On Thursday, December 4, National Australia Bank launched a climate bond to raise at least AUS$150 million for renewable energy. It is already subscribed at AUS$300 million. The bond is the first example of an Australian bank initiating a green bond on the domestic market.
The bond is certified by the 2011 International Climate Bonds Standards, which assists investors in directing finance towards positive climate outcomes. The bond will invest in 17 wind farms and solar energy assets in Victoria, South Australia, Tasmania, Western Australia, NSW and the ACT. Three of the assets are currently under construction. Together, the investments are expected to avoid almost 4 million tonnes of greenhouse gas emissions, the equivalent of enough power for 730,000 Australian households, for one year. The Clean Energy Finance Corporation (CEFC) made a AUS$75 million cornerstone investment in the bond.
NAB Group Executive for Product and Markets, Antony Cahill said, “This provides investors the opportunity to invest in a bond with the same features of any senior, unsecured NAB bond – but with the additional benefit of being dedicated to financing climate change solutions.”
Green bond issuances are growing across the globe, with over US$18.4 billion being issued in the first half of this year, a 67% increase on last year. Total global green bond issuance for 2014 is expected to reach US$40 billion.
Earlier this year in April, the World Bank, alongside Westpac Institutional Bank, launched a AUD$300 million “Kangaroo Green Bond”, backed by 15 institutional investors, and asset managers, including UniSuper, AMP Capital, QBE, and Aberdeen Asset Management. In this case, investments will be directed to assets in developing economies. The World Bank has now launched over 75 green bonds in 17 currencies across the globe. In November 2014, the Bank released it’s first retail green bond in Belgium. That bond allows individual investors to provide capital to support environmental solutions, through a low-risk investment vehicle. All World Bank bond issues are AAA credit rated.
In October of this year, Australia’s largest diversified property group, Stockland, issued a seven year, EUR300 million green bond. The bond was Australia’s first corporate green bond, and will invest in green star rated retail, residential, commercial, and retirement living assets. The total Australian corporate bond market was estimated to be around AUS$11 billion in 2012.
Clearly, 2014 has been a very active year for green and climate bonds, with a number of firsts hitting the market. What does this indicate? On the one hand, it reflects our increasing global demand for energy. In 2012, it was estimated that the broader energy sector will need investments of around US$26 trillion by 2030. Coal, Australia’s largest energy source, already represents an AUS$118 billion in investment pipelines. On the other hand, as our energy needs grow, so do the costs of climate change. According to HSBC and the World Economic Forum, there is a current funding gap of around US$300 billion required to cover the costs and impacts of climate change.
Green bonds and other impact investments are therefore a welcome addition of finance to the sector. They increase the capital available for meeting our energy needs, as well as reducing environmental impact. They also make strategic business sense. Green bonds and other similar vehicles are a key risk reduction strategy for companies and investors. In the World Economic Forum 2014 Global Risk report, of the top ten risks faced by global business, seven were related to sustainability, including water crises, climate change, extreme weather, governance failures, and food crises. In other words, investors aren’t financing these initiatives because they feel good (though they undoubtedly do), but because it makes strategic sense.