Rapidly transitioning to a low-carbon economy is the most urgent priority in reducing risks from climate change. As pledged in the 2015 Paris Agreement, countries are preparing to enhance their emissions reduction targets. Most countries have included sustainable finance mechanisms in their plans to fund clean energy projects and other green projects. The Sustainable Development Goals (SDGs) also offers a framework understanding and prioritising of the changes needed to deliver a sustainable future for people and the planet. The United Nations estimates the annual funding gap to deliver these goals is $2.5 trillion in emerging markets alone.
Green bonds are fixed income securities that have been created to identify and prioritise investments that contribute to addressing climate change.
Green bonds have become popular amongst institutional investors for their attractive set of features that support green projects like renewable energy and biodiversity conservation while offering similar risk and return profiles to vanilla bonds from the same issuer. Externally reviewed green bonds provide additional assurance over the self-labelled green bonds, as, like equities, some issuers have been accused of making false claims (commonly known as greenwash). While relatively new, the global green bond market is poised for growth with US$1.23 trillion in cumulative issuances, and US$171.6 billion so far in 2021.
In contrast to global markets the Australian landscape has had a slower start but issuance has been increasing with US$15.6 billion in issuance to the end of 2019. However, Australia has seen accelerated growth in the green bond market since 2014 after labelled green products were first issued.
With increasing local market understanding and demand, corporates, state governments and banks are looking to tap into this growing pool of capital, providing greater diversification and depth to the market. While mostly bought by institutional investors, retail investors can also access this emerging asset class, most easily through managed funds, although direct investment is also possible in both primary (direct from the issuer) and secondary (via a broker) markets.
Australia’s first green bond fund is run by Australian Unity owned Altius Asset Management and has the Clean Energy Finance Corporation (The Australian Government’s Green bank) as a cornerstone investor. While not focused solely on green bonds, Australian investors can access ETFs like BetaShares Sustainability Leaders Diversified Bond ETF — Currency Hedged (ASX:GBND), of which at least half comprises international green bonds, or the Vanguard Ethically Conscious Global Aggregate Bond Index (Hedged) ETF (ASX:VEFI).
The nation’s debt markets are evolving. Green bonds and loans, and sustainability linked bonds and loans are important tools for accelerating towards sustainability related goals. However, the mantra of buyer beware still holds with investors and lenders needing to gain assurance that claims are real.
Competitive pricing and strong credentials are required if these new investment opportunities are to achieve their potential and drive real changes in capital allocation. Regulators have a role to play in ensuring that, whether being accessed via managed funds or directly, green financial products offered to retail investors have integrity.
In addition to green bonds, an emerging trend is banks supporting green projects directly via green loans and more sustainable business practices through sustainability linked loans. Unlike green bonds which offer limited access to transport, agriculture sectors, green loans and sustainability linked loans allow banks to access a broader range of sustainable lending opportunities. These characteristics of green loans have captured the attention of Australia’s banking giants who are boosting supply of credit for lending to meet their sustainability ambitions.
Green loans are also increasingly being made available to retail bank customers as well, with products by Bank Australia, the big four banks and some credit unions, providing discounted loans for solar energy and other green home retrofits. The Commonwealth Bank’s Green Loan allows existing customers to borrow up to $20,000 at a fixed rate of 0.99%. While Bank Australia offers a mortgage product with 0.2% p.a. discount for homes rated 7 stars or higher and for upgrades.
For borrowers, the opportunity to make homes more energy and water efficient at discounted rates can improve both capital value and operating expenses. For investment properties these features can also command higher rents and reduce the risks of tenants coming into financial difficulties.
After years of being the exclusive domain of large banks, corporate and institutional investors, the early signs are positive that green finance is being made available to retail investors and borrowers, offering them the opportunity to achieve both sustainability and financial objectives in a targeted way.
Below we have listed the Responsible Investment Association Australasia (RIAA) certified products that are actively investing in green bonds. The second list includes the names of the RIAA certified funds that are investing in ethical and responsible initiatives.
Funds actively investing in green bonds
- Affirmative Global Bond Fund
- Pendal Sustainable Australian Fixed Interest Fund
- BetaShares Sustainability Leaders Diversified Bond ETF — Currency Hedged (ASX: GBND)
Funds investing in other sustainable bonds
This article was originally published in Equity, the Australian Shareholders’ Association magazine.
Authors
Madhumita Mukherjee has a Master of Finance from University of Technology Sydney. She loves finance and holds an interest in the financial analysis space. Outside of finance, Madhumita enjoys reading, sketching landscapes and watching Sherlock Holmes movies.
Pablo Berrutti is Altiorem’s founder, he has deep investment and financial services experience including responsible investment, risk management, marketing, communications and strategy. He is currently a senior investment specialist for Stewart Investors Sustainable Funds Group and was formally the Head of Responsible Investment, Asia Pacific for Australia’s second largest fund manager.
For more resources visit www.altiorem.org, a community-built, freely available library that supports its members to be more effective sustainable finance advocates and to implement the changes needed to make it reality.
Follow Altiorem on Twitter and LinkedIn.
