While the success of initial forays into climate bonds by Australian institutions is a cause for celebration, the market could still be hampered by the need for improved standards and the damage caused to Australia's green reputation under the Abbott government.
Intensifying concern over climate change and increasingly conscientious decision-making on the part of institutional investors are expected to provide a major boost to the global market for green bonds.
Australia is no exception to the global trend, with the University of Sydney announcing in early February that it would seek to reduce its carbon footprint by 20 per cent via divestment from fossil fuel assets. The announcement follows the university’s groundbreaking decision last year to refrain from making further investments in coal-related holdings.
Leading members of the sustainability sector in Australia are optimistic about the outlook for climate bond and green bonds this year, given the high propensity for trends to spread between financial markets in today’s globalised economy.
“Australia typically takes its cue from what is happening in the really big economies,” said Norman, Disney & Yong’s global director of sustainability and president of the Energy Efficiency Council Tony Arnel. “I think we can expect growing demand from investors for projects that provide environmental or social benefits, but that also offer low-risk returns.”
Arnel points to the success of initial forays by leading Australian institutions into the realm of green bonds towards the end of last year.
“Last year we saw a number of green bonds issued – EU300 million from Stockland in October and $300 million from NAB in December,” he said. “The fact that NAB received double the $140 million it wanted to borrow speaks volumes.”
The Clean Energy Finance Corporation (CEFC), which was a cornerstone investor in the NAB climate bond, putting up as much as $75 million for the inaugural issue, shares Arnel’s optimism about potential demand in the Australian market for environmentally friendly investments.
“The market’s overwhelming response to the December 2014 NAB climate bond, which closed at $300 million after an initial offer of $150 million, indicates a strong demand and potential in the Australian market for mobilizing capital in renewable energy and green bonds,” said the CEFC.
While Maria Atkinson, sustainability strategist and director at Maria Atkinson Consultancy, shares a similar enthusiasm about the potential for green bonds both globally and at home, she points out that overseas concerns about policy uncertainty created by the current government have damaged the domestic market’s near-term prospects.
“Our global clean green brand has been diminished,” she said. “The world really only has the headlines on what Australia is doing with its new social and environmental policies.
“Expressions such as ‘kill the carbon tax,’ combined with the release of the UNESCO report which criticized management of the Greater Barrier Reef, have damaged our clean, green brand.”
The upshot of all this is a reduction in the availability of overseas capital for Australia green projects, with local investors left to pick up the slack.
“Foreign investment into Australian renewable clean, transportation, clean water and sustainable waste management solutions has declined – these investors are no longer looking at Australia because political risk for these longer time frame projects is high,” said Atkinson. “I predict investment in green bonds for these infrastructure/technology project opportunities will come from local investors only.”
While Atkinson said local investors should be “receptive and even bullish” when it comes to climate bonds, she notes that the Australian market still lags internationally in certain key areas.
“Our local institutional investors are behind Europe in seizing the opportunities of green bonds of significant size and scale for building energy efficiency and low carbon performance,” she said. “Our local market should be receptive but also discerning, because green bond liquidity must be enhanced through standardization.”
Atkinson advocates the development of more thorough standards for green bonds based on international practices in order to foster their appeal based locally and abroad.
“Issuers and investors require a single set of standards for the acceptable use of green bond proceeds and process to evaluate and report on green projects being funded,” she said. “Australia can’t just make up some green performance rules – it must meet the international investors’ standards.”
In spite of these caveats and concerns, Atkinson nonetheless identifies specific areas in Australia where the potential for green bonds remains particularly strong at present.
“Thanks to a historical global green building reputation and more recently the climate abatement policy initiatives of the City of Sydney and Melbourne City, the Australian real estate industry could attract green bond investment by meeting the energy reduction and greenhouse gas abatement criteria of these sophisticated green bonds,” she said.
“Sustainable land use (including sustainable forestry and agriculture) and biodiversity conservation are also strong contenders for attracting international green bond investment.”