Good news. NAB has beaten competitors to launch Australia’s first green bond. That’s local money to local investors for local climate friendly sustainable projects. In particular, renewable energy.
Good, not because it was NAB and not some other bank (no offence NAB) but because there is clearly some fierce competition underway. When we called Ernst & Young partner Matthew Bell to ask if this was the deal he’s been working on, he said no. And yes, the tone in his voice was a tad disappointed.
Well, the deal he is managing with one of the big four banks might yet be bigger – between $200 million and $300 million. It’s scheduled to be launched early in the New Year.
And that’s on the back of Stockland raising a 300 million Euro bond listed on the Singapore market a few weeks ago and the World Bank’s so-called “Kangaroo bond”, managed by Westpac and RBC Capital, which sourced local Aussie investors but was destined for World Bank customers doing clean and green things offshore.
Where those buyers came from there are plenty more. The market is a massive $40 billion in size and bonds overseas are typically four times oversubscribed.
In a quick catch up last week, before Thursday’s announcement by NAB, Bell just happened to be talking green bonds.
“There are “a lot of good reasons why the green bond market at the moment is attractive,” he said.
So far that doesn’t include lower cost of funds. The Stockland bond was issued at market rates. But Bell said that could soon change as the market develops.
“What we’re hoping to see in the future that those bonds in the future will be issued at a discount,” he says.
Well because they are simply better, to put it bluntly. They are “more reliable and the nature of the asset is less risky.”
Auditing and certification will be critical. That’s the part that gives the buyers the assurance they’ve got a green product – that the money is destined for highly rated buildings such as with Stockland’s green bonds, or renewable energy such as the NAB issuance.
Isn’t this what the sustainability people have been spruiking forever? That green and sustainable is good for business?
For Bell the really exciting part of this emerging asset class – because yes, it looks and smells like a new asset class – is the capacity for an index to be created that would rate green bonds from light green to dark green to cater for the variations that will undoubtedly appear.
Cue Moody’s or Standard and Poor’s.
So what we end up with are green bonds (slated for assets that aim for generally sustainability) or climate bonds (focused on reducing greenhouse gas emissions) that have varying levels of intensity.
This requires standards, certifications and auditing.
Bell says that so far, very little of the $40 billion market is actually audited.
KPMG will audit the Stockland green bond to criteria provided and agreed by Stockland and EY will audit this new issuance under way to criteria to be agreed.
The NAB’s deal, slated for renewable energy, will be certified by the Climate Bond Initiative, which has developed methodologies, including for buildings, which is still awaiting approval.
But the lack of auditing and agreed standards for most green bonds so far raises all sorts of issues. And there is no point sweeping them under the carpet, lest the bogie of greenwash starts to raise its unfortunate head.
Bell says it’s inevitable some greenwash will happen precisely because it’s a new untested market where so much is being done for the first time. The challenge is stop up the gaps and get the assurances and certifications happening as soon as possible.
But right now things are still a bit loose.
Bell says, “you can audit the bonds, but the issue is, what exactly you are auditing? Because there are no rules of additionality over the bonds. It’s just they’re associated with a certain green asset with a loose definition.
“And you’d expect that. This is a new market. It’s going to evolve over time.
“But I think what we will see into the future and what I hope we will see is almost an index on green bonds. We don’t have this at the moment. It’s not something EY would take on but we really hope someone develops a market that will. It would need to be Moody’s or somebody else.”
When that happens we could start to see some discounts on the margins, Bell says. “For the same reason Bloomberg Energy Finance said it was cheaper to finance 100 megawatts of wind than it is to finance 100 MW of coal fired power station, because the risks in the commodity pricing aren’t there with the wind and then you can leverage cheaper debt.”