Expanded ‘green’ criteria is set to unleash a wave of new green and ‘transition’ bonds from across Australian industry as companies and superannuation funds leverage markets to help fund their 2050 Net Zero targets.
Waste and residential property sectors are set to join banks, property developers, renewable energy players and state governments in issuing ‘green’ debt ringfenced for decarbonising projects, while big polluters are looking closely at using ‘transition’ bonds to assist their decarbonising process.
Michael Chen, head of sustainable finance at Wespac Institutional Bank, said the Climate Bonds Initiative’s recent definition expansion means investors will soon have access to green debt beyond that of the existing oversubscribed ‘low-hanging fruit’.
“Now that we’ve got good, specific, globally accepted definition of what green looks like in the waste sector, I expect we’ll see some issuance there,” said Chen, adding residential property is not far behind.
Chen also said big energy companies, as well as steel, aluminium, manufacturing and chemical companies are looking at the ‘transition’ format closely.
“Now they’ve got transition guidelines and definitions for what a ‘transition bond’ might look like we’ll likely see some more issuance from those emissions intensive companies.”
Following AustralianSuper’s announcement in November to achieving net-zero carbon emissions for its entire investment portfolio by 2050, the country’s largest fund has not ruled out using green bonds as a tool to reach its ambitious climate target.
“We would look at each bond issue and the investment merit of each asset,” said Andrew Gray, Director ESG & Stewardship at AustralianSuper.
“There’s a strong economic theme in terms of the world’s economy transitioning to a low carbon one and we look at every new opportunity that will arise in that transition.”
The Climate Bonds Initiative, an international investor-focused not-for-profit, established the difference between ‘green’ bonds and ‘transition’ bonds in September, in partnership with Credit Suisse.
“Our research found there’s a useful distinction between activities that do not have a long term role to play in the low carbon economy and those that do,” said a spokeswoman.
‘Green’ bonds are for activities that have a long term role to play in the low carbon economy. For example, Lendlease’s recent $500 million green bond issuance is earmarked for eligible urbanisation projects in major cities, including Sydney, that will benefit the low-carbon economy beyond 2050.
The ‘transition’ label is appropriate for companies wanting to fund their transition towards decarbonisation, but those activities don’t have a long term role post-2050, according to the Climate Bonds Initiative.
Coal companies, for example, could issue a ‘transition bond’ to assist in the early decommissioning of coal plants, or airlines who have yet to find a clear decarbonisation path towards net zero 2050.
“This transition label, which is outside the green label, is where emissions intensive companies can look to become more green,” said Chen.
“This bodes well for investors who are after debt that facilitates the decarbonisation theme, they are often contending in highly oversubscribed issuances.”
The green bond market
The green bond market itself has had a tough year, courtesy of the Covid19 pandemic which saw interest rates plumb record depths.
With central banks dropping rates, banks, who are the major green bond issuers generally, haven’t needed to tape the wholesale green bond market.
“Banks have been receiving cheap liquidity by way of term funding facilities from the RBA,” said Gavin Goodhand, co-founder and portfolio manager of Altius Asset Management, part of the Australian Unity stable.
“And while a lot of finance teams pushed back their sustainable and green bond plans, they are now coming back around.”
Following a slow few quarters at the start of 2020, there have been some major green bond issuances in Australia.
In October the NSW Treasury Coporation issued the largest green bond this year to date, raising $1.3 billion. The 10-year bond was oversubscribed and is attracting a yield of 1.1 per cent.
In addition to Lendlease’s green bond which raised $500 million, Brighte secured a $180 million deal with National Australia Bank to offer green loans to solar customers, and FlexiGroup recently earmarked $110 million as green as part of an asset-backed structure.
Data from the Climate Bonds Initiative shows in the first six months of 2020, only around 55 per cent of green bonds were allocated to investors with ESG mandates, indicating broader demand from investors.
Also, green bonds achieved a higher book cover and spread compression compared to their ‘vanilla’ equivalents, though the comparison is now perfect, said the Institute.