The Point

Sustainable fixed interest: How to weigh up WA’s new green bond

Australians invest some $25 billion a year in local green, climate and social impact bonds, according to the Responsible Investment Association’s latest benchmark report.

But only some meet the highest standards of sustainable investors. And it’s not always obvious which ones.

Consider these three examples of recent issuers:

You may be surprised to learn that only the WA bond – announced last week – met with the approval of Pendal’s income and fixed interest team, including ESG credit analyst Murray Ackman.

WA’s green bond “reflects the focus of the government to green up their economy and their energy use,” says Murray.

How to evaluate Australia’s first sovereign green bond

The federal government last month announced plans for its first ever green bond in 2024.

The bond will offer a return while funding projects – such as hydrogen, batteries and biodiversity – that support a transition to net-zero carbon emissions.

What should investors make of it?

“We’re excited to see the government show interest in green bonds,” says Murray Ackman, credit ESG analyst in our income and fixed interest team.

“But not all green bonds are equal.”

Murray has four main questions that investors should ask when considering the government’s plans:

How investors will be affected by changes to a major Australian climate policy

The Albanese government’s plan to revamp a Coalition emissions reduction mechanism raise a number of issues for sustainable investors – and the economy.

To help achieve its climate targets, the government plans to revamp a Tony Abbott-era policy known as the “Safeguard Mechanism“.

The policy was designed to reduce carbon emissions by regulating the amount of greenhouse gases that big industrial facilities could emit.

But baselines were too high and the policy generally was not enforced, say critics.

From July, the Albanese government wants to strengthen the mechanism in a number of ways, including a 4.9 per cent annual cut on allowable emissions for the biggest emitters.

The changes could create winners and losers in investment markets, says Pendal credit ESG analyst Murray Ackman.

But the mechanism still has serious challenges.

It uses offsets which can sometimes be questionable, allows new fossil fuel projects and is susceptible to cost-of-living pressures.