All eyes on Australia’s inaugural sovereign green bonds
As managers await further details on the framework around Australia’s first-ever sovereign green bond, they believe it could go a long way towards providing additional avenues for sustainable investment and attracting global investors that are on the fence about Australia’s green credibility.
Globally, sustainable finance is on the rise with the international green bond market valued at around $3 trillion at the end of 2022.
In terms of sovereign bonds, MSCI reported they constituted over 20 per cent of the Bloomberg MSCI Green Bond Index in April 2023, a good jump from 7 per cent in 2017.
With the issuance of the Australian sovereign bond, planned for mid-2024, Australia will stand alongside some 19 other sovereigns, such as France, Germany, Italy and China, allocating capital towards achieving environmental goals or climate-related projects.
“The program enables investors to back public projects to drive our net zero transformation, and it boosts the scale and credibility of Australia’s green finance market,” said Assistant Treasurer Stephen Jones at the 2023 ACSI Annual Conference.
“We want to put out the biggest possible lure to attract more green capital to Australia.
“This is a case of actions supporting words. We are not just saying green investment is needed, we are turning up and entering the market, with the capital and the clout of government, and our triple-A credit rating.”
Already, various Australian states have issued their own green bonds, beginning with Victoria in July 2016 and most recently, Western Australia in June 2023.
“The green bond market continues to grow significantly and 2023 has exhibited a strong pick up in green sovereign debt issuance. Hence, it is no surprise to see new countries such as Australia considering the instrument,” said Johann Ple, fixed income portfolio manager, green social and sustainability bonds, from AXA Investment Managers.
“Inaugural issuers have generally been very welcome by investors, especially on the sovereign side and it could again be the case especially as global yields are at multi-year highs.”
Addressing credibility issues
Australia has historically lagged behind its counterparts on the sustainability front, and there have been active efforts by a newly elected Labor government in the last year to ramp up activity and change the narrative in this space.
Four months after the Albanese government was elected in 2022, a Climate Change Bill 2022 passed the House of Representatives, enshrining into law an emissions reduction target of 43 per cent from 2005 levels by 2030 and net zero emissions by 2050.
In the 2023 budget, the development of an Australian sustainable finance taxonomy (backed by a $1.6 million commitment) was announced alongside $4.3 million to bolster ASIC’s enforcement action against greenwashing, and $8.3 million over four years to develop and issue sovereign green bonds.
Steven Spearing, portfolio manager at Apostle Funds Management, agrees that Australia has held a perception of being a “climate laggard” among its peers.
“Australia certainly carries a perception as a climate laggard because of its mining and energy industries, as well as the government support that has historically been given to these sectors,” he told Money Management.
“[It] is also late to the [green bond] party and credibility may be a challenge, especially when it comes to attracting international capital. However, with a more credible government now in place, there is an opportunity to deliver a high-quality program that sets a new standard globally.”
Tamar Hamlyn, portfolio manager at Ardea Investment Management, added that although there’s every expectation the bond will perform well, given it’s the first one of its kind being issued and there’s a backlog of demand, there is some room for doubt.
Speaking on a Fidante podcast, Hamlyn said: “There’s a very, very small probability, though, that a large group of international investors might look at this bond and say, ‘Look, we’re not satisfied with Australia’s climate credentials. We’re not satisfied with the enabled emissions from Australia’s resources exports’, and they might actually take a different view on this particular bond.
“That’s not necessarily the end of the world – international investors are one part of the investor pool that buys this bond – but it’s something people will be looking at very closely as issuance approaches.”
However, there is largely optimism given the success story of the green bond launched in Western Australia, a state heavily evolved in resources and mining. The state issued its first $1.9 billion, 10-year green bond in June 2023 towards funding large scale projects aimed at decarbonising the state’s electricity grid as it plans to shut down its coal-fired power stations by 2030.
According to Adrian Janschek, portfolio manager at First Sentier Investors, the WA bonds were attractively priced, ensuring they will likely perform well in the secondary market, and its sale was heavily oversubscribed, reaching $6 billion in bids from over 60 investors.
Janschek explained: “What we have here is an investor base globally that is endorsing the climate response from Western Australia and now hopefully the government here. Or, they are ESG constrained in which case this is another opportunity for them to invest their funds in the sovereign bond.
“The thing about Western Australia is that people initially thought offering a green bond was a bit of a joke, but [the state] has had a very good transition story.”
He believed the sovereign offering would be beneficial to now getting on board a national transition story while providing additional portfolio diversification for investors.
“It adds some extra diversity to a portfolio over and above just holding vanilla government bonds. You now have access to a green bond, you have access to a part of a transition story of the country and assisting the government to achieve their net zero goals,” Janschek told Money Management.
Continuing, he said: “It’s a buy-in question really with regards to the country as a whole and the way it embarks on its transition to its targets. There are going to be risks along the way, of course. Governments might change, priorities might change, they might seek to emphasise one thing and de-emphasise another. [But] it is a good first step.”
“The way we see the market developing is one where green bonds assume greater importance in portfolios, greater importance in asset allocation, and therefore demand will be strong enough to be at least as good as the yield on a regular government bond,” Janschek commented.
Building a bond framework
Ahead of an expected inflow of green capital to Australia, a framework around the development and issuance of sovereign green bonds is in the works with the Treasury and Australian Office of Financial Management, in consultation with investors.
It hopes to address important questions that linger around the bond such as which kind of projects it will finance, how the government will select them, and importantly, how progress on these projects will be reported.
“What’s interesting about this news is that it poses the usual questions we get about any bond issuance, but it also poses some ESG-specific questions and some green bond-specific questions,” Hamlyn said on the Fidante podcast.
“This is a bond that’s just like any other bond, so as investors, we’re very focused on the size of the bond that’s being issued. We care about things like maturity [and] about what yield or price the bond is going to come at, is it going to trade cheap or rich, and all of those usual questions we face.
“But there’s also ESG specific questions – is there going to be a green yield curve? Or is this bond going to trade at a discount or a premium compared to conventional existing government bonds that are out there already? Those are quite important questions that are new for this particular bond, so you’ll find investors are spending more time analysing this.
“Another critical question is the liquidity of the bond, which is extremely important for our investors because if we’re going to be moving out of conventional government bonds that are highly liquid into another highly-rated government bond that might be [for] more buy-and-hold type investors, there might be a small reduction in liquidity there. That’s something we need to look at carefully. We need to make sure we’re not getting any decrease in benefits for investors by going into this bond.”
Apostle’s Spearing added: “When we talk about green bonds, one thing that we often refer to is additionality – is this adding something new or is it refinancing a project that already exists? We think investors want to see something new, and something that is innovative, something that can achieve significant positive outcomes or create new markets.
“Not only will this give investors the opportunity to directly associate their investments with the positive outcomes those projects are generating, it will allow them to access riskier projects but without taking any additional credit risk, because the risk still sits at the sovereign level. From a sustainable investment perspective, this is very attractive.”
However, Murray Ackman, credit ESG expert at Pendal, warned that investors should carefully scrutinise the plan before investing to avoid any risk of greenwashing.
“Investors will want to reassure themselves that the government is truly responding to Australia’s needs, and not greenwashing poor climate policies or funding projects that would have been financed regardless,” Ackman said.
“Green bonds have a halo effect on the issuer. We will not invest in green bonds from issuers that we do not believe are committed to environmental change and focused on climate stability.”
He highlighted Pendal’s own example, having exited from a Queensland government green bond after the state’s approval of Indian conglomerate Adani’s new coal mine a few years ago.
“When they approved Adani, we exited the green bond because there was a disconnect between what the green bond was attempting to do and what government policy was attempting to do.
“A green bond should be a reflection of an issuer’s philosophy — not an apology for their actions,” Ackman said.