The Point

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.

How to use ESG to assess state government bonds

If you’re investing in state government bonds, you’re probably not too worried about default.

But you might be concerned about a potential credit downgrade – which could result in lower demand for a bond and a drop in its value.

Pendal’s income and fixed interest team has a tool to assess the ESG credentials of state governments – which can highlight credit risks that might lead to ratings downgrades.

The index shows how each state is addressing the UN’s Sustainable Development Goals – a list of the world’s biggest problems.

The ACT, Tasmania and SA lead the index, while WA, Queensland and the NT lag, says Pendal ESG credit analyst Murray Ackman.

“People always talk about default,” says Murray. “But that’s not all we’re looking at.

“There would have to be something catastrophic for a state government not being able to service its debt.

“What does have an impact on your investment is credit downgrades.”

What Sun Cable’s collapse means for renewable investing

What does the collapse of the ambitious Sun Cable solar project say about investing in renewables?

Backed by Atlassian’s Mike Cannon-Brookes and Fortescue’s Andrew Forrest, Sun Cable had grand plans to supply electricity to Singapore from a vast solar array in the Northern Territory.

But the pair disagreed over the method of export – undersea cable versus green hydrogen and ammonia – and the venture is now in voluntary administration.

“The main takeaway is that Sun Cable collapsed over a dispute about exporting – not over the idea of a huge solar array in the NT,” says Pendal ESG credit analyst Murray Ackman.

But it raises questions about a potential Australian energy export industry and the role of green hydrogen.

“Historically, governments and private entrepreneurs are typically best placed to carry the risk of these types of early-stage innovations,” he says.

“For most investors, it’s too early to be going all in on hydrogen.”

Why self storage could be a good place to stash some cash

“The world of self-storage is not something you often hear about, but it’s an asset class we like,” says Pendal PM Julia Forrest, who co-manages property investing in Pendal’s Aussie equities team.

Record high immigration and a downsizing trend towards apartment-living should fuel ongoing strength in the self-storage industry, says Julia.

“Self-storage space in Australia represents 2.1 square feet per capita. In the US, it’s closer to 6.1 square feet per capita.

“So, in terms of available space, Australia is relatively under-serviced. There is a bit of a runway to catch up.”

Julia points to the example of ASX-listed National Storage REIT – her biggest active position in Pendal’s property strategy.

National Storage (ASX: NSR) is Australia’s biggest self-storage owner-operator with 230 centres across Australia and New Zealand.

Julia Forrest: Retail and industrial lead the way in A-REIT sector

A surprising rebound for shopping malls was the standout feature of this year’s real estate investment trust reporting season, says Pendal’s Julia Forrest.

Rising interest rates and the expiration of interest hedges meant earnings declined for many Australian REITs, surprising investors in a sector where performance is typically well-flagged.

“But the positive surprise was in shopping malls where operating metrics improved,” says Julia who co-manages Pendal’s property trust portfolios.

“Occupancy is pushing towards completely occupied – that’s a long way from where we were two or three years ago.

“There’s genuine demand by tenants for more – and better – space and there’s been no supply for four or five years so you’re seeing competitive tension between tenants.”

A rising population and wages growth has sent retail sales 15 per cent above 2019 levels.

Office property opportunities can still be found as work-from-home tensions play out

Office space is on the mind of many businesses as WFH tension between workers and bosses plays out.

The market is continuing to evolve, providing plenty of challenges – along with some opportunities, says Julia Forrest, co-manager of Pendal’s property portfolios.

“It’s been very hard to get people back into the office,” Julia says. “And it seems to be more difficult in Melbourne than anywhere else.”

“Physical occupancy in Melbourne is running at about 47 per cent, but recently there’s been some big employers mandating staff to be back in the office 50 per cent of the time,” she says. “That will help.

“Physical occupancy is still low in government because staff have only been mandated to come back to the office one in every five days.”

There are still opportunities in commercial property, though.

Julia points to newly developed 555 Collins Street in Melbourne. It has a good range of tenants including Amazon, will open close to fully tenanted and the construction contract was well negotiated.