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How to evaluate Australia’s first sovereign green bond

Would you buy a green bond from Albo? Pendal’s MURRAY ACKMAN has a few questions investors should ask before investing in the federal government’s first green bond

THE Albanese government’s plans for a sovereign green bond program will provide an opportunity to spark transformational projects in hydrogen, batteries and biodiversity, says Pendal’s Murray Ackman.

But investors should carefully scrutinise the plan before investing, says Ackman, a credit ESG expert in Pendal’s income and fixed interest team.

Investors will want to reassure themselves that the government is truly responding to Australia’s needs, and not greenwashing poor climate policies or funding projects that would have been financed regardless, he says.

Sovereign green bonds are issued by governments to fund projects that have a positive impact on the environment.

Treasurer Jim Chalmers outlined the plan to introduce a green bond program at last month’s Investor Roundtable, a government forum designed to engage super funds, banks and asset managers.

“The government is planning to issue its first green bond in 2024 and is using it to frame the whole green and sustainability market,” says Ackman.

“They want to show what ‘good’ looks like and to set expectations about these types of issuances, including potentially aligning with other kinds of regulation including climate reporting.

“We are excited to see the government show interest in green bonds. However, not all green bonds are equal.”

Pendal Sustainable Australian Fixed Interest Fund

An Aussie bond fund that aims to outperform its benchmark while targeting environmental and social outcomes via a portion of its holdings.

Ackman has developed four key questions for investors to ask as they judge the government’s plans:

1. Is the bond supporting genuinely new projects?

Green bonds must support new projects that encourage further investment in that area, he says.

This could include hydrogen, large-scale batteries, maintaining biodiversity and climate-change adaptation.

Capital recycling, funding projects that already exist and projects that would likely have happened anyway fall short of this test, he says.

“Additionality is the key term — funding something that would not have been funded but for this green bond.”

2. Are the projects truly revolutionary?

Green bonds should fund risky projects with the potential for big impact, Ackman says.

Funding social housing that provides underserved people with housing in energy efficient homes with solar panels that reduce ongoing living expenses would fit the bill, he says.

“Government has a different risk profile to the private sector and that gives it an opportunity to fund catalytic change — things that cause a step change.

“This is what the US has done with the Inflation Reduction Act, creating a market for hydrogen by subsidising it significantly.

“Government has always had a role historically in bringing about significant change — the internet, space travel — there’s always been government money put up to change how things work.

“This is what we want to see from this green bond.”

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Regnan Credit Impact Trust

3. Is reporting clear and transparent?

The bond issuance should provide an opportunity for the government to set expectations for what meaningful and measurable impact reporting looks like.

“This green bond is an opportunity to put a stake in the ground as to the minimum expectations for reporting and for transparency. This is an evolving space. What was good enough three years ago is not good enough now.

“For the government to say ‘this is this is what good looks like now’ is a powerful thing.”

4. Is the green bond connected to a genuine policy commitment to address climate change?

Finally, Ackman sounds a warning.

Issuing a green bond signals a commitment towards environmental concerns and a promise to continue to support these types of projects.

“Green bonds have a halo effect on the issuer. We will not invest in green bonds from issuers that we do not believe are committed to environmental change and focused on climate stability.

“By issuing a green bond, the Australian Government will be saying that they have a strong commitment.”

Ackman points to Pendal’s exit from a Queensland government green bond after the state’s approval of Indian conglomerate Adani’s new coal mine a few years ago.

“When they approved Adani, we exited the green bond because there was a disconnect between what the green bond was attempting to do and what government policy was attempting to do.

“A green bond should be a reflection of an issuer’s philosophy — not an apology for their actions.”

About Murray Ackman and Pendal’s Income and Fixed Interest boutique

Credit ESG analyst Murray Ackman joined Pendal’s Income and Fixed Interest team in 2020 to provide fundamental credit analysis and integrate Environmental, Social and Governance factors across credit funds.

Murray has worked as a consultant measuring ESG for family offices and private equity firms and was a Research Fellow at the Institute for Economics and Peace where he led research on the United Nations Sustainable Development Goals.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team’s awards include Lonsec’s Active Fixed Income Fund of the Year (2022) and Zenith’s Australian Fixed Interest Manager of the Year (2020).

Regnan Credit Impact Trust is an investment strategy that puts capital to work for positive change.

Pendal Sustainable Australian Fixed Interest Fund is an Aussie bond fund that aims to outperform its benchmark while targeting environmental and social outcomes via a portion of its holdings.

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at May 17, 2023. PFSL is the responsible entity and issuer of units in the Regnan Credit Impact Trust (Trust) ARSN: 638 304 220 and Pendal Sustainable Australian Fixed Interest Fund (Fund) ARSN: 612 664 730. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund and Trust are available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or Trust or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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