Based on the Clean Energy Finance Corporation (CEFC) research, the global green bond market is growing at a rapid pace across the world. This market trebled in 2014 after issuing nearly $50 billion. It was expected to be more than double with estimates of over $100 billion in green bonds issued in 2015. The World Bank Kangaroo Green Bond of size $300 million was the first Australian dollar-denominated green bond on the Australian market. National Australia Bank’s came next with $300 million Climate Bond for wind and solar issued in late 2014, which was followed by $600 million Kangaroo Green Bond issued, by German development bank, KFW, in 2015. The biggest issuance by an Australian-based issuer has been the recent ANZ Green Bond. The issue was closed over-subscribed at $600m. This is one of the largest green bond issuances of any commercial bank in the world for 2015. As per Bloomberg New Energy Finance report, first quarter of 2016 was to be witnessed as a near-record quarter for green bond issuance with a total of $15 billion in new green bonds across the world.
Green bond market overview in Australia_2015 (Source: CEFC)
The Australian market was seen earlier to lag behind the global green bond market, but the scene is changing now. There is a huge potential for growth in this market over the coming decade. The growing Australian green bond market would be key to unlocking new sources of capital and expanding the investor base for this sector, which would be critical to provide the economy with the required levels of renewable energy to underpin Australia’s continued economic growth.
We noted recently that Victoria’s state labor government has become the first government in Australia to issue Green Bonds. They raised $300 million to finance a range of new and existing low-carbon projects that deliver environmental benefits. Treasury Corporation of Victoria (TCV) issued the Victorian Green Bonds. They are also reported to be the first state or federal government-issued bonds to receive international Climate Bond Certification across the globe. The triple-A rated bond was fully subscribed in a little over 24 hours post the launch. The issue was supported by insurance companies, funds management and investors with a specific green or socially responsible investment (SRI) mandate. The Green Bonds proceeds would go in financing and refinancing State investments in energy efficiency, renewable energy generation, and low carbon public transport and water treatment. Victoria, recently has set a goal to boost the share of renewables in its power mix to 25% by 2020 and 40% by 2025.
Five factors that seem to take green bond market ahead in Australia are outlined below:
Demand from renewable energy plants: In June 2015, it was estimated that more than 30 new renewable energy plants would begin operating across Australia within the next five years. These are attracting finance from green bond issues. Analysis by the Clean Energy Finance Corporation (CEFC) shows that the Australian green bond market doubled in size in the first half of 2015. By the end of the year, it was said to pass $2 billion in cumulative issuances.
Better success rate: The investors are now getting attracted to ‘green’ investment products, and the success of the recent green bond issuances suggests for more buyers if the products can be delivered.
CEFC efforts: The CEFC has been active in driving the establishment of Australia’s green bond market, as part of their role in helping expand and deepen the private sector clean energy investor market in Australia. CEFC has invested $20 million in the first certified green bond transaction of its type in the Australian market that is linked to solar PV and renewable energy assets. This is relating to Flexi Group Limited (ASX: FXL), which was the first company from Australia to issue a certified green Asset Backed Security (ABS) of AUD 50 million (USD 39 million) of Class A2-G Notes. Class A2- G notes were a part of an AUD 260 million asset-backed securitization (ABS) transaction. The company intends to use the funds from the green ABS issue to refinance residential solar photovoltaic (PV) systems. The notes are priced at 150 bps over BBSW. The CBI pointed that the CGN closed 5 basis points (bps) lower than the non-green noted when FlexiGroup’s green ABS were launched. The potential for green ABS is enormous in Australia because the rooftop solar segment is flourishing. The issue can also be viewed as an instrument of bringing rooftop solar into mainstream bond market in Australia for the first time as well as a source of cheaper finance for this for renewable energy technologies. By gaining Climate Bonds Certification from London Climate Bonds Standard Board, FlexiGroup has assured investors of the green credentials of this bond and set a best practice example for future domestic issuer. National Australian Bank (ASX: NAB) was noted to act as arranger and green bond structuring agent for FlexiGroup’s Green ABS issue.
Compliance standards: Australian dollar-denominated green bonds issued by Australian banks have been compliant with the Climate Bond Initiative Standard. Under that Standard, bonds are certified to verify that the proceeds which would be used in projects that meet certain criteria, are developed by scientists and industry experts. That is how the issuers are building investor confidence in green bonds.
Balancing risk: Green bonds allow investors to balance their risk across a large number of projects, and maintain greater liquidity that may not be possible through direct infrastructure investments. Institutional investors have started backing green bonds because of focus on areas viewed as increasingly important to their clients.
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