The International Energy Agency estimates that US$53 trillion needs to be invested in energy supply and efficiency to ensure the world maintains global warming at two degrees.
Add in the climate resilience investments required to mitigate the unavoidable effects of climate change and it’s clear there are opportunities for all asset classes, industries and countries.
This is why the green bonds market is surging ahead.
The Climate Bonds Initiative’s Bonds and Climate Change: The State of the Market 2015 report finds that a “large liquid universe of climate mitigation and climate resilience investments exists today”.
“Irrespective of the climate challenge, the next 15 years will not be business-as-usual,” the report finds.
Instead, as the global economy increases by 50 per cent, a billion people move to cities, and technology disrupts entire industries, the choice to invest in growth or investing in climate is a false dichotomy. It’s simply not an either/or equation.
Climate change is no longer an uncertainty, but a clear risk – and investors are looking to address that risk accordingly.
The Climate Bonds Initiative estimates that the largest recipient of the $597.7 billion “climate-aligned universe” is transport – with $418.8 billion in bonds outstanding since 2005. Rail accounts for 95 per cent of this, largely from state-backed entities.
Energy is the second largest sector, comprising 20 per cent, or $118.4 billion. And buildings come in at number three with $19.6 billion.
In Australia, Stockland got the market’s attention last year when it launched a €300 million green bond to fund Green Star projects.
HSBC was a key partner for Stockland, underwriting the industry-leading green bond.
Violeta Jovanoska, associate director of debt capital markets for HSBC in Australia, says green bonds for property “make sense” because there is already a “clear focus at an industry level to develop low-carbon, energy efficient buildings”.
“This is why Stockland was successful as an inaugural issuer in the market,” she says. “Not only were investors able to assess the company from a credit perspective, but they also had a metric for understanding the ‘greenness’ of the company by referring to their Green Star ratings.”
As Green Star buildings continue to demonstrate superior sustainability outcomes – remember Green Star buildings produce 62 per cent fewer greenhouse gas emissions than average Australian buildings – establishing the link between green bonds and Green Star buildings makes sense.
The Green Building Council of Australia is doing this through a number of new partnerships.
For example, emissions data gathered to achieve Green Star – Performance ratings will be recognised under the Climate Bonds Standard, a fairtrade-like labelling scheme for bonds. This will avoid duplication of effort in reporting, while also giving property owners a clear avenue to attract new sources of funds from large-scale institutional investors.
We’ve also established a partnership with GRESB to ensure Australia remains part of the conversation about sustainability benchmarking.
Much like sustainability rating systems, the green bonds market is currently voluntary. Jovanoska says the next challenge – indeed the next step both in Australia and globally – is to “set about standardising the documentation approach to make it easier for corporates to consider the market”.
“We also need to incentives to ensure investors consider green bonds,” she says.
Jovanoska says China is considering tax incentives in the form of withholding tax benefits to investors who buy foreign green bonds. The European Union is looking at how government entities can provide guarantees to certain issuers.
“In Australia, I think we need to join the rest of the world in a more active dialogue and engagement in the development of the green bond market,” she says.
The property sector can lead this – by providing standardised summaries across energy efficiency targets and other relevant metrics.
“This will help offshore investors better understand the Australian property sector and its sustainability agenda.”
So, how do we know that projects financed by green bonds live up to their good intentions? Jovanoksa says we need to support the education of both issuers and investors so that we develop “best practice” green bonds.
When we launched Green Star in 2003, upskilling the industry on best practice green buildings demanded intense education and training. Today we have nearly 1000 Green Star-rated buildings, and a 4 Star Green Star rating is really business as usual in some markets.
Now, we start the cycle again as we work towards Australia being a leader in the world’s growing green bond market.
The Green Building Council of Australia will be hosting a Green Bonds Webinar on Tuesday 6 October from 4-5pm. Register online.
Romilly Madew is chief executive of the Green Building Council of Australia