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The growing green bond opportunity in Australia

This story is an edited version of a workshop delivered by Katharine and Catherine at the ANZ Global Capital Markets Corporate Debt Conference in 2016.

" The investor community increasingly expects those they invest with to have environmental, social and corporate governance issues top of mind."
Katharine Tapley & Catherine Bremner, Director, Sustainable Finance Solutions & Head of Sustainable Finance Solutions at ANZ

Still a comparatively young and small class of investment, the "green bond" market is one of the fastest growing in the world and is gaining momentum in the wake of the Paris climate agreement struck in late 2015.

Issuance reached $US42 billion by the end of 2015 and has good prospects for near doubling during 2016. Most issuance has occurred in the US and Europe but increasingly markets in Asia are gaining momentum. Since mid-2015, $US5.5 billion has been issued in China and in India.

In Australia, in just 18 months we have seen $A1.8 billion of local issuance across four transactions and a €300m issuance by a local corporate. We believe there is significant, multi-billion dollar opportunity for further growth across markets such as commercial property, transportation and renewable energy.

For example, our research shows a significant pool of eligible green-bond assets in the commercial property market across Australian capital cities – we have conservatively estimated this to be just over $A40 billion. Around another $A40 billion is potentially available with rail assets.

QUALIFYING ASSETS

Green bonds are bonds where the proceeds are applied to existing or proposed environmentally friendly assets or expenditure which aim to address key areas of concern such as climate change, natural resource depletion, biodiversity conservation or pollution.

The Green Bond Principals and the Climate Bond Initiative Standards both provide sound frameworks for qualifying such assets or expenditure for green bond issuance.

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Green bonds are of strategic value for issuers and investors looking to improve their environmental credentials. In particular, the investor community increasingly expects those they invest with to have environmental, social and corporate governance issues top of mind.

This is occurring even where investors don't have explicit green mandates. As a result, we see interest in green bonds coming from companies where there is strong alignment between sustainability and treasury teams driven by strategy emanating from the C-Suite.

Our conservative estimate of $A40 billion of potential green bond property assets in Australia was made using NABERS data together with the Climate Bond Initiative criteria for buildings, under which a building must demonstrate top 15 per cent percentile performance relative to the C02 emission intensity of all buildings in its location.

In Sydney 130 properties meet these requirements, while in Melbourne 40 properties meet the requirements.

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We believe rail infrastructure in Australia is also fertile ground for green bonds. Looking at just the public current pipeline of infrastructure projects alone, data suggests the value rail infrastructure assets could potentially be refinanced into the green bond market is just under $A40 billion.

All hybrid and electric vehicles automatically qualify for green bond inclusion, while non-electric assets are judged on a global-emissions basis. Public transport, dedicated freight railway lines and supporting infrastructure also qualify. Excluded is fossil-fuel related transport infrastructure.

The third sector we believe has further possibility, and which is already popular in green bond markets, is renewable energy. Our research into pipeline assets alone shows $A10 billion to $15 billion in large-scale and $A30 billion in small-scale projects.

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As momentum continues to grow globally around 2050 carbon emissions targets, our view is the green bond market will likewise continue to expand.

We believe issuers and investors in Australia are as equally well-placed to drive and participate in this market.

Katharine Tapley is Director, Sustainable Finance Solutions at ANZ & Catherine Bremner is Head of Sustainable Finance Solutions at ANZ.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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