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Why investors are eyeing green bonds post election


A change in government is creating an opportunity for green investors who are looking to cash in on net-zero commitments.

The newly elected Albanese government has reaffirmed Australia's net-zero commitment, creating new opportunities for investors, an industry expert has revealed.

Often thought of as a boring passive investment, bonds, particularly green bonds, could become a favourable asset class in the future.

This is because in order to fund election promises, Australia will need to issue a lot of new green bonds.

As such, Janus Henderson's fixed asset manager Liz Harrison explains this will create a raft of opportunities for investors who want to do the right thing.

"With a new government focused on climate action, we expect additional opportunities for investment to present themselves across a broad range of projects and initiatives," she notes.

How do green bonds work?

Green bonds or climate bonds have the purpose of funding sustainable investment projects.

Usually these bonds are aimed at:

  • Energy efficiency
  • Pollution prevention
  • Sustainable agriculture
  • Fishery and forestry
  • Clean/sustainable water management

In terms of structure, they function similarly to traditional bonds. They are backed by a government, organisation or company, but payments are often linked to the project themselves. The investor will make a profit once the bond matures.

But these bonds have the benefit of helping to mitigate climate-change risks in a portfolio.

Labor's policy

Driving this new wave of green bonds is soon to be support from the federal government.

One of the key policies going into the election was a more ambitious carbon reduction target.

The Labor party said while on the campaign trail, "Our plan will reduce Australia's emissions by 43% by 2030 – which will become Australia's target under the Paris Agreement, keeping us on track for net zero by 2050."

This was compared with the "technology not taxes" approach the Liberal government campaigned on.

But with the way the votes went and a wave of teal independents coming in, there will be even greater emphasis on emissions reductions than Labor's election plans.

Beyond emissions targets, Labor has also committed to other policies, including a target of 80% renewable energy in the electricity mix by 2030.

In order to do so, the government points to community batteries, low-cost solar banks, the building of new electricity transmission infrastructure and improvements in existing industries' energy efficiency.

While the Labor government is committing to reducing Australia's impacts, the states are going even further.

As it currently stands Tasmania and South Australia are targeting more than 100% of their energy consumption to come through renewables.

What does it mean for investors?

This new green environment will impact investors in 2 main ways:

  1. Buying green bonds
  2. Investors in traditional businesses

Across federal, state and corporate Australia, initiatives to support action on climate change and decarbonisation will need to be funded and this is already evident in the rising levels of sustainable issuance.

"In terms of the 'labelled' positive impact market in Australia, this has grown significantly in the past 3 years, with the majority of funding directed towards environmental projects/targets," Harrison said.

"This includes Green bonds, Sustainability-linked bonds and Sustainable bonds (issued off a sustainable bond framework)."

However, the investment case goes beyond just investing in green bonds.

Traditional share trading investors will also need to look into green initiatives.

As it currently stands, only about 10% of Australia's largest 150 companies have committed to science based target initiatives.

But Harrison said that companies actually have sustainability targets but simply aren't reporting on them.

She notes that businesses that do not have sustainable targets could become less attractive investment propositions.

"We view ESG risk alongside business risk, financial risk and management risk and like many of our peers see companies without a credible decarbonisation strategy as un-investable," Harrison concludes.

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