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The Australian Sovereign Green Bond program – what to expect

We have seen a steady stream of Green Bonds come to market in the Australian corporate and semi government space, but issuance has so far been lacking in the sovereign sector.

This is set to change in mid-2024, with Treasurer Jim Chalmers recently announcing the Government’s plan to establish a Green Bond program to help accelerate Australia’s transition to Net Zero. Institutional investment will play a key role in Australia’s pursuit of Net Zero, and it is paramount that the sustainable finance market is credible. 

Capital raised from Green Bond sales are allocated towards achieving environmental goals or to help fund climate-related projects. The AOFM has stated that the Australian Green Bond program framework will detail the categories of projects that will be funded, process for selecting projects, management of proceeds and ongoing reporting requirements. The program will also see an additional $4.3 million allocated to ASIC, enabling the expansion of its surveillance and enforcement capabilities in combating greenwashing practices by businesses. The proceeds from the sale of these new Green Bonds may also be used to co-fund projects with State Governments. Reporting will be a key focus for investors when assessing the program, with the Government initiating the development of a climate reporting framework designed for Commonwealth budgeting purposes.

Australia has some environmental perception issues among global investors, owing to the scale of the domestic mining and energy industries and the historic government support offered to these sectors. Along with the high proportion of coal in power generation, there has been a slow adoption of green technologies such as electric vehicles. The announcement of the Green Bond program could therefore be perceived as having political motivations, acting as a tool to improve the optics surrounding the climate story of Australia. This credibility issue may have an impact on investor confidence, exemplified by the current lack of a national sustainable finance taxonomy. Despite this, we believe the government has set a clear direction on the policy level and view the initiative as an encouraging step.

Inaugural Green Bonds are expected to be similarly priced to new vanilla Australian Commonwealth Government Bonds, although liquidity in secondary markets could be limited as ESG-focused investors are viewed as likely to adopt a buy-and-hold approach, as they have in other markets to date. 

In preparing to launch the program it will be key for the Government to consult with various market participants and look at other successful issuance stories in this space, taking into account international Green Bond standards. At a state level, the jewel in the crown of the fixed rate issues was Western Australian Treasury Corporation’s $1.9 billion, 10-year Green Bond, launched in June 2023. These securities were attractively priced from the outset, ensuring they would likely perform well in the secondary market. The issuance was also a seminal moment for a State that is so heavily involved in the mining industry and which was able to sell its Net Zero transition story so effectively. The bond sale was heavily oversubscribed, reaching $6 billion in bids from over 60 investors, indicating a high level of confidence in the outcomes promised. The New Zealand Government introduced its Sovereign Green Bond program in November 2022; another quality example of how this source of sustainable financing can be implemented on a national level. Demand for the NZ$3 billion sale was more than two and a half times oversubscribed and the securities have fared well since being issued.

The Green Bond market in Australia is structurally undersupplied, so it will be interesting to see how the introduction of sovereign securities into the mix plays out. We expect offshore participants to be the marginal players, as they have a choice whether to invest in Australia. The political uncertainty surrounding changing governments with conflicting views on climate change could influence domestic involvement in the program. 

The Australian Fixed Income team at First Sentier Investors will continue to focus on ESG considerations at an issuer level, and pay close attention to the relative value of the securities in order to determine if we participate in the planned issuance on behalf of our clients.

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