Next steps in Australian market development

Market participants agree that global sustainable-finance markets need exponential growth if they are to achieve ambitious – but critical – environmental goals. Australia is facing the same race against time.

CRAIG How do market participants see the Australian sustainable-finance market evolving over the next 3-5 years? In particular, do they think we will have seen issuance of transition bonds?

BYRNE I think so. At that point Europe will be at the tipping point that Gavin Chappell spoke about, where capital allocation costs have changed for lenders in the space because the lower risk of companies taking environmental, social and governance concerns seriously has been proven.

I think there will have been transition bonds in Australia as well, given the transition that needs to occur in Australia and the potential benefit these instruments could bring.

MCNAMARA It is a challenge in Australia. The bond market here is fickle at best. For many years people have talked about a vanilla corporate bond market but it has never really developed other than for a handful of top-tier corporates. I’m not sure whether there are enough investors locally that are willing to support the development of a broader bond market, including investing in transition bonds.

Australia has a bank-dominated debt capital market and the banks can drive the transition to a sustainability-linked loan (SLL)-type format. If banks were to receive beneficial capital treatment for participating in SLLs, it would drive the price lower. This would likely make them less attractive for other, nonbank, investors.

BYRNE If Australian companies are able to issue transition bonds overseas it would be a source of differentiation and a competitive advantage for those markets. Australian investors would be at a disadvantage.

CRAIG Is there any hope of getting political support for this market evolution in Australia?

WARD I think the market is moving on from the need for climate legislation and, with groups like the Australian Sustainable Finance Initiative (ASFI), the action is happening anyway.

What I would like to see in the next few years is a revisit of the Corporations Act and directors’ duties. We should encourage boards to move away from short-term shareholder-return targets and open up the directors’ duty space to incorporate sustainability requirements.

TONKIN I agree with this. The focus of groups like ASFI is to get investors, insurers, banks and corporates on a roadmap that is building a more sustainable and more profitable future for everyone. We need to look at how we work with policymakers and regulators to achieve these goals.