Green bonds were first introduced to Australia in 2014, and they’ve exploded in popularity since. Whether it is green residential mortgage backed securities or infrastructure bonds to build drought-resistant water systems, Australian green bonds are boosting sustainable innovation on multiple fronts. Let’s take a look at the hard data on these trends before analysing them in greater detail.
The Hard Data
The Climate Bond Initiative recently issued a report on the climate bond market. Australia’s green bond issuance hit 8.3 billion dollars recently, second only to China. Roughly 2.6 billion in cumulative green bonds had been issued in the first half of 2018 alone. That was a 5.3% increase over the prior year. All of this helps to explain why the climate bond was growing globally, especially in the Asia-Pacific region. The building sector was recognized as the one with the largest potential to reduce greenhouse gas emissions.
Green Bond Trends
Green residential mortgage backed securities or RMBS were identified as a key growth area in the Climate Bond Initiative report. This is because low carbon buildings fit into the Australian building code and energy rating schemes. That seamless integration makes it easy to package potential loans and funnel them to mortgage backed securities sold to investors.
Green bonds are being issued by two state governments, the property sector, and tertiary sectors. One example of this is the promised suburban train loop proposed for Melbourne. Sovereign green bonds have been discussed but not issued to date.
The CBI’s Green Infrastructure Investment Opportunities Australia and New Zealand report identified a large number of planned, under-way and completed infrastructure projects that qualify for green bonds. Transport is a strong potential area for green bonds. While most transport financing is through the government, more could be done by the private sector.
The Potential for Corporate “Green Bonds”
The “climate-aligned bonds universe” is estimated to be worth around two trillion Australian dollars. This universe of potential investment includes far more than green home builders. Renewable energy is certainly one category eligible for green bonds. In fact, all Green Star certified projects are eligible for green bonds.
According to the CBI report, “Climate Bonds Taxonomy”, these projects are mostly 6-star rated. Many new construction projects already meet these standards, while the economic potential of retrofitting existing buildings or building new, environmentally friendly public buildings was mostly overlooked in the CBI reports. With all of this investment in green infrastructure, expect to see demand for construction equipment and the building trades continue to grow. A company offering crane hire Melbourne, for example, will surely benefit from these new standards.
Low carbon transport projects are the second big category of infrastructure. And sustainable bond projects include companies recycling waste and reusing wastewater, since sustainable water management is the third category of green bonds.
Note that green bond investment could include the refinancing of existing qualified projects and additional financing for expanding existing facilities and plants.
A company could qualify for green bonds if it derives at least three quarters of its revenue from green business lines. This could include companies transitioning to the green sector, though they need to be doing more than just labelling themselves as green.
Australia is a world leader in green bonds, and these investments are fostering a wave of infrastructure retrofitting and growth that will reap both financial rewards for investors and a better quality of life for future generations.
