March 9, 2018

Building the market: How NAB developed Australia’s first green mortgage-backed bond

NAB has debuted several innovative green and social bonds in recent years. In this article we go behind the scenes to find out how a new, green investment product reaches the market.

NAB recently launched the world’s first mixed green building bond, an AUD2 billion residential mortgage-backed securitisation (RMBS) that includes an AUD300 million green tranche.

“The finance industry has a role to play in building the market for sustainable assets,” said Jacqueline Fox, General Manager, Capital Markets & Advisory. “At NAB we are playing an active role. We’re still in the early days of evolution but we do see this as becoming mainstream in the future.”

The starting point for the bond came more than 18 months ago as our bankers worked on ways to meet growing demand from both domestic and international investors for socially responsible investment (SRI) options, including green bonds.

Increasingly, investors are seeking to incorporate sustainability and Environmental, Social and Governance (ESG) measures into their decision making. By creating new investment products, NAB offers investors greater choice about where they direct their money.

NAB understands that, as a bank, it and the broader financial system has a role to play in the transition to a low-carbon economy. In November 2017, the bank committed to reach AUD55 billion in environmental financing by 2025, including AUD20 billion to support corporate finance.

This follows the 2014 commitment to building the foundations of the impact investing market in Australia and launched the world’s first bank-issued climate bond that financed solar and wind energy generation projects. In 2017, we issued or arranged over AUD2.2 billion in green, sustainability and social impact bonds.

Mike Baird, Chief Customer Officer Corporate & Institutional Banking, said the green Residential Mortgage-Backed Securitisation (RMBS) transaction is another example of how NAB is making sustainable investments more accessible.

“We are thinking outside the box when it comes to helping our customers back sustainable assets and act on environmental issues that are important to them, and to Australian communities,” Mr Baird said.

Assets to support new SRI supply

NAB has spent significant time assessing its asset pool through the ESG lens to identify a broad range of assets that can support SRI supply.  NAB-originated residential mortgages secured by low carbon buildings were recognised as a ready pool of assets that can form the base of new supply for the investor community.

“There is a desire to build more low carbon and energy efficient housing, which helps the transition towards a low carbon economy. There is also a growing demand for socially responsible investing.  The big question is how do you enable access to that, and how do lenders capture the information needed to support the green issuance? At NAB, we see our role as the intermediary that consolidates that knowledge,” Ms Fox said.

The next step was to work within the Climate Bonds Standard certification requirements developed by the not-for-profit London-based Climate Bonds Initiative. NAB developed a framework under which Australian green RMBS could be issued that would give investors confidence the green tranche would be truly green.

Climate Bonds Standard certification

The CBI explains on its web site that the certification scheme is a Fair Trade-like labelling scheme for bonds. It is used globally by investors, bond issuers, governments and financial markets to give priority to investments that genuinely help to address climate change.

The Climate Bonds Standard certification criteria for Australian low carbon residential buildings, published in July 2017, leverages building codes and minimum energy ratings/certification scheme requirements across various states as a proxy for the carbon emissions performance of the top 15% of residential buildings in each local market.  Only new residential housing in Tasmania, Victoria and NSW were deemed stringent enough, at this point in time, to meet the certification requirements.

The AUD300 million green RMBS is earmarked to finance NAB-originated mortgages for Australian residential properties that meet the criteria.

It’s the first Australian RMBS to meet the Climate Bonds Standard criteria. It is also the world’s first RMBS with an underlying pool of both non-green and green residential mortgage securities.

Strong demand

NAB’s green RMBS attracted socially responsible funds and more mainstream investors from Australia and overseas and was close to two times oversubscribed. Reflecting the strong demand, the green tranche was upsized from an originally planned AUD112.5 million.

Australia’s Clean Energy Finance Corporation made an AUD25 million cornerstone investment in the green tranche and described the transaction as “a big leap forward” for the Australian green bond market.

European investors have generally been ahead of other markets in wanting to see their money allocated on responsible investment principles with the Global Sustainable Investment Alliance finding that Europe sits at 53% of total assets under professional management.

Asia has also increased active engagement via government pension and sovereign wealth funds by integrating ESG principles in their investment process.  With Asia’s current ESG assets accounting for 2.2% of the US$23 trillion ESG assets managed globally, this is likely to significantly increase over time.

More Australian superannuation funds and other large investors are incorporating  ESG criteria into their decision making.

“As demand grows, the feedback that keeps coming through from the investor community is the question of whether supply will meet demand,” Ms Fox said. “We want to ensure we are innovating on the product side to ensure we can continue to supply product to investors.”

Read more about the Capital Relief National RMBS Trust 2018-1 here.