Australia is finally ready to launch a sovereign green bond programme. The government has set aside A$8.3m ($5.5m) over the next four years to fund the development and eventual issuance of an Australian sovereign green bond, the first of which is expected to be priced next year.
Although the Australian dollar market already welcomes labelled debt with open arms — KfW scooped A$650m with a five year green bond on Tuesday, for instance — an Australian sovereign deal will likely raise plenty of questions among ESG focussed investors.
Australia has a chequered history when it comes to environmental issues. Despite its wide environmental diversity, the country has a heavy reliance on exploiting the natural environment.
For instance, burning black and brown coal fulfilled almost 60% of the country’s electricity needs over the past year, with renewables accounting for just over a third. In the UK, for comparison, coal only made up 1.2% of the electricity supply mix. By the end of the decade, Australia hopes to generate 82% of its electricity using renewable sources.
Meanwhile, mining accounts for an important share of the country’s gross domestic product.
Even the Australian Office of Financial Management, which issues debt on behalf of the Commonwealth country, has come under scrutiny.
In July 2020, Australian retail government bond investor Katta O’Donnell filed a legal claim against the sovereign. The challenge stated that the government does not do enough to disclose the risks of climate change to investors. As of May 2023, the class action is still ongoing.
Yet Australia regularly feels the impact of climate change. In the months before O’Donnell filed her legal claim, bushfires devastated the country, destroying an estimated 243,000 square kilometres and killing up to 3bn land vertebrates. Although climate change was not the root cause of the wildfires, it most likely helped fan the flames.
Transition is key
Therefore, if this green bond programme is to be more than a just debt marketing tool for one of the world’s largest polluters on a per capita basis, then a robust framework and a long-standing commitment to green borrowing is needed.
The government has already set aside A$1.6m in its latest budget to co-fund a taxonomy for sustainable finance alongside the Australian Sustainable Finance Institute (ASFI). And it must ensure that its green bond framework, in conjunction with its sustainable finance taxonomy, tackles these issues in depth and helps the country on its transition.
Indeed, financing the transition is key for Australia to meet its climate aims. Mining accounts for close to 10% of the country’s GDP and directly employs roughly 1% of the entire population — this is not something that can be switched off overnight.
For Australia’s green bonds to be a success, the proceeds must not just fund a slew of new environmentally friendly projects but help the country’s already carbon intensive industries move towards a more sustainable future.
Incorporating transition should be at the heart of Australia’s green bond framework and its sustainable taxonomy. Research from ASFI found that 84% of polled market participants would welcome a "transition category" within an Australian sustainable taxonomy. The inclusion of such a category would align the taxonomy with that of fellow high polluter and recent green bond debutant Canada.
However, amid its grand plans for green bonds, the incumbent Australian Labor Party government is still pressing ahead with new fossil fuel and natural resource intensive projects. Earlier this year, the Intergovernmental Panel on Climate Change (IPCC) warned that no new fossil fuel projects should be started if global temperature rises are to be contained below 1.5°C.
Although the number of greenlit projects is falling, the government looks likely to go ahead with the first coal mine since last year’s election, despite pressure from climate advocacy groups. The Isaac River coking coal mine in Queensland is set to be approved in the coming days. Once active, it will produce 500,000 tonnes of coal per year for up to five years.
At the end of October 2022, there were 423 natural resource related projects at various stages of development in Australia, up from 367 a year earlier.
An apolitical programme
The inaugural bond deal is set to be launched sometime during the middle of 2024, roughly a year before the incumbent Labor government, led by Anthony Albanese, faces election.
And although the Labor Party maintains a strong lead in the polls — a recent poll conducted for the Sydney Morning Herald gives them a 12% lead over the opposition Liberal Party — it still only has a slim two seat majority in the House of Representatives and is reliant on Crossbench support in the Senate.
Despite the continuation of fossil fuel-driven projects, the Albanese administration has at least already gone beyond its predecessor with its sustainability ambitions. For example, last September the government passed legislation enshrining a commitment to achieve net zero carbon emissions by 2050.
It is therefore important that whichever party wins the next election — be it the incumbent Labor Party or the less than ESG friendly Liberal opposition — must ensure that the commitment to green bond borrowing and financing is maintained. Australia must not let the programme fall to the whims of politicking if it is to succeed.
Of course, both sides of the political spectrum are under pressure from emergent climate focussed political groups: the growing Australian Green Party on the left, and the more centrist teal independents. Such pressure could ensure both parties maintain a more climate-friendly stance.
Australia, for all its climate coddling so far, bears witness to the impact of climate change on a regular basis, from the ongoing bleaching of the Great Barrier Reef (pictured) or the frequent, shocking bushfires.
For Australia's green bonds to succeed and to be more than just a greenwashing exercise, they need to exist beyond government politicking and be committed to funding the transition of the nation.