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ESG Focus: First Aussie Sovereign Green Bond

ESG Focus | Jun 08 2023

FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:

Australia Announces the First Sovereign Green Bond Mid 2024

-Federal government intends to launch its first ever green bond in mid-2024
-Green bonds are typically used to finance projects that provide environmental benefits
-Developing a homegrown sustainable finance taxonomy in Australia is seen as a 'must' by industry insiders

By Riley Young

The announcement by the Australian government of plans to float the first supreme green bond in mid-2024 has sparked hopes that efforts to mitigate climate change down-under are finally getting the attention it deserves.

Green bonds are used in countries such as the United States and Germany to fund new and ongoing projects that provide environmental benefits such as curtailing climate change and global warming.

In Australia, this is the first time the federal government plans to issue a sovereign green bond.

Why a green bond?

Green bonds are used by countries to create a considerable fresh pool of capital for the establishments of new projects to mitigate climate change.

In 2010, the very first green bonds raised nearly US$5bn globally, with the figure rising to US$150bn in 2018, US$266.5bn in 2019, and US$269.5bn in 2020.

Globally, the U.S. government, via Fannie Mae, has issued the greatest number of green bonds, raising up to US$13bn. It’s closely followed by Germany, which has raised up to EUR12.0bn in green bonds.

The first green bond was floated in Australia at state level in 2014. Since then, several green bonds have been floated to support various types of projects.

For example, in the state of Victoria, the green bonds floated so far have been used to fund the construction of railways (78%), renewable energy (14%), water (5%), and low-carbon buildings (3%).

While it’s not clear the kind of investments the government would make using the 2024 green bond, industry players are confident it would send the right signals about the government’s resolve to invest in climate change mitigation.

Speaking after a stakeholder’s roundtable, Treasury Secretary Jim Chalmers said the green bond would allow banks, superannuation funds, and other investors to finance public projects that would help Australia meet its net zero objectives.

Sustainable finance taxonomy

In that case, the government would use private funds to provide capital for national priority projects.

The Australian government wouldn’t work alone in this but would partner with the Australian Sustainable Finance Institute (ASFI) to create common standards and definitions of sustainable standards vide a sustainable finance taxonomy.

According to Dr. Chalmers, the purpose of the taxonomy is to set common standards of the assets and activities to be considered sustainable. 

Consequently, investors will “have maximum confidence” when putting their money in “cleaner and cheaper energy,” Dr. Chalmers predicted, warning about the need “to get the taxonomy right.” He added that the stakeholders had no option but “to get the regulatory regime right.”

Stakeholders who attended the roundtable had similar sentiments, noting that having a homegrown sustainable finance taxonomy is a must. 

According to ASFI CEO Kristy Graham, the lack of a sustainable finance taxonomy had blocked “investment in climate solutions, including clean energy, in Australia.”

Therefore, by the government backing one, it would be possible for the country to “channel additional capital towards” projects that would accelerate transition from fossil fuels to clean energy.

Deanne Stewart, the CEO of Aware Super also had positive sentiments towards the proposed sustainable energy taxonomy, saying, “This is an important step toward creating the common standards and certainty that are required to scale up institutional investment in energy transition.”

It would be easier for superannuation funds and other long-term investors to “better price risk and identify” investment opportunities to help Australia make a swift transition, according to Sonya Sawtell-Rickson, CIO HESTA.

Hence, investors of all kinds would be able to “allocate more capital” to Australia’s climate transition, says Kristian Fok, Cbus acting CEO.

Contents of a sustainable finance taxonomy

Australia is expected to borrow best practices from countries that have successfully developed a sustainable finance taxonomy, requiring issuers to specify how they intend to use the proceeds.

According to industry observers, countries can put green bond proceeds to various uses including climate change adaptation, climate change mitigation, pollution control and prevention, and natural resource conservation.

Possible projects include green energy production and transmission, clean transportation, environmentally sustainable, sustainable water management infrastructure, and improving buildings’ energy efficiency through renovations.

Why buy green bonds?

Experience from elsewhere shows investors almost always subscribe to green bonds in a bid to demonstrate how much they are responsible for supporting sustainable projects with a positive impact on the environment.

But other investors want more than just impacting the environment positively. Many want their businesses to gain stronger credits and improve their prospects by adopting a more sustainable model.

Plus, investing in green assets could just be the best way for businesses to maintain existing customers and attract new ones. 

Since green bonds are like any other type of investment, they can also help investors to diversify their portfolios, maintain liquidity, and manage risk concentration.

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