There’s a new buzzword in finance at the moment and the name is bond. Green bond.
The federal government’s first green bonds were issued earlier this year and aim to be the impetus needed to help drive further development of green, social, and sustainable lending in Australia and unlock (much-needed) capital for green initiatives that deliver significant environmental benefits, including lowering greenhouse gas emissions; increasing Australia’s renewable energy production; and bolstering biodiversity conservation, restoration, and adaptation.
The green bond program enables investors to back public projects that drive Australia’s transition to net zero by 2050 and support environmental objectives. Green Treasury bonds attract green capital to Australia by increasing transparency around climate outcomes and the scale of green investments available.
In June, the government issued $7 billion of its inaugural green bond, in a major milestone for Australia’s sustainable finance market. The Commonwealth Bank of Australia, NAB, Deutsche Bank, UBS AG Australia branch, and Westpac served as joint lead managers for the issue, which was oversubscribed by more than three times, with more than $22.9 billion in bids from 105 investor institutions across Australia, Asia, Europe, and North America. Around 65 per cent of the bond issue was allocated to Australian investors.
$7 billion
Inaugural green bond issued by the government in June
The green bonds pull more global and domestic green capital into financing the decarbonisation journey for Australia, with money raised from the bond backing sustainable programs like green hydrogen hubs, community batteries, and clean transport, as well as programs to conserve biodiversity, among others.
The green bond, maturing in June 2034, will pay a coupon of 4.25 per cent.
Initial price guidance for the issue was for a spread of -5 to -1 bps to the implied bid yield for the primary 10-year Treasury bond futures contract.
The Australian Office of Financial Management (AOFM) and market participants estimated a ‘greenium’ – the amount by which the yield on a green bond is lower than a comparable conventional bond – of approximately 2 bps. This generally implies investors are willing to pay a small premium for investing money to finance environmental and net-zero transformation projects for Australia.
Speaking at the time, Treasury ministers including Treasurer Jim Chalmers; the Minister for Climate Change and Energy, Chris Bowen MP; and the Minister for the Environment and Water, Tanya Plibersek MP, said that the green bond program “demonstrates the Government’s commitment to achieve net zero emissions by 2050 and the objectives of the United Nations Sustainable Development Goals”.
The inaugural issuance of green Treasury bonds by the AOFM sets a pivotal precedent, with the body announcing at the end of June that around $2 billion of green Treasury bonds will be issued at tenders in 2024–25.
Lenders have also begun focusing on green bonds. Non-bank lender Firstmac has been a pioneer in developing the Australian green bond market and became the first lender to issue a residential mortgage-backed securities transaction that includes home loans written under the rooftop solar proxy accredited under the global Climate Bond Initiative.
The $1.2 billion RMBS issue featured $306 million of green bonds, backed by Australian residential mortgages on homes with solar panels installed.
Speaking in June, Firstmac’s chief financial officer James Austin said the RMBS issue was just the latest in a series of initiatives launched by Firstmac to develop a funding pipeline for green loan products in Australia.
“We are very proud to have once again led the way in developing products that help to reduce Australia’s carbon emissions, after previously issuing green bonds for energy-efficient homes and also pioneering the reporting of greenhouse gas emissions from each vehicle in our auto bond issues,” Austin said.
Borrowers becoming more green
The growing demand for green finance signals a burgeoning market for sustainable investments in Australia. But it’s not just investors who are thinking green, borrowers are, too.
According to the recent People & Planet Report 2024 – authored by Broker Pulse, the lending insights division of Agile Market Intelligence and sponsored by Beyond Bank, P&N Bank, and People First Bank – a lender’s social, community, and environmental stance is important for brokers and their clients.
The report found that values like community and sustainability are gaining traction among borrowers. The consumer survey – fielded by Lightspeed Australia – received a usable sample of over 2,000 responses (including 680 who had an existing home loan).
It found that almost half (46 per cent) of Gen Z home owners highly value their lenders’ commitment to environmental and social programs, indicating that this is an important factor for borrowers when choosing a mortgage lender.
Moreover, more than four in 10 (44 per cent) consumers said they were willing to pay more for products and services that are environmentally sustainable or have a positive social impact and 71 per cent believe companies should focus on reducing their carbon footprint and improving their social impact over profit.
However, the broker survey – which was fielded by the Broker Pulse panel at Agile Market Intelligence – received a usable sample of 477 mortgage and finance brokers and revealed that two-fifths (43 per cent) of brokers had not asked clients about the importance of their values aligning with those of their lender.
Nearly a third (32 per cent) of the brokers surveyed signalled that they had no desire to assess their clients’ values, with older brokers less likely to consider asking these questions in their fact-find compared to younger brokers.
Out of these brokers, 17 per cent said they did not believe they needed to engage in these conversations, while 15 per cent said they had never considered doing so.
Commenting on these trends, Agile Market Intelligence’s commercial director Oliver Stofka says: “The report identifies gaps between the priorities of consumers and mortgage brokers, providing a roadmap for better alignment and education.
“By understanding and bridging these gaps, brokers can better serve their clients and build stronger and longer trust-based relationships.”
