The CEFC and Climate Bonds

This article is also available at PV Magazine

May 8, 2019

Australia’s Clean Energy Finance Corporation has invested more than $500 million in 12 climate bond issuances since it began investing in 2012, establishing a leadership position in this rapidly evolving investment channel.

Richard Lovell is an Executive Director in the Investment team at the CEFC, where he leads CEFC investments in debt markets and climate bonds. Richard is also responsible for capital management activities relating to the CEFC’s balance sheet. Richard has previously held senior roles at the Westpac Institutional Bank, Société Générale and Perpetual Trustees.  

Here Richard discusses Australia’s evolving climate bonds market.

How has the Australian climate bonds market evolved since the CEFC began investing?

Richard Lovell: Australia’s climate bond market has progressed significantly since the first issuance in 2014, with all sectors of the market showing increasing sophistication in their approach to climate bonds. We have seen growth in the volume of climate bonds issued, a stronger appetite from investors, and increasingly diverse issuer types.  We expect this accelerating trend to continue.  We have now reached the point where there is significant unmet demand for sustainability linked investments from the broader capital markets, alongside developing interest from key financial intermediaries to tap into new market opportunities.

We have also seen the market re-focus away from the relative costs of climate bond issuances compared with other finance options.  The market is increasingly considering the benefits and flow-on impacts offered by climate bonds. These range from the potential to access a broader pool of investors, to the ability of issuers to develop climate bond frameworks which give additional momentum to business sustainability goals, including through the development and acquisition of assets to support the climate bond issuances.

What has been the CEFC’s role in helping to develop that market?

The CEFC has been an active investor in the climate bond market.  Our mandate means we can work with potential issuers far earlier in the process than other investors.  We are able to give early commitment to transactions as a means of encouraging issuers to go through the process of developing a climate bond framework.  We have approached the market from the perspective of providing material commitments to purchase bonds which then act as a cornerstone to build investor demand.  This can give issuers increased confidence that a bond issuance will be able to be completed and that it will be successful.  Because we are not driven by the same constraints as the broader market, we are then happy to limit our actual investment in the transaction to a reasonable amount, which allows other investors to participate in the transaction.  This approach is based on the current position of a lack of supply.  We also actively engage in sector-wide forums to promote understanding of the benefits of climate bonds and to try to overcome non-financial barriers to investment wherever possible.

How can climate bonds benefit the PV industry?

Climate bonds offer a proven channel for access to funding for the PV sector.  Already, Australia has been the first jurisdiction to see the issuance of certified climate bonds backed by consumer finance for residential PV installations.  We are seeing significant interest from investors in solar PV at all scales and there are a lot of smart people working on creating solutions so that pool of capital can be accessed to further increase the uptake of PV in Australia.  

There is often tension between making PV a compelling proposition for energy users and making the end investment attractive to investors – this balance is one that the PV industry more broadly will need to keep in mind.  If this balance can be struck, climate bonds can be a significant part of the funding solution, especially in a market like Australia where there is a concentrated banking sector mainly focussed on mortgage lending.

Why are climate bonds attractive to institutional investors?

Properly structured, climate bonds offer a low risk investment proposition which fulfils the need for investors to find ways to invest which are consistent with the principles of responsible investing.  Most investors are increasingly being asked to increase their exposure to investments which can be considered socially responsible, in response to demand from underlying superannuants, regulators and other stakeholders.  Many investors do not have the capability to assess the environmental or emissions related merits of specific investments. Climate bonds offer the benefit of independent certification of this aspect of the transaction.

Where has the CEFC invested in climate bonds? 

The CEFC has invested more than $500 million in 12 innovative and market leading climate bonds, often acting as a cornerstone investor to attract other investors. These include:

• $30 million in the Woolworths Group green bond, the first certified green bond issued by an Australian retailer and by a supermarket business globally. The $400 million green bond will help fund the Woolworths 2020 sustainability strategy, through the installation of LED lighting, energy efficient refrigeration, solar panels and other clean energy technologies. The retail-focused bond provides a new asset class for institutional investors seeking opportunities that meet environmental, social and governance requirements.  
• $20 million in Australia’s first certified climate bond linked to rooftop solar PV and energy storage. The FlexiGroup bond was structured to link to the size of the underlying solar assets, providing investors with a clear demonstration of the credit performance of these assets, and encouraging capital markets to provide more direct funding capacity for the renewables sector. In another market first, the FlexiGroup green tranche also achieved a relatively better price than the comparable uncertified tranche.
• $90 million in the NAB Low Carbon Shared Portfolio, an innovative finance offering to create sustainability-linked investment opportunities for fixed income investors such as superannuation funds. The portfolio is backed by senior loans to seven NAB-financed wind and large-scale solar farms. The Low Carbon Shared Portfolio creates an opportunity for institutional investors to participate in the renewable energy sector, giving investors credit exposure to the underlying projects without entering into individual project financing transactions.