Are investors ready to embrace Australia's new bond era?

After many years of limited activity on green bonds in Australia, we have seen a number of developments in this space recently, with the announcement of the Australian Government issuing a green bond. This reflects the substantial increase in activity in green bond development globally.

Joining the latest episode of the ESG in 10 podcast, is Tamar Hamlyn, portfolio manager at Ardea Investment Management, to take us through the developments in the green bond space in Australia and what this means for sovereign bond investors.

Transcript

After many years of limited activity on green bonds in Australia, we have seen a number of developments in this space recently, with the announcement of the Australian Government issuing a green bond. This reflects the substantial increase in activity in green bond development globally.

Joining the latest episode of the ESG in 10 podcast, is Tamar Hamlyn, portfolio manager at Ardea Investment Management, to take us through the developments in the green bond space in Australia and what this means for sovereign bond investors.

In the 2023 federal budget, the Australian government made an announcement that has triggered a lot of interest from sovereign bond investors. Can you take us through this announcement and why it is so important to Australian sovereign bond investors, but also the Australian market more broadly?

What's most interesting of all is that we finally got news that the Australian government will be issuing a green bond. And that might be a little surprising because there's actually plenty of countries already that are issuing green bonds. They've been in place for a number of years in countries like the UK, Germany, the European Union. Even the Australian states have been issuing green bonds for a number of years now as well. So New South Wales, Queensland, and most of the other states have been doing this, too. So it's really good news that the federal government is finally reaching the point where they're going to be doing that as well. The timing is still quite late, though. It's not likely to occur actually until the middle of next year. Now, they could well come in earlier, they could get there sooner, but that's our best case expectation at the moment by the end of next year.

The big question that a lot of people have been asking is, why has it taken so long to get to this point?

There’s a bit of an interesting sort of backstory as to why, and when we think about the structure of government here in Australia, one of the key differentiating factors is it's actually the states that own most of the green assets. So things like the energy grid, the water supply, even fundamental essential services such as healthcare and so on, they're all sort of owned and operated by the states. Now to issue a green bond, you actually need some green things that you want to spend money on. Up until now, the federal government actually hasn't had that many things it can spend money on. So there hasn't been that scope for a green bond. Now we're finally getting to the point where the government's realized that has to change, and that's why they've made the announcement that they have to move towards this issuance around the middle of next year.

So it's obviously a really significant announcement and quite a big deal for sovereign bond investors in Australia, globally, other investors in other jurisdictions looking at us. You’ve already mentioned some of the green projects and things like that associated with the green bond development. What questions does this big announcement pose for sovereign bond investors?

I think what's interesting about this news is that it poses the usual questions we get about any bond issuance, but it also poses some ESG specific questions and some green bond specific questions. So this is a bond that's just like any other bond. So as investors, we're very focused on the size of the bond that's being issued. We care about things like the maturity and so on. We care very much about what yield or price the bond is going to come at, and is it going to trade cheap or rich? And all of those usual questions we face whenever a bond is issued. But there's also some ESG specific questions and they relate to things like, well, is there going to be a green yield curve, for example? Or is this bond going to trade at a discount or a premium compared to conventional existing government bonds that are out there already? So those are quite important questions that are new for this particular bond. So I think you'll find that investors are spending a lot more time on analyzing this as it comes to market.

There's also a third really critical question, and that is the liquidity of the bond. And that's incredibly important for our investors because if we're going to be moving out of conventional government bonds that are extremely highly liquid into another government bond that is a very, very highly rated government bond as well, but might be more buy and hold type investors, there might actually be a small reduction in liquidity there. And so that's something that we need to look at very carefully as well because we want to make sure that we're not getting any decrease in benefits for investors by moving into this bond.

Listen to the podcast to hear the full interview with Tamar, as he shares his perspectives on the Australian green bond program and explores the significance of considering social factors in the realm of sovereign bond investing.