The Climate Bond Initiative’s Green Property Working Group has finalised its consultation on the criteria for the Climate Bond Standard for Green Property, and the appetite including commercial buildings, residential buildings and upgrade finance.

The proposed criteria were released on June 19 and the final criteria have now been submitted to the Climate Bond Standards Group for approval.

Ché Wall, director of Flux Consulting in Sydney, was a member of the drafting subcommittee, along with Australian representatives including global head of sustainability for ANZ Bank Cath Brenner, Sydney-based consultant Matthew Deegan, executive director of Eureka Funds Management Niall McCarthy, and executive director of corporate and project finance at the Clean Energy Finance Corporation Simon Brooker.

How the green building climate bond standard could really shift some capital

The standard for green buildings that Mr Wall has been working on is focused on a building’s ongoing performance and verification of outcomes, rather than the building’s NABERS or Green Star rating.

“We are trying to bring the [green] property sector to the same level of surety as wind farms and solar farms,” he said.

With these types of projects, the greenhouse gas emission abatement over the life of the project was both relatively easy to quantify and predictable over the life of the bond and the project.

“With the property sector, the challenge is, can we provide the same level of surety? Are on-off building ratings enough to provide surety?”

The issue, he said, is that star ratings were never designed to change the upstream behaviour of institutional investors; they were designed to change the behaviour of the designer/builder/developer teams, and have succeeded at this. However, as an asset class, green buildings where the credentials are based only on that initial rating have not normally provided the long-term surety in terms of environmental performance that fixed-income investors, such as the insurance sector, want.

“The investor appetite is greater than the tools and techniques [available to deliver],” Mr Wall said.

Green bonds for property not bound to politics

The big opportunity he sees for green bonds for property include its freedom from politics. Unlike the Renewable Energy Target and other policy-driven initiatives that encouraged people to set up businesses, and then shifted dramatically when the policy was changed, as an asset class property is fairly policy-proofed. Mr Wall also said that a sustainably operated property was a lower-risk investment than a non-sustainably operated building.

He believes the new green property climate bond standard, and climate bonds for this asset class, has “tremendous potential to impact how people behave in the property sector”.

In addition to methodologies for assessing a property’s performance relative to the marketplace and strategies for ensuring a property for which bonds are issued is “the greenest in the marketplace”, Mr Wall said there needed to be a “nice, elegant way of aggregating properties” so the total value of the bond issue is large enough to interest the institutional investors – generally $250 million at least.

Mr Wall said green property bonds could really shift the Australian property sector, as it extends on the “great gains” in the green building, design and operational space, and encourages investors to really examine potential assets, and decide if they want their capital locked into a non-performing asset, or a high performing one.

“This is about fundamental drivers and long-term sustainable returns,” he said.

Unlike the equity market, which he said was about short-term gains, green bonds were an attractive, long-term investment, usually for a minimum six to seven years, which “eliminates short-termism”.

“It is a more appropriate focus for more appropriate [building] outcomes” that ties financial outcomes to long-term operations of a building, from design through to support of the design by effective management, and verification that what was rated in terms of design and as-built is actually delivered in terms of building performance.

New green property bonds eagerly awaited

Mr Wall said he expected two main types of green property bond to be issued in the Australian market. The first, he said, would be the large property trusts bundling assets, with a “layer of investment banks” providing issues of bonds that are comprised of aggregations of a number of properties the banks hold interests in. The second type will be aggregations of green mortgages via banks or other lending institutions.

Fixed interest portfolio manager for Australian Ethical Investment Tim Kelly said his organisation was keenly anticipating new green bonds [or climate bonds] issues in the Australian market.

“We eagerly await another Australian green bond issue, having participated in the first ever issue of an Australian Dollar denominated green bond in the Australian market in April this year,” he said.

“Because of the size of our market, with infrequent generic corporate issuance and little liquidity outside the major banks, we would not expect the next green bond to originate from the private sector – which is not to say we wouldn’t welcome it if it were to come to pass!

“We would anticipate the next green bond issue to come from one of the multinational development banks, such as World Bank organisations IBRD and IFC, or the German Development Bank KfW.”

The latter already committed almost 40 per cent of its new business to climate and environment protection projects though 2013 without dedicated green bond financing, but launched its first “Green Bond by KfW” in July 2014, and followed this up with the world’s largest green bond, a US$1.5 billion issue, which settled last week.

“KfW has not flagged an intention to issue a green bond in Australian dollars, but they haven’t ruled it out either,” Mr Kelly said.

As divestment grows it will trigger new green bonds or climate bonds

He said that as the divestment movement grows, those looking for a greener pasture to grow their capital in could trigger an Australian green bond or climate bond issue.

“The divestment movement has been largely focused on the equity markets, but it is equally relevant in fixed income investments.

“It is important for people seeking green bond opportunities to communicate this demand to their superfunds, financial advisers and investment brokers – if they know that the demand for green bond investment opportunities is there, then the potential exists for an issue to arise from ‘reverse inquiry’ to the issuers of green bonds to supply the Australian dollar market.

“The involvement of UniSuper (as a $100 m cornerstone investor) in April’s IBRD green bond issue was in fact the thing that turned it from an idea to reality.”

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