Green bonds attract orange light from Aussie bankers

Sean Kidney, CEO of the Climate Bonds Initiative, is in Sydney for investor and client meetings, telling people why he believes the market for green bonds issued by bank themselves is primed to take off in 2015.

"Their treasury people think it's a good angle [to access funding slightly more easily] while their origination teams like the angle of attracting new clients or offering a more interesting deal to existing corporate clients in the bond market," Kidney said.

Even banks in emerging markets are included, with India's YES Bank issuing that country's first green bond last month.

Australian banks are also warming to green bonds. According to Kidney, they can choose from plenty of examples based on the experiences of major overseas banks.

He reels off several examples, including Bank of America just over a year ago issuing a three-year US$500 million green bond as a demonstration to its own corporate clients, as much as to attract a new investor base.

A few months later, in April last year, TD Bank launched Canada's first corporate green bond, and the world's second green bank bond. It was similar in size and tenor to BoA's transaction, and was done for similar reasons - "as an example to others" was how Kidney characterised the bank's motivation.

Likewise, Credit Agricole harnessed their loan book to issue a series of uridashi bonds and private placement bond transactions totalling almost $500 million.

And there is a market for these bonds, as NAB discovered when it launched a $150 million transaction and closed it at $300 million.

In fact, so popular are green bonds becoming among the marketing folk in banks' syndication teams that Kidney said the time had come to push for greater regulation and standardisation of terms. His concern is that "very pale green" bonds might be pushed as "dark green" bonds.

Part of the friction stems from how the funds raised are applied, said Kidney.

It comes down to what is "demonstrably green". Clearly, funding renewable energy programs or the construction of brand-new energy efficient six star buildings or railways that take thousands of trucks and cars off the road are more desirable than a cheap retrofit the just scrapes in under self-interested building standards.

Proponents are pushing for some comfort that the money raised is going to be applied in an acceptable manner. "There are some rules emerging in the market, but at the same time there needs to be a way to grow investor demand for green assets," Kidney said.

Kidney noted that some transactions push away at the bottom end of these definitions. He cited the recent very average effort by Regency, a US-based REIT, where it bundled different buildings, ranging from what he termed "shallow retrofits" up to newer buildings into asset-backed "green bonds".

"Our argument is that the definition should not be about opinion or based on standards set up by industry bodies," he said. "And I'm not going to say that anyone in this market is not well intentioned."

Nevertheless, the assets being funded need to be verified by reputable organisations, particularly for projects or buildings that are aimed at mitigating climate change. "It's going to require investors to educate themselves," he said.

Kidney also said bankers were not the right people to decide whether a bond was "green" or not.

"They should just get out of the way and remember that this is a public interest issue, addressing environmental changes, and needs complete transparency so the public can scrutinise every green bond."

Otherwise, he warned, the system gets gamed as happened in Syracuse, New York when a shopping centre developer was allowed a green bond tax credit from the Obama administration on the basis of a proposed green property project.

"But then they changed their mind, decided it was too hard, but kept the tax credit. A reporter picked up on it, and 18 months later the US tax authorities investigated, but nothing happened," Kidney said.

That led Kidney to suggest there needed to be a two-tier system of green bonds: one for regular issuers and another for those that come to the market rarely (and, when they do, might tempted to game the system).

Green bonds have credit risk and coupon on a par with any other "plain vanilla" corporate bonds and the environmental aspects are a bonus. One way the government could encourage the market, Kidney suggested, was to offer tax credits for genuine "green" bonds, as happened in the US and, he said, was about to happen in China.