The investment arm of one of Australia’s state governments, TCorp, has issued a A$1.8 billion sustainability bond reflecting the appetite of investors which are increasingly hungry for bonds that are issued to fund social and environmental projects.
The TCorp issuance follows in the footsteps of other large institutional investors around the globe that have issued green and sustainability bonds including the Canadian Pension Plan Investment Board and Caisse de Depots, with Japan’s GPIF also focusing on green and social bonds.
TCorp last week launched the bond whose proceeds will be used to invest in green and social projects across New South Wales, including water infrastructure and access to essential transport and education services. The borrowing agency for the NSW public sector said the bond issue will have a coupon of 1.25 per cent and a maturity date of 20 March 2025.
It’s the second bond to be issued under the NSW Sustainability Bond Programme amid surging demand for fixed income products that incorporate ESG. “It recognises where the market is heading and will satisfy investor demand,” said David Deverall, chief executive officer at TCorp, which has more than A$107 billion of funds under management. “Investors have embraced the social assets introduced to complement the green assets in the pool,” he said. “We see this as a path forward to intergenerational equity and a key opportunity to invest in the sustainable development of assets in NSW.”
The issue was oversubscribed by A$740 million. Asset managers accounted for 62 per cent of investors and the bulk of investors were from Australia.
The bond issue follows TCorp’s $1.8 billion 10-year green bond launched a year ago and which was oversubscribed by A$767 million. Another government borrowing agency, Queensland Treasury Corporation, sold A$1.25 billion of green bonds this year. All up, Australian borrowers issued US$15.6 billion of green bonds, placing Australia third in the Asia-Pacific region for issuance, on data from the Climate Bonds Initiative for the year to June 30, 2019.
While sustainability bonds are relatively new, the issuance of green bonds have grown in popularity and has now hit the US$1 trillion mark.
The growing demand for these bonds from fixed income investors jibes with the findings of a green bond investor survey of 48 top Europe-based fixed income managers with combined assets under management of €13.7 trillion.
Specifically, the survey carried out by the Climate Bonds Initiative, highlighted the unmet demand for green bonds and flagged a lack of adequate supply, especially from corporate issuers. Respondents called for improved transparency, standardisation, clear linkages of proceeds to green outcomes, supportive policy frameworks and the inclusion of a wider issuer universe.
“This will require a concerted effort from issuers, underwriters, ratings agencies, regulators and policy makers,” the report’s authors said. “It also reinforces the critical role the capital markets can play in helping the world allocate capital towards addressing climate change”
TCorp’s new issue comes as Japan’s Government Pension Investment Fund, the world’s largest pension fund, at US$1.4 trillion, and the European Bank for Reconstruction and Development, plan to develop sustainable capital markets through a focus on green bonds and social bonds. GPIF has forged a similar initiative with Nordic Investment Bank.
GPIF requires its asset managers to integrate environmental, social and governance aspects into their investment analysis and decision-making.
Hiro Mizuno, GPIF’s executive managing director and chief investment officer, said the pension fund regards the purchase of green, social and sustainability bonds as one of the direct methods of ESG integration in fixed income investment.
“GPIF wanted to make such bonds mainstream investment products, in order to ensure sustainable performance of the pension reserve fund for all generations,” he said earlier this month.
For its part, NIB has an explicit mandate from its Nordic and Baltic owner countries to finance projects that improve productivity and benefit the environment. NIB established its environmental bond NEB framework in 2011, and has since issued a total of €3.7 billion in environmental bonds.
In January, the Canadian Pension Plan Investment Board issued its first Euro denominated green bond. The sale of €1 billion in 10-year fixed-rate notes will enable CPPIB to invest further in eligible assets such as renewables, water and real estate projects, as well as diversify the Fund’s investor base. This issuance follows CPPIB’s inaugural green bond in June 2018, the first such market offering from any pension fund. Investors bought $1.5 billion of the Canadian dollar-denominated 10-year bond.
Fiona Trigona, TCorp’s head of funding and balance sheet, said there had been a huge change in appetite for environmental and social-friendly bonds since they issued their green bond a year ago, as boards and investors increase their focus on social responsibility.
“While green bonds have existed for a number of years, investor appetite is rapidly evolving. Demand is now increasing for bonds underpinned by not only green, but also social assets.”
Speaking of the two transactions, Trigona said it was important to see the banks’ attitudes change in terms of providing more fixed income products in this area,” she said. “The dealers bringing transactions to market now know this is an area they need to get more involved in.”
Joint lead managers are ANZ, Bank of America Merrill Lynch and National Australia Bank.
TCorp said it was working closely with the NSW government to ensure the assets financed are aligned with the International Capital Market Association’s sustainability bond guidelines and the United Nations’ sustainable development goals.
The asset manager has access to a A$3.5 billion pool of green and social assets thanks to the state government’s investment in infrastructure and social projects.
Five new sustainable water and wastewater management projects have been identified for the sustainability bond, as well as two new social projects relating to education and transport. TCorp said it’s committed to reporting on the outcomes of these assets on an annual basis.