sustainability space.

Elena Lambros
Yeah, it's really clear to hear the passion in your voice when you talk about it. And I also think if you look back in 15 years at CBA, I imagine you have quite a good understanding of some of the challenges clients have around banking and how you can also integrate ESG into that, which hopefully we can explore in a little bit more detail as we go through the conversation.

Sarah Lalor
Absolutely.

Elena Lambros
So when we talk about, you know, the businesses that you support and CBA, and the focus on getting that trifecta of ESG, what do you see in terms of how businesses are approaching sustainability?

Sarah Lalor
SMEs are starting to get involved. So we're seeing a much stronger appetite from smaller business and corporates who are seeing the commercial as well as the environmental and the community benefits. It can be challenging, but they're realising the opportunities for the business and becoming more sustainable as well as the risks if they don't.

I think the effect of the new mandatory climate-related disclosures are really pushing down through the supply chain in Australia, with smaller businesses being asked for a sustainability strategy or emissions data as part of a procurement process. And this is new for many of our customers, but it has become a forcing mechanism for the mid-market and SMEs to shift from what I call a “curiosity mindset” to more of an “action mindset”.

Some of the examples that I'm seeing here at CBA through our green asset finance and our business green loan will be the electrification of car fleets, solar panels and batteries, investment in waste management and recycling infrastructure. And all of these investments reduce both the environmental impact and energy costs in the business. So a real “win-win”. So it's fantastic to see SMEs getting involved.

Elena Lambros
Yeah, absolutely. And then in terms of that “win-win”, it's great to see that the bank has quite a range of products that can support them. But then are you finding that people are kind of pleasantly surprised by the cost reductions or the outcomes that they get as well, once these things have been brought through?

Sarah Lalor
I think they are. I think the challenge—in particular for smaller businesses—is actually prioritising the time to actually understand what the opportunities are in their business and what the cost impact will be in the commercial outcomes. And that does actually mean that they need to prioritise management time and effort to understand that.

But when they actually take that time and they make the investment, we hear fantastic stories about—again—both the commercial and the environmental outcomes from the investments.

Elena Lambros
That's what I always like to hear about. You know, those actually great commercial outcomes, because I think that really helps people see the point sometimes in regulatory compliance.

Sarah Lalor
Yeah, very powerful.

Elena Lambros
So then moving on, in terms of, what do you see in terms of the latest innovations and trends in sustainable finance that CBA is really excited about?

Sarah Lalor
So corporates now have an appetite for sustainability-linked loans. So sustainability linked loans/green loans/social loans, have been very common for institutional businesses for a number of years now, but we're really seeing a greater appetite for these offerings amongst corporates, and even down into the mid-market.

In particular for our sustainability-linked loans. So for anyone who isn't familiar with this product, it's essentially a structure that links predefined sustainability-related targets to the interest rate of general corporate purpose debt. Client feedback has been really encouraging in this part of the market, in particular, when it comes to actually helping them to prepare for ongoing regulatory and reporting compliance, being much better able to respond to sustainability questions from suppliers or customers. But also it's improved the governance alongside these sustainability initiatives, which can often be very core to their overall business strategy, and frankly, they should be. Also seeing a real trend towards social-related outcomes for the targets that are chosen for sustainability linked loans.

I think historically, there's been a bit more of a skew towards environmental outcomes such as emissions reductions or water/waste water usage or waste management. But actually social impact is an increasing area of focus for our business banking customers and the sustainable finance solutions really can support a business to achieve those ambitions as well as the environmental outcomes. So I love that these products are becoming more attractive to corporates.

Elena Lambros
Yeah, that's great to hear. I would agree that the metrics that surround some of those environmental impacts are probably well understood these days, but having that social outcome, is really engaging also for clients or employees to hear what their business is doing. So great to see traction in that space.

Sarah Lalor
Well, actually, I think you make a really good point there. You mentioned employees, but I think businesses are really understanding that there's a whole range of stakeholders that care about sustainability outcomes. It could be employees, it could be their customers, it could be their suppliers, but also even their investor groups. So it's becoming much more important for businesses, regardless of the size or nature of that business, to have a really positive story to share with respect to the sustainability outcomes that they achieve, and sustainable finance can really help them on that journey to achieve the outcomes and support the story.

Elena Lambros
Yeah. Great point. Can you share any examples of how CBA customers have harnessed sustainable financing solutions to drive ESG outcomes, and how do customers measure the impact of these initiatives?

Sarah Lalor
Sustainability linked loans clearly drive ESG outcomes. So for sustainability loans (or SLS, as we often refer to them) we work with customers and an independent third party to set sustainability-related KPIs and targets that are relevant and ambitious to that particular business. If they achieve their targets, they'll get an interest rate benefit on their debt. So businesses have a very strong commercial incentive to achieve these goals, and in doing so, that means that you're driving ESG outcomes.

The targets are tailored to the client. As I said, they commonly include things like emissions and waste reduction as some of the environmental outcomes. But as I mentioned earlier, we're increasingly seeing the inclusion of social outcomes, like improving employee and community outcomes in particular. Some of the examples that I've seen more recently are targets relating to mental health and wellbeing for employees, improving diversity outcomes in the workforce and, very commonly, we will see targets that support Indigenous communities, which is fantastic to see.

But part of setting your target is measuring your baseline. And in my experience, once the baseline data is available, that's a real catalyst for businesses to improve their outcomes. You know, “measure what matters”, as they say. But SLS and the process you have to go through to actually have one of these products, that's a great way to drive and measure impact.

Elena Lambros
Yeah. There's nothing like measuring your impact and actually seeing it increase year-on-year. It feels like you've actually really achieved something. And then, in terms of the industries that you work with - Is there any particular industries you see taking up sustainable finance or a particular size of business where you really see the growth or the benefit?

Sarah Lalor
Hospitality. Retirement living and aged care. And commercial property. They're three industries that we really see big growth and real interest and appetite in.

In hospitality, for example, we've supported a number of our clients there. Soldier Brothers is an example. The Crystal Brook Hotel Group is another great example, where they've actually completed some of the first known sustainability linked loans in the hospitality sector. And these hotel groups have really understood the importance of sustainability across their national portfolios and how it can be a point of difference in their market and its importance to their customers.

Retirement living and aged care, I'd say, is emerging, but we’re really seeing that coming through as an industry that is starting to look into this space and really progress with investing in sustainable outcomes. We've seen both social loan structures where the facilities support high levels of concessional residents, and SLS structures with retirement and land-lease communities, and they're increasingly focused on the environmental outcomes as well as resident wellbeing-type outcomes. So there’s really interesting things being done there.

I think commercial property, for a long time, has been quite focused in this space, and there's real clear evidence there greener building attracts higher rental returns. They've got lower vacancy rates. So commercial outcomes are very clear in that industry. One of our clients, Cromwell, in particular has been really pushing the levels of ambition with a dual label structure, which is quite unique, and that's where they've got both the green loan based on the high performing credentials of their portfolio, but they're also adding a sustainability linked loan into the structure to drive further sustainability improvements. You'll also see out in the market, the volume of new commercial properties being constructed with high neighbour ratings is increasing exponentially. It's a big focus in hospitality, retirement sectors and commercial properties and within all of those sectors coming down into from the corporate into the mid-market side of the business as well.

Elena Lambros
Great. Thank you. And it kind of seems to me, when you talk about those businesses and what they've been focusing on, it seems more like just the kind of “standard expectation” to have those considerations and sustainability built in. And then people are obviously doing more innovative things on top of that. But that baseline expectation seems to be there.

Sarah Lalor
That's actually a great point you make there, Elena. It will absolutely will be a standard expectation across all businesses and all industries to have very clear sustainability outcomes at some point in time. But I feel like there's this period of “first mover advantage” where the businesses that can really think strategically about the opportunity here and not just think through the compliance lens, can really open up access to new markets. They'll end up winning more contracts and tenders when it comes to procurement, and they'll become more attractive places for people to want to work, for more customers to want to buy their products. So there is this real period of time where those that can think strategically will get a greater advantage.

Elena Lambros
Yeah, that's really great to see and a really well-made point. And then just kind of following on from that. Where do you think the opportunities are for growth in the sustainable finance sector?

Sarah Lalor
Scaling of products. So I think, as I mentioned earlier, these type of products have been very common in the institutional space for a long time, both here in Australia as well as overseas. But ultimately, if we think about Australia's transition to net zero, the corporates, the mid-market and SMEs have absolutely got to be part of this journey, and they've also got to have access of products that are suitable for the nature and size of their business. I think regulatory and industry developments play a really important role in scaling products so they are able to provide much greater certainty for businesses and banks, helping us to then scale the availability of sustainable finance down into the business banking client base.

With SMEs contributing to more than half of GDP. We cannot transition without this group. They're going to be really critical, and they're going to need sustainable finance to invest. I'd also touch on the mandatory climate-related disclosures that came into effect this year for the larger corporates, and that will gradually be rolled out to include smaller businesses. This is going to increase the focus of businesses on the investment needed to manage both the risks and the opportunities relating to climate, and then they're going to need more scalable products to support this. 

You know, the other recent development in the industry, which I think is really helpful, is the sustainable finance taxonomy that has just been released by the Australian Sustainable Finance Institute. This will provide a common language and dictionary, so to speak, around sustainability terms. That, in turn, will provide much greater consistency and confidence in the market (in particular those with less sophisticated businesses). So again, as they mature on their journey, they're going to need more sustainable finance product options. Sarah Lalor sustainable finance products is critical.

Elena Lambros
Thank you for highlighting those two regulatory reforms or compliance issues, I think they're really helpful examples of how you can use those changes with mandatory climate-related disclosures to actually have some good outcomes. The taxonomy, which provides that consistency and good understanding really just helps people with where they need to get to next. And really helps with scaling products or getting investment going, because without that transparency, that kind of accountability, it can be really difficult to navigate this area.

Sarah Lalor
I couldn't agree more. And I think the other important point there, Elena, is how it will make Australia more competitive on a global scale. I think having a taxonomy that is relatively consistent with international peers is going to be really helpful, in particular for investors who are looking to invest in Australia. And I think we'll see more of that when it comes to investments relating to sustainability, renewables, all the rest of it. I think that will really help level the playing field and bring Australia more aligned to our peers internationally.

Elena Lambros
Absolutely and the more competitive we are in the space, the better for the country.

And then my final question for you is, how is CBA sustainable finance offering different to others in the market? How do you differentiate yourself?

Sarah Lalor
Look it's all about our people, Elena. So while we have a full product offering that meets the needs of businesses of all sizes, it really comes down to having the right people on the ground that can work with our clients, no matter where they are on their sustainability journey.

We see a real variation of businesses based on the size and nature of the business, the industry they operate in, the drivers that might be there to encourage them to focus on sustainability—but it really is a journey, and we have to be able to support them, regardless of where those businesses are on that journey.

So we have a dedicated team supporting our business banking clients; a team of sustainable finance experts who work with our relationship managers across the network to support our clients’ ambitions and their need for capital to support investment in sustainability. And we have invested very heavily in upskilling our bankers on ESG. We had over 150 bankers who completed what we call an “ESG Mastery Course”. This is a course that we developed in partnership with the Australian Graduate School of Management at the University of New South Wales, and we got fantastic feedback from our bankers on the ability for them to have a much more informed conversation with clients and do a better job at helping those businesses on their journey. I'm very proud of the investment in the ongoing capability uplift across all of our relationship managers in the business bank. It really is all about our people.

Elena Lambros
Thank you. On that note, I just want to say thanks again for coming on the podcast. It's actually been really, really engaging, hearing about how sustainable finance is kind of supporting SMEs to grow in this area and come up with solutions. So thanks again for joining us.

Sarah Lalor
Thank you so much for having me, Elena.

Elena Lambros
Thank you for listening to this episode of ESG Matters @ Ashurst. I hope you found this episode insightful. To subscribe to future episodes of Game Changers and to hear previous episodes, click on the link in the Show Notes or search “ESG Matters @ Ashurst” on Apple Podcasts, Spotify, or wherever you get your podcasts. And while you're there, please feel free to leave a rating or a review.

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In the meantime, thanks again for listening, and goodbye for now.