Drought-resistant water infrastructure, green residential mortgage-backed securities (RMBS) and waste and recycling initiatives are among the future opportunities for Australia’s fledgling green bond market.
Presenting the Climate Bond Initiative’s research on the state of the global green bond and climate market on Wednesday morning in Sydney, Climate Bonds’ head of markets and report author Bridget Boulle said that the climate bond market was growing globally, including in the Asia Pacific region.
Since Australia’s first deals in 2014, the total green bond issuance is now $8.3 billion.
Green residential mortgage-backed securities have been identified as a key growth area for Australia’s green bond market. Because the Climate Bonds Criteria for low carbon buildings can piggy back on Australian building codes and energy ratings schemes to achieve certification, this provides a “streamlined process to package potential loans and pave the way for growth in green residential mortgage-backed securities
There are also opportunities in water and waste due to Australia’s drought-prone climate and the recycling crisis caused by China’s ban on some overseas recyclables.
Despite Australia’s unfavourable policy backdrop for financing green projects, UBS Global Asset Management executive director, fixed income Jeff Grow said at the King & Wood Mallesons hosted event on Wednesday that the “low hanging fruit” had been done, with green bond commitments made by all the major banks.
“Two of the state governments have already done one. The development banks have been the big drivers and some of the property funds have come here as well,” he said.
He said that “transport is the easy one” in Australia, particularly in the major cities. Although most transport financing is done by government more of this could be done by the private sector.
Mr Grow also said that green mortgages were a “clear area for growth”. NAB has been a leader in this area so far.
“A lot of our clients have certainly put pressure on us to talk to Treasury, to talk about a sovereign green bond, in some form.
“With the government about to hit a surplus the impetus for that might be a little less than it was two years ago. But there is certainly potential there for the Commonwealth to step up.”
He said that utilities are another big opportunity, but it can be more difficult to determine how green some of these projects are compared to other sectors.
The “climate-aligned bonds universe”
Ms Boulle said that the “climate-aligned bonds universe” was now worth US$1.45 trillion (AU$2.04 trillion) worldwide.
As of this year, the scope of this research had been expanded to include companies that are “strongly climate-aligned”, which Ms Boulle said would “give us a much fuller idea about how much investment is going into green bonds”.
These strongly climate-aligned companies must derive 75 per cent of their revenues from “green” business lines, which means companies that are “transitioning” to green are more likely to be included.
Is green labelling important?
According to King & Wood Mallesons partner Anne-Marie Neagle green labelling has an important role to play.
“Green labelling is a really good signalling tool and a really good tool to put a bit of objectivity and transparency over what we are doing and why we are doing it.”
But the value of green labelling is dependant on maintaining transparency and objectivity standards, she added.
Are green bonds performing financially?
Mr Grow said that although there is a lot of investment and client scepticism about green bonds in that you are forsaking returns to accommodate ethics, this is “not what we are finding”.
“The issuers are generally pretty good. You do not have to sacrifice return for green bonds.”
When will green bonds have a real impact on sustainable futures?
Ms Boulle said the green and climate bond market will need to reach US$1 trillion a year to have a real impact on driving sustainable outcomes, including the transition to a low carbon economy.
“We’re a fair way off that but we are forever optimistic.”