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Ethical Fixed Income in Australia

In recent years, there has been a clear global focus of Environmental, Social and Governance (ESG) standards. As a result, companies have become more ethically conscious and developed new initiatives to demonstrate this behaviour to investors. One such initiative has been the rapid rise of the Green Bond market which is estimated to be ~US$150 billion. These instruments are like any other regular bond but the proceeds are typically earmarked towards environmentally friendly projects.

The Climate Bonds Initiative is an international not-for-profit which promotes the development of climate bonds, tracks the green bond market and certifies fixed income instruments as Climate Change Bonds. Under the organisation’s methodology, a green bond does not always constitute a Climate Change bond and will depend on the underlying funding program.

Figure 1. Historical Green Bond Issuance

Green

Source: Climate Bond Initiative

While a number of development banks have issued green bonds in Australia dollars (including the World Bank and European Investment Bank), in 2014 National Australia Bank (ASX: NAB) was the first Australian entity to issue green bonds. Since then the other major banks have followed suit. Interestingly, FlexiGroup (ASX: FXL) launched the world’s first green securitisation transaction (under Climate Bond Certification) where payments are linked to solar receivables and renewable energy assets.

More recently, Victoria became the first Australia government to issue green bonds raising $300 million to fund investments in energy efficiency, renewable energy generation, low carbon public transport and water treatment. The securities were issued by the Treasury Corporation of Victoria (TCV) and received international Climate Bond Certification. Queensland followed suit in March 2017 issuing its own green bond of $750 million.

Table 1. Green Bonds issued by Australia Entities with Climate Bond Certification

Issuer Issued Size
National Australia Bank December 2014 $300 million
ANZ Bank June 2015 $600 million
FlexiGroup April 2016 $50 million
Westpac Banking Corp June 2016 $500 million
Victorian Government July 2016 $300 million
Monash University December 2016 $218 million
FlexiGroup February 2017 $50 million
Queensland Government March 2017 $750 million
Commonwealth Bank March 2017 $300 million

Source: Climate Bond Initiative

To further promote ESG standards, last month NAB issued the world’s first Social Bond to specifically endorse gender equality raising $500 million. The proceeds of the issuance will finance or re-finance organisations that are funded by NAB, cited by The Workplace Gender Equality Agency (WGEA) as an Employer of Choice for Gender Equality and whose primary activities don’t involve negative social activates (i.e. alcohol, gambling, fossil fuels etc.).

Figure 2. NAB’s Gender Equality Bond

Gender Equality

Source: NAB

Overall, these types of instruments are growing in popularity and we expect issuance will increase. Investors are more socially and environmentally aware and issuers who do not comply with these trends will tarnish their reputation. This was evident only a few weeks ago when AMP announced it would sell $570 million worth of tobacco and weapon manufacturing-related stock and bond holdings under its revised Environmental, Social and Governance (ESG) program and Responsible Investment Philosophy. We expect more innovative ethical investments will be created in coming years as demonstrated by NAB’s social equality bond which will ultimately support sustainable solutions of Australia’s future.