As founder and CEO of the Climate Bonds Initiative, Professor Sean Kidney has been helping develop the global market for sustainable finance through science-based certification and advocacy since 2009.

But it’s the opportunities for issuers and investors unlocked by the energy transition today which excite him most as the global $US4 trillion plus market[i] continues to evolve at pace ahead of 2030 targets.

“Among the major investors globally there is certainty now the future’s green,” Kidney says. “This future has been decided; the question now is the speed of transition and who’s going to be a winner.

“It’s like an arms race in a certain direction going on in the global economy. The difference is we’ll be building what we need to have for a better society.”

London-based Kidney was in Australia recently to meet with issuers, investors and transition specialists in the public and private sectors. He says while risk is still a factor driving activity, it’s the opportunities in the new economy that business needs to grasp.

Kidney cites the transition commodities boom as one sector where this is playing out now, plus the increased investments in energy, transport, land use and agriculture, with similar changes eventually rolling out across the entire economy.

“I used to talk about the freight train coming as climate change,” he says. “Now, it’s global economic transition, driven by policy with the 2030 commitments. The question for companies is: OK, it’s happening, it’s underway, it’s speeding up. If the world’s going to be different in five years’ time how do we continue to prosper?”

Planning for change

To this end, Kidney says corporates and institutions need to understand, develop and implement transition plans as part of their strategies to cope with both a future of potential widespread economic disruption and the increased physical effects of climate change on operations, supply chains and markets.

Transition plans detail how an organisation is setting, managing and financing its climate goals in the shift to a low greenhouse gas (GHG) emissions economy. They are increasingly being used by banks, investors, policymakers, regulators and other stakeholders to help inform decisions around climate and transition risk across the value chain.

“Between now and the end of 2025 I’m saying everyone’s got to start doing a transition plan,” Kidney says. “It doesn’t have to be perfect, and it will take longer to get the details – but this doesn’t matter. You need a team internally that’s looking at this and starting to put out guidelines on what to do and what to focus on. Plan to take advantage now – figure out your strategy, get the data, understand what’s going on and start getting ready.”

Along with the work Kidney’s Climate Bonds Initiative (CBI) is doing, guidance on transition planning is being developed by international organisations including the Glasgow Financial Alliance for Net Zero (GFANZ), the International Sustainability Standards Board (ISSB) and the UK’s Transition Plan Taskforce (TPT). The frameworks generally involve demonstrating such principles as ambition, action and accountability for the road ahead.

Investor demand

With the pace of change involved in meeting today’s near-term targets, Kidney says issuing green bonds is becoming a proxy for a company that is taking action in reducing their transition risk, which means they are getting more attention from investors.

“In Sweden for instance, institutional investors tell me if someone issues a bond, and they haven’t issued a green bond, the standard question is whether there’s a problem they need to know about. That signalling aspect is actually pretty important.”

A move towards more mandatory climate-related disclosures across a number of jurisdictions, including in Australia and already present in New Zealand and Europe, is a definite regulatory trend to watch too, Kidney says.

However, he doesn’t see this as a real driver of action over the increased investor appetite for sustainable debt and the relationship to company responses in the growth of global capital markets.

Cumulative green bond issuance to date aligning with CBI definitions is $US2.334 trillion[ii], with record levels of green bond issuance in the first half of 2023 of $US380 billion according to Bloomberg New Energy Finance[iii].

In Australia this year, almost $26 billion of AUD-denominated sustainable debt was issued in 1H23, an increase of over 18% from 1H22 volumes, with over 60% of issuance coming in green bond and green loan formats, Bloomberg data shows.

Kidney says the CFOs and corporate treasurers he talks to around the world are all asking about regulatory and government policy settings so they can make sure their interim transition plans are appropriately positioned.

Setting standards

The CBI’s work in mobilising global capital for climate action involves developing taxonomies and sector pathways with its independent science-based criteria. These standards determine whether and how assets are aligned with Paris 1.5 degree emissions-reduction goals and provide a signal of climate benefits to investors.

NAB was an inaugural sponsor of the Climate Bonds Initiative’s work to develop the prototype of the Climate Bonds Standard[iv] which allows investors to identify and prioritise “low-carbon and climate resilient” investments through certification underpinned by a scientific framework.

Kidney says the Climate Bonds Standards is 1.5 degree-aligned and helps to provide assurance and credibility through this level of ambition.

As the market evolves, Kidney says that one significant move today is the extension of thematic labelling for different subsets of sustainable bonds. These include labels like blue bonds, which are similar to green bonds but help fund marine and ocean-based initiatives, or transition bonds to help heavy emitters with funding of their decarbonisation activities. There is also increased interest in funding for biodiversity, natural capital and climate adaptation measures.

“I talk about different thematic bonds as gelato,” Kidney says. “We’ve had green gelato in the past but now we’re seeing a multiplicity of flavours – it’s all gelato, but we’ve just got more flavours.”

Transition bonds are an emerging form of sustainable debt, with the main primary market today being Japan, he says. When appropriately certified, these are a way for investors to allow some high-carbon investments in a portfolio contributing to the low-carbon transition.

Sovereign green bonds

Kidney says even though global bond market issuance was down last year, in the same period the global share of green bonds grew. He sees this as a trend set to keep going, especially with a range of sovereign bonds being developed around the globe.

Australia announced the nation’s first sovereign green bond program in April this year, which is aimed at enabling more institutional investment for the transition. The first issuance is planned for mid-2024 with a framework expected to be released well in advance.

To assist in establishing the program, NAB is working with the Australian Office of Financial Management (AOFM) and Treasury as structuring advisors, along with UBS.

NAB’s Global Head of Sustainable Finance David Jenkins says the program is a milestone initiative the bank is excited to be helping develop.

“The program will play a vital role in boosting the scale and credibility of Australia’s sustainable debt markets,” Jenkins says. “It will attract additional investor capital to support Australia’s net zero transformation, increasing transparency around climate outcomes and driving the long-term sustainability of the nation.”

He says general investor feedback suggests that for a successful issue, the market expects at a minimum there to be a cohesive rationale and articulated sustainability strategy which links to projects being funded through the green bond.

Sustainable finance support

NAB’s 2023 half-year investor presentation reported $7.4 billion raised for customers through labelled green, social and sustainability bonds and $9.1 billion through labelled green, social and sustainability-linked loans supported by the NAB Group[v].

The bank’s sustainable finance team has led significant sustainable finance transactions including deals with Australia Post, La Trobe University, Queensland Treasury Corporation, NBN Co Ltd, QIC Global Infrastructure and New Zealand’s inaugural sovereign green debt issue, all funding a broad range of projects.

Jenkins says while green bond issuance has been traditionally focused on mitigation, there is increasingly a move today towards adaptation and resilience to combat the effects of climate change on a range of fronts – including flood proofing or other climate-resilient investments.

He agrees with Kidney that there is a strong sustainable debt appetite from investors driving activity today, with corporates realising there is a risk in not being ready to take part.

“With the stock of natural resources of sun, wind and water, Australia is a unique selling proposition to the rest of the world,” he says. “It really is a tremendous opportunity we at NAB are pleased to be supporting through our sustainable finance offerings.”

[i] H1 Market Report 2023 | Climate Bonds Initiative

[ii] Climate Bonds Initiative | Mobilizing debt capital markets for climate change solutions

[iii] 2H 2023 Sustainable Finance Market Outlook Bloomberg NEF

[iv] climate-bonds-standard-v3-20191210.pdf (climatebonds.net)

[v] 2023 Half Year Results Investor Presentation (nab.com.au)

Climate change is a significant risk to the planet and a major challenge for society to address. At the same time, opportunities are emerging as the transition to net zero occurs.

NAB is supporting customers to decarbonise, build their climate resilience and help achieve the goals of the Paris Agreement.