On what Lang Walker knows about green bonds (and others are picking up)

This is interesting.

Two of the five buildings in the $600 million ANZ climate bonds issuance last week turn out to be new developments

That’s Walker Corporation’s Tower 4 D in Collins Square in Melbourne, due for completion mid next year and Brookfield Multiplex’s Brookfield Place Tower 2 in Perth. The other buildings, Tower 1 at Brookfield Place, Grocon’s Legion House in Sydney, and DEXUS and Cape Bouvard’s Alluvion House also in Perth are existing.

What this mean is not only are Australia’s property developers fast and early adopters of green buildings, but they’re also jumping onto climate bonds quick smart.

So if you’re an investor in these Australian Stock Exchange-listed companies then you’ve just learnt that at least some of these companies’ portfolios have secured significantly lower debt than what’s available on the commercial debt market. Much easier to manage too. (Think brown paper bag tied up with string and stuffed into the bottom drawer for 20 years.)

Here’s a few other interesting items.

In Europe, leading oil companies this week called on the UN to organise a global price for carbon.

Woodside chief executive Peter Coleman quickly chimed in to push for his company’s particular type of fossil fuel, gas, to move the ascendency in the effort to save the planet.

At the World Gas Conference in Paris on Wednesday Coleman ridiculed the concept of “clean coal”, a media report said.

“Give me a break,” he said, “who coined ‘clean coal’ and why did we let that happen?”

Then he quoted the World Health Organization saying air pollution killed seven million people world wide and that smog was the world’s “largest single environmental health risk”.

“Our industry has historically been too timid to address the shortcomings of coal but now it’s time for us to stand up and we need to stand united,” Coleman said.

The story was in The AFR.

We kid you not. How the worm turns.

Here’s another interesting thing: In Australia the banks are falling over themselves be first or biggest or best with climate bonds.

We know this because NAB recently took out a full-page ad in a major newspaper to promote its issuance of a $300 million green bond last year and within days, ANZ leaked its own imminent issuance of $600 million in green bonds. We’ve also heard that the others are gnashing their teeth and beavering away to jump in the game (Westpac managed a Kanga (Aussie dollar) green bond for the World Bank last year). Maybe they’ll double the stakes again.

Each of the items above are connected.

All of them dovetail into the divestment movement and the wakeup call to the finance world that things are morphing fast. It’s no longer a mantra of Greed is Good. It’s Green is Good.

As UN climate boss Christiana Figueres says there’s no stopping the environmental revolution because it’s driven by technology. She might have added that it’s driven by money too. But then one tends to substitute for the other.

So what are we learning about climate and green bonds?

Heaps and our sources tell us there’s plenty more to pick up.

Rob Fowler

We asked Rob Fowler, who joined the advisory team for the Climate Bonds Initiative in Australia in January, how he sees the market.

Fowler says the level interest from banks, bank customers city councils and even state governments is “remarkable”.

“All the major banks are interested in issuance,” he said this week.

“All the major banks are very keen to engage. They want to issue themselves and they’re encouraging their customers to get involved”.

More interest is coming from developers and industrials, he says.

Why? An existing asset can be refinanced at a “pretty cheap rate” he says, or a much lower coupon than for a commercial loans.

We ask how new development finance had made it into the ANZ issuance. (We understood climate or green bonds were refinancing vehicles.) Fowler will not confirm our information but says that as long as the overall risk profile of a portfolio met investor needs – and it is sufficiently green – then there was no structural barrier to prevent new developments qualifying for a climate bond.

Fowler says $300 million is about the smallest issuance you can take to market so he’s not surprised ANZ went with double that amount in its issuance.

A big advantage of climate bonds, he says, is the diversity of investors, compared to just one investor in a commercial loan.

“With the commercial loan there’s usually a higher level of engagement and a relationship you have to manage over time. With a bond the capital markets take care of it.”

For any project a green bond can free up risky development money, at higher cost, much earlier than it would otherwise.

The higher the risk the higher the expected returns and vice versa and bonds are generally “low risk and low returns”.

“And that’s what the big institutional investors need.”

“The reality is that the debt capital markets is a private sector market with trillions of dollars every year and at the moment with the divestment movement there’s a lot of money that’s not previously been in the green space now pouring into it.”

The benefit for city councils could be immense, he says, They could access capital from a range of investors in a “very structured way” and create a funding channel that would provide security and lower risk for its stakeholders.

Fowler won’t be drawn on whether there is pressure from the green bond market to also open up social impact bonds; for now he says the CBI is sticking to carbon and green issues.

He thinks it’s possible China might head that way because of the huge pollution, waste management and remediation issues it needs to deal with.

For now, what’s important is to set up a global standard so that investors are comfortable with low carbon metrics, he says.

“This is a very standardised market. Investors don’t want to do due diligence on this.”

What’s interesting though, is that you can mix a portfolio with properties or elements with various levels of risk.

Fowler says a lot of effort goes to defining what’s green. There are standards emerging for solar, water, building, waste and even resilience. In other words everything you need to turn the world away from climate catastrophe – and a degraded environment.

With green buildings there’s a need to set tough standards because it’s expected that there needs to be a “substantial transformation” he says.

“So for that you can’t lock in marginal improvements.”

Buildings need to be in the top 15 per cent performers for their particular market place in terms of CO2 emissions per square metre. That’s information included in NABERS energy ratings and also included in Green Star ratings.

But here’s the clincher, they need to move down to zero emissions by 2050.

So if you’re wondering how a climate bond can accept a relatively good building (mother Earth doesn’t care about relativities and commercial fairness) then that’s the deal. Start your building here or there but get to zero by 2050.

Sounds good.

The next big fascination for those engineering the next climate bond property deals is residential.

That’s a tough story for now.

Fowler says diplomatically, “We’re in the process of nutting out what sort of code rating and number of stars might be appropriate.”

But imagine a whole tranche of apartments built for a lower than commercial loan price and all shaping up greener and cleaner than their neighbours.

Precinct level development is another area of interest and investigation and so is the infrastructure area such as public transport.

China is the other big mover. It’s about to “go nuts”, Fowler says. Provinces and cities will soon be able to issue their own green bonds in order to clean up pollution and turn to renewable energy.

Will China be able to set its own standards with the danger it change standards to suit its own agenda?

Not likely, says Fowler. China may have plenty of its own capital but it also like diversification, evidenced by its rapid and escalating investment in property and infrastructure investments world-wide.

So what’s the bottom line on climate bonds – the cost?

Between two and three per cent. And that compared to commercial loans of anywhere from four per cent to 10 per cent, depending on your risk profile.

Fowler thinks this an interesting juncture in the environmental revolution. “The climate change community has thrown up a lot of engineers and a lot of policy makers, but very few financiers.”

Watch out world, things are about to change. Radically.

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