What are green bonds?
Green bonds were created to fund projects that have positive environmental and/or climate benefits1. The majority of green bonds are green “use of proceeds”, which means proceeds from the bonds are earmarked to finance new or existing projects with environmental benefits. The green bond label assists investors in identifying, and thereby facilitates growth, in climate-aligned investments.
Globally, the green bond market continues to grow year-on-year. In 2015 over $42 billion was issued globally and 2016 is expected to reach over $100 billion2. Issuers range from development banks, the largest to date being the European Investment Bank, and growing corporate bond and commercial bank issuance.
In Australia, the Clean Energy Finance Corporation (CEFC) expected that the Australian green bond market would pass $AUD 2 billion in cumulative issuances in 20153. All Australian issuances have been fully subscribed immediately after announcement, with many over-subscribed.
Do green bonds live-up to expectations?
Green bonds can be used to finance projects with a range of themes. Globally, energy, and buildings and industry are the largest sectors, followed by transport, water, waste and pollution, and agriculture and forestry.2 However, with the rapid growth in the green bond market, many questions have been asked about the environmental claims of these bonds and whether proceeds are in fact allocated to assets that have uncertain environmental value. Bonds are labelled green by the issuer, who should explain to investors the green eligibility criteria for the use of proceeds. Around 60% of green bonds are also currently reviewed independently.2
In a bid to build confidence, the Green Bond Principles (GBP) and Climate Bonds Standards Scheme are aiming to develop standards and certification schemes for green bonds. These schemes provide clear, science-based criteria on what is considered green. Examples from the Climate Bonds Standards Scheme2, which is quickly becoming the industry standard, include:
- Low-Carbon Transport projects applicable for certification should be compatible with an emissions trajectory that limits global temperature rises to 2 degrees. Applicable assets include public transport and private vehicles that are electric, hybrid or alternative fuel.
- Energy projects focus on the criteria for wind, solar and geothermal and are developing criteria for bioenergy, marine energy and hydropower.
- Water Climate Bonds criteria focus on improving the climate resilience of water assets and encompasses investments in engineered water infrastructure for water collection, treatment and distribution
- Do green bonds need to be issued by green companies?
No, green bonds do not need to be issued by green companies. Green bonds are all about the use of proceeds, or the environmental impacts of the specific project that the bond proceeds are funding. Green bonds can be issued by the fossil-fuel industry or any other industry/company with traditionally non-green credentials.
The urgency and size of investment required to mitigate climate change means big companies with big budgets need to be encouraged to spend on green projects4. Slowly companies which were traditionally fossil-fuel are building out their own renewable energy divisions, many of which may be even larger than pure renewable energy players. From an investor’s perspective, they are able to invest in and encourage green projects without necessarily taking on any renewable energy risk. Green bonds issued by fossil fuel companies are backed by the full balance sheets of these companies, whilst using the proceeds to build renewable business units.
How big are green bonds in Australia?
Australia has been an active region for green-labelled and certified bonds with green bonds issued from ANZ Bank (2015), National Australia Bank (2014), Westpac (2016)2. In June this year the Victorian government became the first state government in Australia to issue green bonds to fund government investment in energy efficiency, renewables, public transport, and water treatments across the state. $AUD 300 million worth of green bonds were issued into the market and were fully subscribed in a little over 24 hours5.
From a risk perspective, all green bonds issued so far into the Australian market have ranked alongside traditional senior unsecured debt. This means that while funds are being directed to green-related projects, the bonds aren’t exposed directly to the performance of the underlying ‘green’ assets. This has meant green bonds have priced largely in line with traditional bonds.
Altius Asset Management and Green Bonds
As a fixed interest specialist with a keen interest in sustainability, Altius has been a strong supporter of the green bond market. Altius’ sustainability process is rigorous in its assessment of the sustainability of the issuer and also looks at each green bond on its own merits. A green bond is not automatically excluded if it is used by a non-green company. “If a company is slowly progressing from being a high carbon business to low carbon, then this would be viewed positively by our sustainability committee,” says Gavin Goodhand, Senior Portfolio Manager for the Altius Sustainable Bond Fund.
The Altius Sustainable Bond Fund – an easy place to start
Many investors now have a desire to align their personal values with how to invest their money – but they just don’t know where to start. The Altius Sustainable Bond Fund is an easy place to start.
All well-balanced portfolios should have an allocation to bonds, but investors looking for responsible investment choices in fixed income have historically had few options available to them. The Altius Sustainable Bond Fund employs two levels of sustainability screening to ensure it invests only in companies which conduct their business and apply capital responsibly, giving full consideration to a range of environmental, social and governance (ESG) issues.
Find out more about the Altius Sustainable Bond Fund