Stockland stunned the property and capital markets on Friday by announcing Australia’s first green bond, for EUR300 million. According to UBS, which underwrote the sale along with HSBC, the move stirred strong interest from investors and property companies. It’s a signal this long awaited market is finally under way and that new green investment appetites have been awakened.
“This transaction has generated a lot of interest, as you’d expect whenever there are new developments in the market,” Barry Sharkey co-head of capital markets at UBS, told The Fifth Estate.
“Everyone is interested to understand what the bond is, how it’s done and what its application is, what the investor base is like and what are the parameters that make it.”
For Stockland, this is a sign of confidence from picky investors in Europe where standards for sustainability and climate-focused action are both more evolved and more demanding.
According to Sharkey, Stockland’s track record and commitment to sustainability in Australia was key to the interest.
Stockland chief executive Mark Steinert said, “We currently have the highest number of Green Star rated shopping centres in Australia and have completed the first Green Star rated retirement living village, Affinity in Perth. Our largest ever residential community project, Caloundra South on the Sunshine Coast in Queensland, is the first Green Star residential communities pilot project in the country.”
“This green bond will help support our continued investment in projects like these to the benefit of our customers, communities and investors.”
For the sustainable property sector and more deeply the climate sector it’s a sign that this trend, still in its infancy, has the hallmarks of a looming giant.
Just give it time.
On Monday Sharkey stepped through the process.
All the bonds have been sold to European institutional investors and wholesale funds, particularly in the UK and France, where the appetite for green and climate bonds continues to grow, Sharkey says.
The bond is a seven-year issue, priced at a Euro fixed rate coupon of 1.5 per cent and it has been snapped up by the Europeans, with the notes listed on the Singapore Stock Exchange.
Green bonds good for business
Stockland chief finance officer Tiernan O’Rourke said the green shade of bond was good for business and demonstrated the company’s ability to access a range of debt markets.
“It provides further diversification of Stockland’s funding sources, increases the average life of our senior facilities and secures funding at competitive long-term pricing,” he said.
“This issuance will extend Stockland’s pro forma weighted average debt maturity to 5.8 years and weighted average cost of debt reduces to 6.4 per cent from 6.5 per cent.”
Interest and future demand
Sharkey says he has fielded a number of inquiries from issuers wanting to know about the deal, and whether they could also issue a green bond, but Sharkey won’t be drawn on who or how many.
The appetite hasn’t exactly come from nowhere, Sharkey says. This deal is typical of social, ethical or environmental investment.
“In the last couple of years this type of investment has resonated with investors, whether it’s issued by development banks, property companies or other issuers. It’s a positive development.”
Key to this investment market, Sharkey says, is that the investors exist in a spectrum of sustainability. “Some are at the dark green end of the spectrum and some are pale green.”
But it’s hard to know how big the market is right now or how big it might grow.
“It’s very hard to accurately quantify how big that dark green segment will be,” Sharkey says.
“Only time will tell.”
How it works
As you might expect, because it’s a debt instrument the “credit assessment comes first and the green second”, Sharkey says.
But here is where the kicker comes in, “Some investors were also very interested in the sustainability credentials of Stockland.”
The company’s global profile as a sustainability achiever and its track record was an important part of the investment proposition, Sharkey says.
Stockland was named one of the Global 100 Most Sustainable Corporations in the World at the World Economic Forum in Davos, Switzerland in 2014, for the fifth consecutive year.
According to Sharkey, Stockland is taking as robust an approach as possible for a market that still doesn’t have any standardised global rules or a clearly defined investor group looking at this.
So what happens if Stockland doesn’t achieve the criteria it’s promised its green bond holders?
That’s a hard question to answer right now, Sharkey says, but maybe in future years, if the size of the green investor base develops further, he suspects there could be the emergence of some economic consequence, much in the same way there’s a financial penalty if the credit rating of a bond issuer slips below investment grade.
This would be a “final step in the maturity of the market”.
So what has Stockland promised? And why the controversy?
In the green bond issue Stockland has set out the criteria it will abide by and its performance against this criteria will be audited yearly by KPMG over the life of the bond.
But nothing is perfect especially when it’s a first, and there’s some controversy.
Stockland has promised the proceeds of the bonds would be directed to funding the “development and redevelopment of green star rated retail, commercial, residential and retirement living projects, ensuring Stockland’s continued leadership in sustainability.”
The bonds would be directed to properties with a minimum 4 Star Green Star rating.
However, in some thinking, that’s a target that’s on the low side.
Sean Kidney, founder and chief executive of the Climate Bond Initiative, says the offer could have been greener and regrets there is not a stronger focus on carbon emissions in 4 Star Green Star and Green Star Communities, which he says allocates only 5 per cent of credits for reducing greenhouse gas emissions.
See our separate article, Sean Kidney on Australia’s first green bond
Standards are emerging
Kidney’s group is working on its own set of parameters and standards for green and climate bonds, and the collective clout of its members – who claim to represent $22 trillion of global investment – is probably enough to set the market agenda in this emerging asset sector.
CBI members include RaboBank, Royal Bank of Canada, HSBC Holdings pls, Nomura, Bloomberg, S& P Dow Jones Indices, Solactive, MSCI, ICAP, CDP.
o See the draft standards from the Climate Bond Initiative now agreed and waiting for signoff https://www.climatebonds.net/standards/standard/green-buildings
See our previous articles on this issue:
- Here comes politics-free green property bonds to lend a big hand
- Ché Wall: why green property bonds are game changers
- The green bonds era has begun, and it’s good news for property
There is a clear difference between green versus climate bonds.
If the focus of the CBI is carbon emissions then green bonds will appear to fall short. One focuses on purely climate outcomes, which you can define by carbon or greenhouse gas emissions and the other on a much broader range of criteria, such as materials, water and ecology.
In Australia with its aridity, the focus on water might be stronger than in Europe.
Ché Wall, lead author of the methodology for climate and green property bonds for CBI, said that right now, “you could call anything a green bond”.
The CBI, he says, is trying to produce a standard that will bring authenticity so you don’t have to scrutinise every single one.
“From the purchasers perspective it’s a complicated space and difficult to understand what’s the best in market and best value from an environmental perspective.”
From the perspective of measuring reductions in carbon, Wall says the best method over a long term financing project is “disclosure of performance over that term”.
“So you can work out the effective carbon savings year on year.
“That’s quite a different dynamic to Green Star [Green Star measures Design and As Built] which is done to provide a quality independent or third party credential at a point in time.”
He likened the scenario in green bonds to the days before Green Star, when “you could produce a green building and write your own script.” Green Star, and the CBI will perform similar roles, to “help people frame those claims in a common language”.
“I’d love to see this become a potent force.
“There’s a delicate balance between sufficient stringency versus too stringent that puts the market down before it’s even started.”
He said it was “great that Stockland made this initiative and used whatever tools were available to them and it should be congratulated for making the move”.
Chief operating officer for the Green Building Council Robin Mellon says Sean Kidney raises some “valid points” that Green Star – Design and Green Star – As Built ratings do not necessarily lead to good performance.
It’s why the performance rating tool was developed and why the new Green Star – Design & As Built tool includes a “Commitment to Performance” credit to encourage and reward buildings that are designed, built and then operated to best practice benchmarks, Mellon says.
Mellon points out that Green Star measures a wholistic range of environmental impacts impacts such as water, materials, indoor environment quality, land use and ecology.
But it also gives significant weight to greenhouse gas emissions.
Future green bonds
Would future bond issuers tend to create their own bonds with their own set of criteria as Stockland had done or might they use the Climate Bond Initiative criteria?
Sharkey says that’s an interesting issue to watch.
Sharkey says, “We’re closely watching all these developments. There’s a range of organisations involved in developing the green bond market, , whether its green investors, third party organisations like CBI and of course bond underwriters like UBS.”
The problem for Stockland was that the CBI draft rulings on a green property bond were still not approved.
Whether new bond issuers use the CBI parameters or set their own, there’s no going back on the trend, Sharkey says. “It’s a fundamental shift.”
“Different people are going at different speeds, but the direction is very clear. We’re going in the right direction.”