The success of the Australian government’s first green bond lays a solid foundation to expand the program and support the country’s transition towards a net-zero economy, said Anna Hughes, CEO of the Australian Office of Financial Management (AOFM).
AOFM, which issues debt on behalf of the federal government, raised $7 billion with its debut green bond in June. The deal was more than three times oversubscribed and attracted strong interest from overseas, with 35% being allocated to international investors.
“What we’re hoping is that with a AAA-rated sovereign issuing a green bond, it will mean we have even more international investors participating in green bonds in Australia,” Hughes (pictured above left) said in conversation with Nell Hutton (pictured above right), head of Westpac’s Institutional Bank.
The global market for sustainability-linked bond issuance has grown to almost US$1 trillion per year, according to ratings agency S&P Global. Australia’s sustainable debt market, however, is relatively small in global terms. One of the key objectives of the green bond is to support its development by adding scale and credibility.
Proceeds from the bond will be used to help finance three types of environmental projects:
Hughes and her team received strong interest from investors during a month-long roadshow, which took in major financial centers in Europe and Asia, as well as Sydney, Melbourne, and Brisbane. Virtual presentations were also made to North American investors.
The roadshow drew a broad range of views on Australia’s progress in tackling climate change.
While some investors were comfortable with the country’s plans to shift away from its reliance on coal-fired power, others felt the energy transition was moving too slowly.
The government’s cost of borrowing under the green bond, which will mature in June 2034, was slightly cheaper than its conventional equivalent.
Hughes attributed this so-called “greenium” to strong demand and the participation of dedicated “green” investors.
“We’re expecting our green bonds to operate a lot more like our normal bonds over time. That’s certainly been the experience offshore – that the premium has got smaller and smaller as more bonds come on to the market,” she said.
AOFM’s next priority is to “build out” the green bond, increasing the volume available on the market. Hughes expects this to happen over the next 12 months and, all being well, a new green bond is expected to follow in two or three years.
Westpac was a joint lead manager on the bond, and Hutton said the deal offers an important pathway for enabling investors to back public projects that drive Australia’s transition to net-zero.
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