Australia green bond market muzzled by policy uncertainty

THE National Australia Bank recently launched the country’s first-ever “green” mortgage bond recently, keeping its expectations for demand in check with price guidance at a similar level to a non-green-bond it was also selling.

Global interest in so-called-green bonds has soared as banks and companies look to tap the appetite for climate-friendly-investments, which can increasingly sell at a premium – dubbed “greenium” – over regular deals.

However, the Australian market is less confident.

While it is growing quickly from a low base, bankers say that issuers and investors tend to approach deals with caution, rather than optimism.

For a country with the world’s fourth-largest-pool of retirement funds and a high level of awareness of green issues, the market is underperforming its potential, they say.

Just A$3.2 billion (2.5 billion dollars ) of green securities were sold in Australia last year compared with more than 40 billion dollars in both France and Germany by governments and private companies.

Globally, 155.5 billion dollars of green bonds were sold last year.

The Australian government has never sold a green bond and currently has no plans to do so.

There are only two off-the-shelf bond funds who label themselves as sustainable.

The biggest hurdle to developing the Australian market is perceived flip-flopping on environmental policy by the federal government, according to bond market sources.

“Corporate issuers are not in the same position as European issuers because there are no clear guidelines of the policies and what cost-benefits will accrue to them,” said S&P Global Director Parvathy Iyer.

Iyer is S&P Global Ratings Senior Director who added that Australian fund managers were otherwise keen on green projects.

“If you had a carbon tax or an emissions trading scheme, and it became a cost to companies, then they would progress the green approach and issue green bonds.

It would be a chain reaction,” she said.

Australia introduced a carbon pricing scheme in 2012 only to repeal it two years later and then in 2015 reduced its renewable energy target for 2020.

Policy beyond 2020 is unclear.

Other governments have been more proactive.

Poland and France have sold sovereign green bonds to help finance state-backed renewable power projects and to subsidise energy-efficient buildings, tree planting and other projects.

Other countries have offered tax breaks to bondholders, such as in Brazil, where income from green bonds that finance wind projects is not taxed.

Sydney-based Yen Wong,  head of credit research at Altius Asset Management, which is one of the only two local sustainable bond funds in the country, said investors needed a stable policy outlook.

ALSO READ: Aviation authority find possible wreckage from MH370 on Seychelles

“What is supporting the growth, for instance of renewables, when we have a political environment that doesn’t support it and where the regulation for de-carbonising the economy is uncertain,” she said.

Green bond issuers in Europe and the United States are increasingly benefiting from greeniums as investor demand rises, according to a study by  Australia-based Climate Bonds Initiative (CBI).

CBI is an international organisation that promotes investment in green securities.