NAB Executes ESG-Linked Interest Rate Swap

National Australia Bank (NAB) has joined the growing number of banks offering ESG-linked derivative contracts, announcing it has traded an interest rate swap with an unnamed customer that allows the latter to benefit financially if its hits certain ESG criteria.

ESG-linked derivatives are new to the Australian market and provide an opportunity to incorporate sustainability objectives into every area of clients’ financing, rather than a small number of specific instruments such as bonds.

“Many of our clients are reaching out to us asking questions about how the product works,” says Drew Bradford, head of Markets at NAB. “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.

“In this specific case, the client was undertaking vanilla debt hedging with a panel of banks,” he explains. “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,” Bradford continues. “This manages their interest rate exposure and enables them to financially benefit should they deliver on their sustainability objectives for their shareholders and communities”.

NAB points out that 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,” says Bradford. “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.”