First green bond listed on NZX

Photo: Getty Images
Photo: Getty Images
New Zealand’s first green bond, issued by the Auckland Council, started trading on the NZX debt market this week. The bond has been created to fund projects marked for environmental or climate benefits. Business editor Dene Mackenzie reports on the growing trend of issuing environmentally-friendly investment opportunities.

The Auckland Council listed $200 million of fixed rate bonds on the NZX debt market this week at a coupon rate of 3.17%.

The NZX said it would start planting a native New Zealand tree for every $5 million of sustainable finance.

The listing of the inaugural green bond in New Zealand supported the exchange’s strategic commitment to grow the country’s environmental market, NZX said in a statement.

Auckland Council intended to use proceeds from the offer to refinance existing debt used to buy electric trains and equipment, and to help finance new ones.

"The success of our first green bond issue shows there is clearly strong appetite in the market for investments that have positive outcomes, which is encouraging given the amount of investment earmarked for Auckland’s low-emission public transport solutions," council acting group chief financial officer Matthew Walker said.

The green bonds were expected to be assigned a long-term credit rating of AA from Standard & Poor’s and Aa2 from Moody’s.

Rating agency S&P says the issuance of green covered bonds, backed by assets considered to have a positive environmental impact, grew strongly in the first half of this year.

As market activity increased, investors were inquiring more about green covered bonds and the nature and challenges of green finance.

Such was the demand for information, S&P issued a fact sheet to address the most frequently asked questions, Casper Andersen, director European covered bond ratings said.

"Despite the recent rise in issuance, there is still plenty of scope for growth. The volume of green covered bonds only represents a fraction of the broader covered bonds market."

S&P Global Ratings expected the proportion of green bonds could rise significantly as regulators pushed for greener finance and banks focused increasingly on underwriting the financing of green assets.

"In our view, the emergence of green covered bonds highlights the growing prominence of green finance in the traditional area of covered bonds and offers an alternative mechanism for banks to contribute to financing global climate commitments."

In the past, green cover pools had largely comprised green mortgages, Mr Andersen said.

Those types of green properties, whether new or refurbished, residential or commercial, offered significant potential to improve energy efficiency, since the building sector accounted for more than 30% of global energy-related carbon dioxide emissions.

However, the concept of a green asset extended beyond green mortgages.

While there was no common definition of what constituted a green asset, projects involving assets for generating renewable energy, sustainable transport methods — rail infrastructure and electric vehicles — buildings with green certifications, and water conservation equipment were generally considered green, he said.

Other assets such as efficiency improvements to fossil fuel-based power plants and nuclear plants, in some cases, qualified as green, although the categorisation was sometimes disputed.

It was hard to say what proportion of traditional covered bond mortgage assets were green, as issuers had previously had difficulty identifying the green loans they had already underwritten, Mr Andersen said.

The current set of green covered bonds in  Europe used different eligibility criteria for green buildings, which ranged from financing or refinancing new energy-efficient buildings to refurbishing commercial or residential properties.

To identify green loans, banks used certain recognised building certifications. Identification was made difficult by certification definitions and methodologies varying across countries, resulting in a lack of comparability.

Additionally, exacerbating those issues were challenges accessing the energy performance of buildings and energy performance certificates due to privacy concerns and data access constraints in certain countries, further limiting the ability of banks to differentiate their green mortgage lending.

Covered bonds backed by public sector debt might offer an attractive source of green finance, particularly if political will supported the public sector to playing a larger role in encouraging green investment.

Issues of public sector covered bonds could use their loyal investor base to offer attractive funding for future public sector green projects, such as renewable energy-generating installations of public sector facilities or funding for other green infrastructure, Mr Andersen said.

NZX head of issuer relationships Joanna Lawn said environmental finance would play a significant role in funding New Zealand’s infrastructure investment into the future. Green bonds would play a major role.

Global green bond issuance could jump to a record $US250 billion ($NZ369billion) in 2018, up from $US155 billion last year, according to Moody’s.

 

At a glance

Covered bonds are highly regulated, and enjoy superior credit ratings and lower funding costs compared with unsecured debt issued by banks. This is achieved through a dual recourse structure where bond investors have a claim over a dedicated "cover pool" of assets, as well as a general claim against the issuer itself. Covered bond legislation defines strict conditions with which the issuer must comply to ensure the quality of the cover pool collateral is maintained.

In order to enable covered bonds to be adapted for low-carbon finance it will be necessary to create a consensus on what type of assets will be eligible, how these will be managed, and what definitions apply to low-carbon assets. The objective should be to establish a legislative framework, which both fulfills a low-carbon public policy purpose and enables reliable term funding to be accessed by banks.

— Source: Climate Bonds Initiative

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