Bonds spread from green to social impact

·3-min read

Australia can catch the wave of demand for social impact finance, not just assets that are green, bankers say.

There is growing recognition by companies that to get access to a vast pool of global capital, a business has to be operated sustainably.

Green debt has been brokered for more than a decade to fund assets that have a lesser impact on the environment, but that has evolved rapidly over the past year to include Indigenous and other social projects.

Companies can use new forms of debt to meet net zero emissions targets or get a discount from meeting health and safety, diversity, human rights or wellness goals.

Charles Davis, managing director of sustainable finance at Commonwealth Bank, told AAP that more clients are wanting to link their sustainability strategies to financing.

"While green finance continues to be the dominant form of sustainable debt, sustainability-linked loans and bonds have grown considerably over the last year," he said.

"Whether an organisation is focused on reducing carbon emissions, increasing the diversity of its workforce or supporting communities, sustainability-linked loans and bonds can play a key role in helping them pursue their goals."

He anticipates demand will only accelerate in 2022.

Banks are developing products to satisfy demand as shareholders and customers scrutinise how companies operate.

A green bond could be used for an asset that is "green" like a solar farm or buildings designed to reduce energy and water use.

A sustainability loan is for a company or set of assets that have an environmental and social governance (ESG) element.

Social projects target improvements for a specific population or a particular issue such as education, affordable housing, food security or better health.

A sustainability linked loan can be used for any company or organisational operations, rather than a specific asset.

Priced against sustainability strategy and targets, for example having a certain percentage of Indigenous workers by a set date, the customer gets a discount if they reach the target or pay a premium for failure.

There are also so-called green, social and sustainability instruments that don't require a borrower to commit to targets, although they must have a framework of something they are trying to achieve.

Globally, sustainable debt issuance surged to $US3.2 trillion ($A4.5 trillion) in the first half of 2021 as demand goes exponential.

It took 12 years for the first $US1 trillion, another year to reach $US2 trillion and just six months to reach $US3 trillion, Bloomberg data shows.

The Victorian government's green bond sale in July raised $300 million from insurers, fund managers and investors with a specific green or socially responsible investment mandate.

LED traffic lights, mini-hydro power stations, low-carbon buildings and a new renewable energy power station will get a slice of the proceeds.

Queensland Treasury's green bonds are supporting the Gold Coast light rail, cycleways, South East Queensland's city train network, electric powered tilt train rolling stock, and solar projects.

Western Australia's Premier and Treasurer Mark McGowan in November issued his state's first ESG information pack to attract global investors.

He plans to sell bonds to bankroll programs to avert biodiversity loss, find cleaner sources of fuel and close the gap on Indigenous disadvantage.

But similar sovereign bonds aren't likely, despite a growing global appetite.

The federal debt manager, the Australian Office of Financial Management (AOFM), has no plans to issue new lines of Commonwealth bonds.

Treasurer Josh Frydenberg has said the private sector is best placed to assess and manage the risks they face.

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