UPDATED: Stockland has issued Australia’s first green bond – for EUR300 millon over seven years. The bond, listed on the Singapore Stock Exchange, is rated A-, achieving a 1.5 per cent coupon. The move has won accolades for this first move into the fast emerging market for green and climate bonds. But despite this, Sean Kidney who is chief executive and founder of the Climate Bond Initiative, which is working on a framework for climate and green property bonds, thinks the environmental goals could have been stronger. Following is an edited extract from his blog on the CBI website.
This is Australia’s first green bond. Great to see the green bond market expanding its geographical reach.
- See our article, Stockland’s green bond stirs appetites for more
The green bond framework was reviewed by KPMG. Proceeds will go to investment in the development, redevelopment or tenant improvements that have, or expected to receive, Green Star ratings of 4, 5 or 6 or equivalent.
Additionally, proceeds can be allocated to capital projects that have a third party verify that any reductions in energy, water and/or waste will be achieved. Stockland will also apply their own sustainability policies to select projects within these categories.
So, lots of criteria – but what does it all mean for green performance of the bond in terms of energy and emissions performance? From the report, this is unclear. We are informed that Green Star is the rating system for sustainable buildings from the Green Building Council of Australia, but are Green Star ratings of 4, 5 or 6 good or bad? How do they define “sustainable buildings”? What is meant by “or equivalent”? How will Stockland’s sustainability policies be applied to select specific projects? These are all things investors need see in the reporting to be able to properly evaluate the green credentials of their investment.
A closer look at the Green Star scheme showed that actually the scheme only rates on a scale from 4 to 6, which implies any Green Star rating is included in Stockland’s eligibility criteria. Okay. As for what that means in terms of specific environmental impacts, such as energy and emissions, this is more difficult to tease out. The Green Star ratings, like other green buildings standards such as LEED and BREEAM, is not a rating system that is focused on energy or greenhouse gas emissions – it uses a broader definition of green buildings. The lowest standard of 4 Green Star is understood to be able to be achieved with any specific credits awarded in the Energy category. [UPDATED: see below].
Consequently, energy and greenhouse gas emissions is only one of 9 categories that feed into the Green Star rating, which means that the rating is not sufficient to ensure that a building has good energy or emissions performance. For example, provided a building scores high on indoor air quality and materials, but have poor emissions performance, it could still get Green Star certification – there are no hurdle rates at the specific category level, meaning the Green Star rating scheme alone cannot provide much assurance around energy or emissions performance.
For bond proceeds intended for large-scale greenfield communities, Green Star has a specific rating scheme. But unfortunately, only 5% of credits are for reducing greenhouse gas emissions.
Ché Wall, lead author of methodology for the Climate Bonds Low Carbon Green Property standards and also co-founder of the Green Building Council of Australia, sees the issues identified as being a result of application rather than inherent deficiencies:
“Green Star has had a tremendous impact on commercial office development in Australia and has increased the awareness of green buildings precisely because it was designed to measure design and construction and nothing more. Investors from outside the green buildings sector are driving the demand for green bonds, and tend not to understand the strengths and weaknesses of different approaches to measurement. This is complicated further when an Australian bond is issued in European markets, where different measures are used in the sector.”
Then there is the issue of Stockland including “capital projects that have a third party verify that any energy, water and/or waste reductions will be achieved”. From a climate perspective, this is problematic for a couple of reasons. First, projects fully focused on water could qualify, leaving energy performance unaltered. Second, even for projects fully focused on energy, more detail is needed to ensure it has a positive climate impact. This might sound a bit strict – after all, any emissions reduction is better than nothing, right? Well, actually, that’s NOT the case for energy efficiency in buildings. This is because retrofits of buildings do not happen very often, building new or retrofitting existing buildings with only minimal cuts in emissions can actually be counterproductive from a climate perspective, because it locks in that emission performance until the next investment period, which could be as long as 30 years! The IEA has highlighted this is sue, calling for deep cuts in emissions in buildings. Have a look at our green building standards for what we expect for green bonds in this space.
It’s worth emphasising that we do think rating tools have a role to play in markets where reliable baselines can’t be established and therefore taking a robust approach to evaluate emissions reductions is not possible. However, the ambition should be to include buildings that will perform at the higher end of the ratings scale.
In the case of Stockland and Australia, data on baselines is readily available, and so green property bonds do not have to rely on design and construction rating tools, such as Green Star, that do not provide the necessary granularity of information and recurrent reporting of actual benefits delivered from the proceeds for climate-interested investors.
We would also like to see some more details from Stockland around post-issuance reporting. The company has committed to public annual reporting, which is in line with best practice. Great! Reporting will include disclosure on allocation of proceeds to eligible projects, and where applicable, disclosure of the Green Star rating or equivalent. Good to see reporting commitments on a specific indicator – but again, this does not provide information on the energy or emissions improvements associated with the bond over time.
We have no doubt that Stockland is able to provide investors with all these details, and hope to see at least some of this included in Stockland’s first annual report on their green bond!
UPDATE: The Green Building Council said in a statement responding to this: “All buildings aiming to achieve a Green Star – Design & As Built certified rating must meet conditional requirements around greenhouse gas emissions and sustainable sites. Specifically, commercial buildings must meet a minimum 4.5 NABERS Energy rating, and residential buildings must demonstrate at least a 0.5 star rating higher than the minimum legislated requirement. All other buildings must demonstrate a 10 per cent improvement over a reference building under the Building Code of Australia.
However, an Australian industry expert has advised in response that “the suggestion from available information is that NABERS 4.5 is an optional pathway and not a requirement”.
In addition “detail of new Green Star Design and As-built seems to require only 5 per cent improvement against Building Code of Australia, not 10 per cent as stated in the GBCA comment.” Information shown in the attached image, an extract from the website on Thursday is “confusing”, the source said. “You can also use Green Power to achieve this, which seems a bit strange”.
The GBCA again responded by pointing to more information on eligibility criteria on its website
It also said: “Extensive feedback from industry and our technical working group resulted in four compliance pathways. Achieving a NABERS Energy rating is the most commonly used method to demonstrate compliance with greenhouse gas emissions (as the majority of Green Star projects are still office projects). There are, however, three other compliance pathways because the market has told us it wants flexibility.
“The prescriptive pathway you or your ‘industry source’ circled below is primarily for smaller projects that want to go down a ‘deemed to satisfy’ route. Yes, they need to demonstrate 5 per cent improvement to meet the compliance requirements, but they need to demonstrate a 10 per cent improvement to achieve any Green Star points.”