Australia’s delayed green bonds to face higher scrutiny

An fixed income manager has welcomed the launch of Australia’s green bond program but warns it will need to meet high standards given the lateness to join the race. 

Treasurer Jim Chalmers stated the government will introduce a sovereign green bond program which will enable investors to back public projects driving Australia’s net zero transformation. It will also attract more green capital to Australia by increasing transparency around climate outcomes.

Appearing on a Fidante podcast, Tamar Hamlyn, portfolio manager at Ardea Investment Management, welcomed the move but noted Australia lags behind global peers. 

“The Australian government will be issuing a green bond. Plenty of countries have been issuing them for years, such as [the] UK and Germany, even the Australian states. It’s really good news the federal government will be doing that as well but it’s not likely to occur until late last year.

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“It’s the states that own and operate most of the green assets such as energy grid, water supply and services such as healthcare.

“To issue a green bond, you need things to spend money on and until now, the federal government hasn’t had that many green assets it can spend money on so there hasn’t been scope for a green bond.”

He said potential investors will be spending a lot of time scrutinising the bond program, its risks and ESG considerations, and how it compares to other green bonds issued globally. 

“Liquidity is also incredibly important for investors because if we are going to [move] out of traditional government bonds [that] are highly liquid into one which is highly rated but might be ‘buy and hold’, then there might be a reduction in liquidity. We don’t want any decreasing benefits for investors by moving into this,” he said.

The lateness of the federal government to come to the green bond market means it will have higher standards to meet which have been increasing over the years. The European Investment Bank issued an equity index-linked bond to fund renewable energy and energy efficiency projects back in 2007, for example.

“We want to see a high-quality program, we want to make sure these bonds are highly tradeable, highly liquid and that they also meet the very high standards of issuance. As well as the usual scrutiny, it needs to pass an additional layer of scrutiny from investors. 

“Given [green bonds] have been out for a while, it’s incredibly important the standards are met as they have been increasing year-on-year.

“So because the Australian government is coming to this late, they will have to pass higher standards than if they had launched earlier.”

He expects high demand for the bond as it is the first one but questions if it will meet standards from international investors given Australia’s resource-heavy economy. 

“That’s not the end of the world as they are only one part of the pool, but it is something people will be looking at very closely as the issuance approaches.”