As the global push for climate action becomes increasingly mainstream, so too has the appetite for green bonds.
Finance and sustainability experts from some of Australia’s largest companies gathered in Sydney on Tuesday for a presentation by chief executive of the Climate Bonds Initiative (CB), Sean Kidney.
Attendees included representatives from Australia’s big banks, KPMG, Varna Capital, QBE, Sunsuper, Macquarie Capital and the Bank of China, as well as waste management giant Veolia and supermarket Woolworths.
Kidney has represented CB in over 30 countries to advocate developing green bond markets, and is a member of several sustainable finance boards including the European Commission’s Platform on Sustainable Finance.
He said that rather than hinder interest in green investment, COVID-19 had spurred global leaders to jump on the opportunity of “rebuilding for the future”.
“Build back better has now become the European commission slogan…the Biden administration slogan, and effectively the Chinese government slogan as well,” Kidney said.
In addition, global emissions reduction targets have created the imperative for governments, companies and investors to look beyond 2050 to what the shift to a greener future will mean for their assets.
Helping drive the desire for green bonds is not just the environmentalist sentiments of government and corporate leaders, but sustainable assets’ new reputation as being worth more money than their polluting counterparts.
“In thinking about this, it is about managing forward risk, it is not about sentiment,” Kidney said.
“A lot of banks, if they’re highly exposed to fossil fuel portfolios or even auto company portfolios, may have more risk on the balance sheet than is necessarily evident by looking at a simple credit rating of those companies.”
CB places the value of green bonds issued globally so far at US$1.185 trillion and expects the issuance of roughly an additional US$400 billion dollars during this year, up from roughly US$250 billion the year before.
Government institutions in Europe and the US are increasingly preferencing green investments, according to Kidney, and actively seeking new assets to add to their green bond portfolios.
Many country’s central banks have become increasingly aggressive in addressing these issues, including the People’s Bank of China (PBoC) to which Kidney served as an advisor on green bonds in 2015.
“With this change at a central bank level, we’ve effectively seen a change at the top of the intellectual mountain of economics,” Kidney said.
“It’s very hard now for anyone in the economics profession, or in the business profession to argue that this is not material when you have so many central banks around the world saying this is material.”
Who decides what is green?
With all of this, defining what is and isn’t a green bond is also becoming more refined, which is why Kidney advocates for governments to develop a range of sustainable tiers, or “shades of green” which fall above a minimum threshold.
“Beyond solar and wind, working out what’s in and what’s out can be quite challenging. We require specialist expertise,” Kidney said.
Currently in Australia there is only a loose definition of what constitutes a green bond, in the form of voluntary guidelines, which creates room for companies to greenwash their bonds.
This does not always entail painting an entirely brown asset green, but can include financing emissions reducing projects that fall short of what is necessary.
Rigid taxonomies are under development in Europe and Asia to define what constitutes a green bond, in which respect Australia is lagging behind but seemingly headed for a market-led solution.
Ideally, the sustainability of bonds would be balanced against tangible climate targets and based on scientific modelling, which could then be quantified into guides for different sectors.
Kidney added that means taking into account new technologies to help reverse the damage done to the atmosphere.
“The only way we stabilise the world’s climate is we start introducing large-scale direct air capture in the next ten years,” he said.
“These will be machines that will sit in the desert, suck CO2 out of the atmosphere and use it or bury it. So for that reason let’s support (direct air capture) until we’re out of this crisis, which will probably be 2100.”
The Built Environment
Last month, property and infrastructure giant Lendlease issued a $300 million 10-year fixed rate green bond, following the success of its debut $500 million green bond in October 2020.
Mark Todd from the Bank of China told ausbiz that the second issuance received over $1 billion dollars worth of bids in less than 48 hours.
“Lendlease is now the largest non-bank ASX-listed issuer of green bonds to date,” acting group chief financial officer, Frank Krile said at the time,“highlighting growing demand from the investment community for opportunities to support projects with strong sustainability credentials.”
As Kidney pointed out, the demand is there and therefore the next step is the generation of even more green assets in which to invest.
“If there’s one singular achievement of the green bond market in the last eight years, it’s to have turned the terms of debate from green being high risk and a little bit scary, to actually being low risk. And you see that reflected in their performance.”