Tuesday 09 June 2015 by Elizabeth Moran Opinion

Green shoots for green bonds

Published in The Australian 6 June 2015  

There is a growing appetite among investors for ‘socially responsible investments’ and the green bond fits into this category. A few weeks ago ANZ priced a $600 million debut green bond. This article looks into this development of the green bond market

glass bottles on fence

In recent years, many people have become more aware of the social and environmental impact of their investments and have decided they want their funds to support worthwhile initiatives.

This phenomenon, known as ‘socially responsible investment’, means there is a growing appetite for investments that are consistent with a range of social values.

One example of a ‘socially responsible investment’ is green bonds. A green bond is a bond that helps fund projects that have positive environmental and/or climate benefits. Some of the specific environmental categories include: alternative energy, energy efficiency, pollution prevention and control, sustainable water, and green building. 

The first ever green bond was issued back in 2007 jointly by two development banks – the European Investment Bank and the World Bank. The market was slow to develop but gained momentum in 2013 when the first USD1 billion bond was launched by IFC, part of the World Bank Group, and sold within an hour.

According to the Climate Bonds Institute, global green bond issuance last year was USD36 billion, with issuance this year of USD14 billion until 31 May 2015. Their 2015 target is a huge USD100 billion.
 
 global green bond issuance has exploded with target
Source: CBI, FIIG Securities

On the domestic front, the World Bank was again first to the market, launching Australia’s first green bond last year with a $300 million issue.  NAB was the first domestic bank to follow suit, raising $300 million in 2014 and late last month ANZ also came to the market raising a significant $600 million.

The ANZ bond was senior unsecured maturing in June 2020 with a fixed interest rate of 3.25% or 80 basis points over semi-quarterly swap. The funds support loans to wind and solar projects and green star rated commercial property. Importantly, the bonds are certified by the Climate Bond Institute and verified by independent auditor Ernst and Young.

The bonds were issued in the over-the-counter market and bought by a diverse range of investors including governments, asset managers, superannuation funds, councils, not-for-profits such as schools and charities, banks and insurance companies. At the moment, individual investors would need to invest $500,000 to own the bonds directly, putting them out of reach for most people.

The returns on green bonds have been low to date, reflecting the very low risk of the institutions issuing them. There are now high yield green bond issuers in the global market and we expect over time to see high yield green bonds with more attractive returns in the domestic market.

While the market is developing and there’s a limited supply of green bonds, we expect they will be tightly held by investors who need to satisfy fund mandates. In time they should become available in smaller parcels for individual investors.

There are some individual investments in community organisations such as Australian National University, NSW Schools and Royal Women’s Hospital that may meet your own investment parameters. These bonds are inflation linked with returns from 4.6 per cent to 5.7 per cent per annum and available from $50,000.

If you are keen to invest in a socially responsible way there are a number of superannuation funds, banks and investment managers offering socially responsible investment options. I think it’s important to fully understand what the funds invest in and if the investments are accredited by the Climate Bond Institute or other recognised bodies and that the accreditation has been verified by an independent third party.

Supporting socially responsible investment or worthwhile institutions is admirable, but like any investment, you’ll need to assess the risks and if the returns provide adequate compensation.  

Note: Prices accurate as at 3 June 2015 but subject to change. 

Disclaimer

The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced or  distributed to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.

Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the company which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice.

No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

FIIG shall not have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.

FIIG provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not provide tax advice and is not a registered tax agent or tax (financial) advisor, nor are any of FIIG’s staff or authorised representatives. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at www.fiig.com.au/fsg.

An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.

The FIIG research analyst certifies that any views expressed in this document accurately reflect their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.