Comments on WA’s first green bond

Dr Kylie-Anne Richards, Deputy CIO, Fortlake Asset Management, Fund Manager, Blossom, comments on the recent issuing of Western Australia’s first green bond to fund major projects to help decarbonise the state’s electricity grid, including wind farms and big batteries.

Western Australia (WA) and Queensland have been in the international spotlight for their perceived lack of concerted effort towards climate change mitigation. This criticism was underscored in 2019 when Sweden’s central bank excluded bonds from these states due to high emissions and perceived climate inaction. Notably, these states have some of the highest per capita greenhouse gas emissions globally.

Recently, however, a shift in the narrative is evident. An increasing desire among investors to align their capital with sustainable and environmental initiatives is transforming the financial landscape. This burgeoning demand for eco-conscious investments is projected to have a substantial price impact as more investors start redirecting capital from non-sustainable ventures.

Responding to these changing market dynamics, several Australian states, including Queensland and WA, have begun issuing “green” and “climate” bonds. Queensland currently leads as the largest green bond issuer among the states, with the bond proceeds dedicated to environmentally beneficial projects and assets.

Green bond issuances are more than symbolic gestures towards sustainability. In an era where climate risks play an increasingly significant role in determining the value of government bonds, countries falling behind in their green commitments risk higher borrowing costs. Advanced economies struggling to manage their climate transitions may face liquidity constraints and challenges financing recovery from severe climate shocks or natural disasters.

A notable stride in this direction is the successful issuance of Western Australia’s first green bond, raising $1.9 billion to finance the state’s shift from fossil fuels to renewable energy. The oversubscription of the bond offering underscored the strong investor appetite for sustainable investments. The Western Australian Treasury Corp’s high credit rating further amplified investor confidence.

Despite debates around the “greenium” or green premium and questions on whether lower issuance yields offset the additional costs of green bonds, WA’s experience shows that in the absence of a greenium, green bonds can still attract significant interest. Their issuance serves various purposes, from signalling a commitment to the market and enhancing reputation to catering to investor demand and paving the way for future greeniums. Despite the yield being on par with the state’s ordinary bonds, the successful bond issuance attracted over $6 billion in bids from more than 60 investors.

In a broader perspective, this successful green bond auction by the Western Australian government signals a growing commitment to sustainable investment. It potentially heralds a shift towards financial solutions that address climate change and promote renewable energy, setting a precedent for other governments or organizations contemplating similar green initiatives.

The Australian government is set to reinforce this commitment by partnering with energy investors to introduce the nation’s first sovereign green bond by mid-2024. This initiative aims to boost institutional investment in the transition to net zero emissions by providing a vehicle for large investors, such as superannuation funds and banks, to finance public projects aligned with this goal.

By offering investors another way to engage with public projects oriented towards the energy transition, the bond program is expected to attract more green capital to Australia and bolster the scale and credibility of the nation’s green finance market. Thus, the success of the Western Australian green bond auction and the proposed sovereign green bond initiative together serve as a step in the right direction for sustainable finance in Australia.