Commentary On Reserve Bank Board Interest Rate Decision - 18 June
18 June 2024
Chart of the Month - June 2024
Something new, something green! On June 3, Australia’s federal government issued its first-ever green bond: AUD 7 billion (see chart below). It was oversubscribed three-times over. While it represents a small start compared to total treasury bonds on issue, it is another step in the direction of sustainable finance for a country that has already embraced green bonds at the state and corporate levels.
The excitement behind Australia’s new green bond
Australia is one of only eleven countries with a “AAA” sovereign debt rating. However, with its large exports of coal and LNG, and large livestock production, it does not have a strong green reputation. In 2022, Australia ranked 10th for GHG emissions per capita.
The federal government’s new AUD 7 billion green bond leverages Australia’s superb economic management and world-class institutions with its commitment to achieve net zero GHG emissions by 2050.
Some Australian industries may be far from green at the moment but as the government’s recent announcement of its “Future made in Australia” program demonstrates, Australia has set its sights on becoming a renewable energy superpower.
The growth in electricity generation from solar and wind power has been substantial over the last ten years (see chart below).
Overseas investors have also noted the u-turn on climate change at the federal level with the Australian Labor Party ending almost 9 years of conservative rule in 2022.
Strong demand
Despite forecasts that the new green bond would be sold with a similar yield as a plain-vanilla Australian 10-year treasury bond, the new green bond attracted a strong premium of 1.5 bps. German government green bonds are currently trading with a 0.5 bps premium. Australia’s strong premium is a tick of confidence in the Australian government, its institutions, and its green ambitions.
Some investors are now calling for the Australian government to keep issuing bonds over time to establish a sovereign green bond curve. This is the government’s intention.
“Demand for the bond confirms Australia is a go‑to destination for international green capital.” Jim Chalmers, Australian Treasurer.
The issuance and demand for Australia’s green bonds also reflects growing investor appetite for green bonds globally (see chart below).
Green bonds aren’t new in Australia
While this is the first green bond issued by the federal government, Australian state governments, companies, and international organisations have been issuing AUD green bonds since 2014. The first green bond was a kangaroo bond issued by the World Bank while the second-ever green bond was issued by the National Australia bank.
The chart below shows that most AUD green bonds are issued by international development banks and agencies and Australian state governments.
International organisations want to tap Australia’s well-developed capital market for green projects while state governments are taking advantage of domestic and international appetite for quality green infrastructure projects.
Going forward, we can also expect increased growth in Australian corporate green bonds given that the government has introduced a bill to parliament that includes mandatory reporting requirements on climate-change related activities by companies, in line with ISSB (International Sustainability Standards Board) standards.
What is a green bond?
A green bond is a bond whose proceeds must be spent funding or refinancing existing or new green projects. Guidelines for green bonds are provided by the ICMA (International Capital Market Association). The ICMA provides voluntary regulations, support, and education for global capital markets. The green credentials of a green bond is typically verified by an independent third-party organisation.
The first-ever green bond was issued in 2007 by the European Investment Bank. The first government green bond was issued in 2016 by Poland.
Final thoughts
Every extra dollar put towards fighting climate change will be a dollar well spent. And if those dollars are vouched by third-party certifications and transparent reporting even better! Beyond green bonds, Australia is also seeing the development of green loans and the securitisation of those loans - watch this space.
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