Murray Ackman: Why we bought Australia’s first Commonwealth green bond

Australia has joined other sovereign nations in issuing an inaugural Commonwealth green bond. Senior ESG and impact analyst MURRAY ACKMAN explains what it is and why Pendal invested in it

• Australia has joined 30 other sovereign issuers by issuing its own green bond
• Investors willing to pay a premium for the bond, market oversubscribed
• Why bonds, why now? Pendal’s income and fixed interest experts explain
• Browse Pendal’s fixed interest funds

THE Commonwealth Government just issued its first green bond.

It has a June 2034 maturity with $7 billion issued.

The Green Treasury Bond also came with a “greenium” (meaning investors were willing to pay a premium to hold it) of around two basis points, which is roughly consistent with global peers.

Green bonds are meant to finance solutions for climate change and environmental challenges, but not all bonds are equal.

At Pendal — and at our specialist sustainable investing business Regnan — we’ve seen quite a few green-labelled bonds that don’t have any meaningful impact. Some are simply doing business as usual.

For governments, this is a particular risk.

At Pendal we are not interested in green bonds made up of already-completed projects that they were going to work on anyway, such as public transport or other infrastructure projects.

But we were very active in buying this bond – mainly across our sustainable funds, through which investors expect the majority of bonds to finance specific projects in the environmental or social space.

How did we judge this new bond? We asked a few questions:

• Does this green bond fund new things?

We want the first Commonwealth green bond to support new projects.

This is known as additionality – that is, funding something that would not have been funded but for this green bond.

Half the proceeds will go towards existing commitments and half will go towards new commitments.

In our view, this is quite reasonable and is better than some other green bonds from governments.

Ideally, we would like to see completely new projects, but we recognise that there are complications in doing this for a first issuance.

• Does it fund revolutionary projects?

Government has a different risk profile to the private sector and that gives it an opportunity to fund catalytic change — things that lead to a step change.

The list of projects funded include some that will help with the transition to a low-carbon economy – with the focus on renewable energy, clean transport, climate change adaptation, and a circular economy.

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Electricity generation is the biggest source of emissions in Australia, so upgrading the grid to allow greater renewable energy connectivity will be essential in reducing emissions.

Electrification using renewable energy will significantly reduce emissions. The green bond includes investments in modernising the electricity grid and developing new transmission infrastructure through concessional financing.

This bond also funds projects that relate to this – from community batteries and electric vehicle charging infrastructure to loans for energy-saving home upgrades.

However, there are some sectors that cannot easily switch to electricity – for instance, industrial activity, which requires certain inputs for chemical reactions.

Taking a page from Joe Biden’s Inflation Reduction Act, which has made hydrogen use and production more viable, this bond will also help fund the development of regional hydrogen hubs.

We would like to see more catalytic change, but for the very first Commonwealth Green Bond, we are pleased with the scope of projects.

• Is clear reporting available?

The Commonwealth’s commitment is to distribute an annual impact report no later than 18 months after first issuance.

This will be reporting at a portfolio level rather than each bond line, which is fairly typical.

The government has also made the commitment to have independent verification of allocation and impact reporting.

This will assist in establishing annual reporting with independent verification as industry standard.

We are hopeful that this bond will demonstrate what the minimum requirements are for clear and transparent reporting for green bonds in Australia.

What else do we know about this bond?

A green bond should be a reflection of an issuer’s philosophy — not an apology for their actions.

Prior to issuing, the government announced funding to progress leadership on climate action in Government operations, which includes financing to support all Commonwealth entities in publicly reporting on their climate risks, opportunities and management.

This bond is consistent with recent government action to respond to climate change as well as engage in environmental repair through this bond.

The government has put in a lot of effort to make sure it got its inaugural green bond right.

The market has agreed, being nearly three times oversubscribed.

We anticipate that there will not be a new green bond for at least a year or two, so we believe it should perform well in the secondary market.

It provides integrity to the Australian green bond market and will provide a clear example of expectations for the market in future.