Debt markets take the climate-change initiative
The race to save the planet is real. The science is grim – some say it is already too late to save our species. However, the fact that the transition to a low-carbon economy is as much an economic issue as an environmental one gives debt-market participants reason to be optimistic.
Sean Kidney, London-based chief executive office of Climate Bonds Initiative (CBI), reveals: “On the current trajectory, climate scientists expect the global temperature to rise by 4-6 degrees Celsius by the end of the century, sea level to rise by 4-6 metres and the World Health Organisation predicts a major spread of pandemics to the extent that one- to two-thirds of the global population could be gone by 2100."
Kidney, who was in Sydney, Melbourne and Auckland in August to launch CBI’s green infrastructure investment opportunities (GIIO) Australia and New Zealand report, with KangaNews as sole media partner, says on the current trajectory numerous major cities around the world will be underwater by as early as 2050. “In this scenario, the poor will flee disaster – unless there is a social and economic plan to support them to stay.”
However, Kidney also insists this is the current trajectory but not necessarily the worst-case scenario. According to the GIIO report, about 70 per cent of global greenhouse-gas emissions come from infrastructure construction and operations such as power plants, buildings, and transport. Therefore, it is possible to overcome this global challenge and meet the goals of the Paris Agreement by investing US$100 trillion in “climate-compatible infrastructure development…between 2016 and 2030”.
“I am optimistic about the outcome because we have the money,” Kidney told delegates. “There is more investable capital sloshing around the system now than there has been in the history of the human planet. Japanese and German government bonds pay yields of zero and less. This is our opportunity to take vast slabs of transactions to institutional investors who need to find yield – particularly long-term yield, and investors will participate provided the transactions are priced for appropriate risk.”
In Australia and New Zealand, the CBI hopes to connect the green investments – including in dedicated green financial products including green bonds, green loans, and social and sustainable bonds – identified in the GIIO report with the investment potential, as well as to support both countries in their transition to a low-carbon economy.
In order to make the economic transition to a low-carbon economy, encouraging green infrastructure investment at a greater scale is as crucial as the need to address challenges including congestion, decarbonisation and overall climate adaptation.
According to CBI’s GIIO report, Australia and New Zealand have the potential to be regional leaders in green infrastructure delivery. Both countries have the capacity and economic conditions to develop a medium-term sequential pipeline of green investment opportunities. In addition, both countries’ financial sectors are well positioned to develop and export green-finance expertise.
Australia and New Zealand are ripe to drive forward the green infrastructure pipeline because, as the report notes “although both nations have traditionally relied heavily on high-emission, fossil fuel-powered transport – there is an increasing focus on low-carbon public transport and freight rail. There is a boom in building small- to large-scale renewable-energy capacity. Green building certifications have grown significantly, and ‘resilient’ buildings are becoming mainstream.”
The GIIO report identifies more than 400 projects and assets that qualify for green refinancing, additional or new financing, according to the climate-bonds taxonomy. The taxonomy is a standard and certification scheme that references eight climate-aligned sectors – energy, transport, water, buildings, land use and marine resources, industry, waste, and information and communications technology – with the purpose of encouraging common broad ‘green’ definitions to support the growth of a cohesive market.
According to Kristiane Davidson, a Paris-based CBI consultant and lead author of the GIIO report, of all the sectors the report identifies the greatest dollar value is attached to the low-carbon transport investment opportunity. “In New Zealand, 60 per cent of the government infrastructure pipeline is transport-related, and 50 per cent of this is what the CBI considers to be low-carbon, based on the CBI taxonomy,” Davidson says.
She also highlights that Australia is leading the world in green buildings. “There are 1,986 green-star rated projects in Australia, which are mostly commercial. This number does not include residential buildings. So there are significantly more opportunities in the pipeline.”
Several other assets in the GIIO report are also suitable for infrastructure investment, including Melbourne Metro Rail and Auckland’s electric trains, Davidson continues. The latter are “already partially financed through green bonds…” she says, adding that “...another interesting development is the extent to which New Zealand is also moving to electrification of waste and postal vehicles.
"We produce an integrated report in which we disclose our progress against the TCFD. I cannot emphasise enough how important disclosure is to help make informed investment decisions. We recently put in place our first fund-manager mandate with a requirement to report against the TCFD."
According to Kidney, Australia also has a reasonable assets portfolio with a “strong rail network, water utilities that are world class in terms of dealing with adaptation and energy management, and a reasonable clean-energy pipeline”.
The Queensland government which, via Queensland Treasury Corporation (QTC), issued a A$750 million (US$538.1 million) debut green bond in March 2017, owns several assets of these types. Tessa Dann, Brisbane-based associate, funding at QTC, states that at that time the issuer had identified a circa A$1 billion pool of qualifying assets. Little more than a year later, QTC has more than quadrupled the size of its pool to around A$4.6 billion. It already includes the majority of Queensland’s low-carbon transport fleet and QTC’s focus now is to add diversity to the pool.
“We have noted from conversations with investors that diversity in the types of assets is something they are looking for,” Dann told delegates at the Sydney event. “Aside from renewable energy, which is a key part of the Queensland government’s broader ambitions – it has a 50 per cent renewable-energy target by 2030 – we are looking very closely at the state’s water infrastructure. We have just under A$82 billion in loans to clients and just under A$14 billion of this is lent to our water entities and water boards. This is a huge opportunity to include some of our water assets.”
According to Katherine Palmer, Sydney-based senior manager, funding and balance sheet at New South Wales (NSW) Treasury Corporation (TCorp), NSW is currently embarking on record levels of infrastructure investment, which is more than any other state in Australia. “It is a significant amount,” she told the Sydney gathering. “Over the next four years we anticipate A$87 billion will be spent on infrastructure – A$51 billion of this will be on rail and road projects. Typically, rail works well in a sustainability bond portfolio that showcases green investments.”
The NSW government highlighted the intention for TCorp to issue its debut sustainability bond in the NSW 2018 budget, with launch pencilled in for before the end of the 2018/19 fiscal year. Palmer says the state-treasury corporation is thinking innovatively about the way the assets the state has can be used to back the bonds.
“A number of the projects the state undertakes have interesting sustainability initiatives, such as Sydney Metro Northwest which will fully offset operational electricity with renewable energy,” Palmer says. “Investors in a bond that might include this type of asset, or investors in general state bonds, are already supporting such participation in this ideal policy framework.”
“Aside from renewable energy, which is a key part of the Queensland government’s broader ambitions, we are looking very closely at the state’s water infrastructure. We have just under A$82 billion in loans to clients and just under A$14 billion of this is lent to our water entities and water boards. This is a huge opportunity to include some of our water assets.”
Wall of cash
Data from the latest responsible investment benchmark report, published by the Responsible Investment Association Australasia in August, reveal that 55 per cent, or A$866 billion, of the A$1.56 trillion total assets professionally managed in Australia in 2017, were managed using a responsible-investment approach. This is more than in 2016, when it was 44 per cent, and more than double the 25 per cent figure globally.
CBI’s report argues that since the signing of the Paris Agreement in 2016, institutional investors are increasingly demanding investment opportunities that align with the Paris two-degree goal, address environmental challenges and support sustainable development.
“There is no real bottom to green demand”, Kidney adds. “It is really a matter of getting product in front of investors. Internationally, many investors are saying they would like to ‘green’ their entire portfolio – subject to risk and yield. The leaders are already hedging their risk and positioning for value by heading in this direction.”
A survey of Australian institutional investors released by the Investor Group on Climate Change (IGCC) in August, also found that local investor appetite for low-carbon and green-investment opportunities is strong.
Jeff Grow, senior portfolio manager at UBS Asset Management in Sydney, says all other things being equal his mandate drives him to prefer green to non-green bonds.
However, he adds that his fiduciary duty is to outperform the benchmarks his clients give him within set parameters. “When I have reached this point, I can do good. So if an issuer has green and vanilla bonds outstanding with the same return and the same credit risk, I will buy the green,” Grow says.
Emma Herd, chief executive officer at IGCC in Sydney, also notes the extent to which investor conversations are far wider than the ‘greenness’ of specific transactions – with this data coming through clearly in its recent survey.
“Whereas previously investors were seeking very dark-green opportunities, increasingly what they are looking for now is focused on the decarbonisation of their portfolios and investment opportunities that help them achieve this. They are also looking for investments which help demonstrate their Task Force for Climate-Related Financial Disclosures [TCFD] reporting to their members to show they actively support the low-carbon transition.”
Cbus Super (Cbus) has imposed similar processes on the asset managers it uses. “We lead by example,” says Nicole Bradford, portfolio head, responsible investments at Cbus in Melbourne. “We produce an integrated report in which we disclose our progress against the TCFD. I cannot emphasise enough how important disclosure is to help make informed investment decisions. We recently put in place our first fund-manager mandate with a requirement to report against the TCFD.”
Pablo Berrutti, head of responsible investment, Asia Pacific, at Colonial First State Global Asset Management (CFSGAM) in Sydney, says ESG factors form part of an internal credit rating CSFGAM assigns to all its investments. These internal ratings are entirely independent of any rating assigned by an external credit-rating agency.
“We have been tracking the relationship between the internal rating we give the bonds and that assigned by the rating agencies,” Berrutti explains. “We have found that bonds we have rated lower than the rating agency – and for which we therefore demand a higher rate of return – are generally ones that have high or very high ESG risk, and vice versa.”
Conversations that include sustainability considerations take on a new level of discussion, issuers insist.
Dann explains that subsequent to pricing its inaugural green bond, QTC amended its approach such that it can issue green bonds in line with the International Capital Market Association’s Green Bond Principles as well as the CBI standards.
“Our inaugural green bond sparked discussion within government,” Dann says. “Whereas before we were trying to find projects, we were suddenly in a position where clients were coming to us to suggest financing specific assets with green bonds. Some of the projects did not fit within CBI certification criteria – so the change to our approach is really about positioning for the future.”
She continues: “Instead of being reactive, we try to be proactive. We want to make sure that in the future we have the ability to fund new and innovative projects as they arise with green bonds.”