Date posted: 25/01/2018 5 min read

Responsible investing is now a win win for business

Business is seeing the value in green bonds and social impact investment as they deliver better returns

In brief

  • The green bond market has experienced rapid growth, and this is forecast to continue in 2018.
  • Green bonds can be a win-win for business, achieving both good prices and environmental outcomes.
  • Green bonds are being issued locally in Australia and now in New Zealand.

At the Accounting for Sustainability (A4S) Annual Forum, His Royal Highness the Prince of Wales spoke on the vital role of the finance community in addressing many of the challenges facing humanity today. As a member of the Accounting Bodies Network (ABN) of A4S, Chartered Accountants Australia and New Zealand was there to hear what Prince Charles had to say.

The Prince of Wales spoke about the release of the Financial Stability Board’s (FSB) Taskforce on climate-related financial disclosures (TCFD). Among other things, he noted, “Having the right information is absolutely vital in making good decisions.”

A panel discussion followed, addressing the issue of social impact investing. The panel noted that whilst mainstream investors could invest in this area, it is currently hard for individuals to invest for specific outcomes and social purpose. The individual investor is generally limited to exclusion type funds, which is not sufficient.  Others on the panel commented on the growth of debt and green bonds.

What are impact investment and green bonds?

According to Impact Investment Australia, impact investing is a growing field that is helping to finance solutions for many of society’s most pressing challenges.

Impact investments are investments in organisations, projects or funds that have the intention of generating measurable social and environmental outcomes, alongside a financial return. In this aspect they are different from grants because a financial return is expected. Yet they are also different from mainstream finance because measurable social and environmental benefits are expected.

“Green” bonds are a subset of impact investments, one where funds are used purely for environmental or climate-related projects. The World Bank is one of the largest issuers of green bonds, having issued its first such bond a decade ago.

The subsequent growth in green bonds globally has been rapid. The World Bank reports the global market was worth US$4 billion in 2010 – just two years after the first bond was issued. The Climate Bonds Initiative recently reported that US$155.5 billion in green bonds was issued in 2017 globally, and they expect this rapid growth to continue, forecasting US$250-300 billion for 2018, and up to US$1 trillion by the end of 2020.

For green bonds to have validity with investors, companies normally issue bonds in line with either the Green Bond Principles (GBP) guided by the International Capital Market Association (ICMA) and/or the Climate Bonds Standard created by the Climate Bonds Initiative. Issuers must obtain assurance in order for the Climate Bonds Initiative to certify the bond. This assurance requirement seems to be giving the Climate Bonds Standard the edge with investors.

A win-win for business

Scott Longhurst, Managing Director of Finance and Non-Regulated Business for UK water supplier Anglian Water, and a panel member at the Annual Forum, commented on the company’s green bond issue earlier in 2017: “This bond issue will enable us to address the three-fold challenges of water scarcity, climate change and environmental protection in the face of a growing population, but it also represents the pinnacle in responsible financing. We aim to lead the wider finance community and other business leaders towards more resilient and sustainable business models.”

Longhurst noted that the bond price achieved was slightly better than for other issues making this a win-win for business. Anglican also sought an independent review of their green bond framework.

Manulife recently launched their first green bond in Singapore. The notes are the first green bond issuance by a life insurance company and also the first by a Canadian issuer to be certified as Climate Bonds by the Climate Bonds Initiative.

“As one of the world’s largest life insurers, our success is linked to the long term well-being of our customers, our employees and the communities we serve around the world,” said Steve Roder, Manulife’s Chief Financial Officer. “We are also a long term investor, which puts us in a unique position to help facilitate the transition to a more sustainable economy.  Issuing a green bond aligns our financing with our existing green investment activities.”

Manulife engaged Sustainalytics to review the Green Bond Framework and provide a second party opinion on the alignment of the Framework with the Green Bond Principles 2017, as administered by the International Capital Market Association.

In line with Manulife and Anglican’s examples, the market is shifting to bonds that have been independently reviewed to overcome investor concerns over the quality of the bonds and their environmental credentials.

What about in Australia and New Zealand?

The green bond market in Australia has been growing at a similar rapid pace to the global market. In 2017, there were seven major green bonds in Australia, collectively valued at US$2.56 billion. All of the four major banks have issued green bonds, in addition to property funds, the Victorian and Queensland Treasuries and Monash University to name a few. Many of these entities have received a cornerstone investment from the Australian Government’s Clean Energy Finance Corporation (CEFC). The CEFC is a specialist clean energy financier, investing with commercial rigour in projects with the strongest potential for de-carbonisation. Their aim is to act as a catalyst to accelerate investment in emissions reduction.

New Zealand’s first green bond was launched in 2017 by the International Finance Corp (IFC), part of the World Bank. Contact Energy also released their first green bond in 2017. The NZX’s newly released Environmental, Social and Governance guidance note, to accompany the NSX Corporate Governance Code, also includes a section on green bonds.

Have you considered how you and your organisation might participate in the green bond market?

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