With international governments and business leaders focused on climate change, the financial sector has an important role to play in supporting the transition to a low-carbon economy. One of the ways the capital markets can embrace the challenge is through impact investment, and more specifically, the evolution of the green bond market.

Recent green bond transactions show the sophistication and size of the market is expanding rapidly as issuers tap into the strong appetite investors have for socially responsible assets. Oversubscription levels have been high as investors around the globe look to decarbonise their portfolios.

“The attractiveness and potential of green bonds is really starting to be recognised,” said John Barry, head of capital financing Asia at National Australia Bank, a thought-leader in the impact investment space. “NAB is naturally excited to leverage and extend its position as Australia’s leading financier of renewable energy, arranger of green bonds and securitisation house.”

The latest figures from Bloomberg New Energy Finance (“BNEF”) show $95.1bn of labelled green bonds were issued in 2016, up 100% from 2015 volumes, and bringing the total cumulative issuance of labelled green bonds to more than $215 billion since 2007. Of this 2016 issuance, use of proceeds were split more equally between sectors including 38% to energy, 18% to buildings and industry, 16% to transport, 14% to water, 6% to adaptation, 6% to waste management and 2% to agriculture and forestry according to the Climate Bonds Initiative.

Australia’s Important Role

In Australia, the domestic green bond market has grown from A$600 million issued in 2014, to A$1.2 billion in 2015, and A$905 million in 2016. (The 2016 figures exclude Monash University’s A$218 million green bond, which was sold in the US private placement market.)

NAB has been developing the Australian green bond market since 2011 and became the first bank to issue a Climate Bonds Standard certified green bond globally and the first domestic green bond issuer when it completed a A$300 million bond in December 2014.

Since then NAB has arranged three other landmark deals for clients, including the A$205 million first USPP green bond for refinancing of Hallett Hill 2 windfarm, a world-first Climate Bonds Standard certified securitised green bond for Flexigroup, and a A$300 million Climate Bonds Standard certified green bond for the Treasury Corporation of Victoria (TCV) to be used for financing renewable energy, water treatment, and low carbon buildings and public transport.

Demand/Supply Imbalance

One of the major constraints hindering the development of the green bond market is the lack of supply. Many potential issuers remain hesitant about taking the leap, partly because the traditional bond markets are flush with liquidity, and partly due to the perception that issuing a green bond is time-consuming and costly. David Jenkins, director of investment grade origination at NAB in Sydney, expects more issuers will be drawn to the market as it becomes price competitive.

Click to read the full report (PDF, 187KB). The report was first published on FinanceAsia on 22 March 2017.
Read NAB’s latest insight in capital financing: Capital Financing: 2016 Year in review (PDF, 6.8MB)