Getting to a greenium on green and climate bonds  

The green and sustainable bond markets are going from strength to strength as governments and corporates look for ways to finance the energy transition and increasingly seek funds to mitigate the effects of climate change.  

Grace Tam, Head of Consumer Finance at the CEFC, recently sat down with Sean Kidney, Chief Executive of the Climate Bonds Initiative, and David Jenkins, Global Head of Sustainable Finance at the National Australia Bank to discuss developments in the green bond market.

GRACE: Thank you both for sitting down with me today. In the ten years that the green bond market has been operating, issuance has risen strongly every year until 2022 when the market dipped. Now in 2024, has the market regained its upwards momentum? Can you tell me about how it’s performing, both globally and in Australia? 

SEAN: It’s booming. Globally, we expect green bond markets to grow nearly 40 per cent this year, and both ourselves and S&P Global are saying US$1 trillion in issuance of green bonds by the end of the year, where it was about US$600 billion last year. The Société du Grand Paris in Paris issued a green certified climate bond earlier this year and they were 18 times oversubscribed.  

DAVID: In Australia, in 2023 for the full year Australian borrowers and issuers raised over US$31 billion in sustainable debt¹ – and we’re on track to beat that number this year, mostly led by green bonds. We’ve continued to see more green bond issuance from semis, the Australian Office of Financial Management (AOFM) and the NBN Co, but less so in the corporate space.

GRACE: When the green bond market got underway a decade or so ago, there was a widespread expectation that investors would want a premium for taking them because they were illiquid. What are we seeing now? 

SEAN: Actually, it's turned out that it works the other way. 
In the middle of March 2020 when global bond markets slowed for two weeks and US Treasury markets froze, I was getting phone calls from investors saying, “Guess what? I'm getting bids for my green bonds.”

It means that in a secondary market, they’re priced better than ordinary bonds, so investors are generally happy to bid a bit tighter at primary because they're getting something which is worth more in a secondary market. And that’s what’s driven that ‘greenium’ globally. 

DAVID: In times of market stress and volatility, issuing in green and sustainable bond format has been seen as a means of risk mitigation from a Treasury team’s point of view, because they typically attract a larger pool of motivated investors than comparable standard bonds from the same issuer.

And that greenium is made up of either a smaller new issuance concession for a new green bond line or just purely being priced tighter relative to their standard bonds.

GRACE: Developing a standard taxonomy for green and sustainable bonds has been a big matter ever since the outset of the market over a decade ago. Where are we up to? 

SEAN: There's a perfect storm brewing of guidance and regulation over the coming year, which will make life a lot simpler for investors and issuers.  

We announced a couple of months ago a collaboration between Principles for Responsible Investment and United National Environment Program Finance Initiative about interoperability of taxonomies. We'll be doing some work this year to allow investors to work across the global crop, to look for harmonisation and make that harmonisation work. 

We’re also working with other standard setters. We’re talking with ScienceBased Targets Initiative, Transition Pathways Initiative and so on about common guidance around transition finance, which is a key part of this whole mix. 

DAVID: In Australia, we're probably being a bit more rigorous from the outset, and that's through no small part due to our focus and reliance on what Sean and his team have been doing with climate bond certification. That has tended to be the default approach mainly because, when we began, investors were very clear – they wanted a credible science-based approach to any claims on the merits of green bonds issuers were making.  

There's a heavy focus on interoperability and usability of the Australian taxonomy. So far, it’s been focused on climate mitigation first – and the government’s Sustainable Finance Roadmap has made this climate mitigation prioritisation clear – from 2025 and beyond ASFI and the government will consider the inclusion of climate adaptation and resilience, plus nature and biodiversity criteria into the Australian taxonomy. 
The Australian sovereign, through the AOFM and Treasury, are working very, very closely with the states about what they're funding and how they're reporting on their respective allocation and impacts for their green and sustainability bond programs.  

I would expect that as the taxonomy is published and as investors look start to look at opportunities to categorize where their investment flows are going in accordance with the Australian taxonomy, that will give more clarity and provide more guidance to the states and corporates. 

GRACE: Resilience is becoming more of a focus in climate change discussions. How is that playing out in the sustainable finance sector? 

SEAN: We're publishing a Climate Resilience Taxonomy, which is the extension of the existing taxonomy, which looks at physical, social, economic and ecosystem resilience. This is an extension of the current universe of qualifying assets, because climate change is happening.  

DAVID: Australia is very much exposed to the rising frequency and severity of the impacts of climate change. You've only got to look up and down the Australian coastline to see the range of severe climate change related weather events we've had in recent times.  

And, certainly, the emergence of the resilience taxonomy that Sean’s team will work on will be a great tool to help articulate and demonstrate to people the sorts of expenditures that they can earmark against future green bond and loan transactions. 

GRACE: A question for David. Ahead of the taxonomy being in place, are we seeing issuers already doing the work to be able to issue under the taxonomy or are you expecting a period of transition before we see anything?

DAVID: I think people are taking a ‘wait and see’ approach. Is it going to impact what my investors expect or want to see? So then the question comes, what do investors and bank financers expect and what's beneficial to the issuers to address these expectations?

GRACE: And Sean, do you think people will then cherry pick taxonomies if there's an Australian sustainable finance taxonomy, but then there are still these other existing taxonomies that they've used to date?

SEAN: There's a risk, but it's not actually happening. That's the point of our project with Principles for Responsible Investment and the and the United National Environment Program Finance Initiative – to flush out that sort of issue. 

GRACE: Thanks Sean and David. It sounds as if the global and Australian green bonds markets are set to continue their upwards momentum, and the standardisation of the green bond taxonomy will further increase confidence in these already robust markets. 

1 Source: BNEF Sustainable Debt Tool – includes green, social, sustainability and sustainability-linked bonds and loans.