The Point

Pre-election rate rise on the cards

Australia this week sped past the RBA’s 2-to-3% inflation target and caught up with other global economies.

What’s next?

Beyond the headlines of yesterday’s 5.1% CPI result, the contribution of new dwelling purchase price and rents are useful bellwethers, says Anna Hong from Pendal’s Income and Fixed Interest team.

“New dwelling prices came in at 5.7% for this quarter — the highest since the turn of the century. Builders are finding it difficult to quote given the cost pressures they’re facing.”

Meanwhile rents turned the corner, contributing 0.6% this quarter. “Rent growth is accelerating across capital cities and there is more to come.”

This means increased pressure on the RBA to hike rates during the election campaign, says Anna.

“Markets have already priced in aggressive rate hikes in 2022 and a cash rate forecast above 3% by end of 2023. This may come as a shock to mortgage holders.

“The RBA is increasingly looking like it must join other central banks in dampening demand to rein in inflation rather than waiting for supply to fix itself.”

Why ‘true’ social bonds are in short supply

Most social bonds investors have the same aim: to make money while making a positive difference in society.

An example is the National Housing Finance and Investment Corporation, which last year issued $200 million in social bonds, making returns for investors while providing cheap funding for social and affordable homes.

But not all social bonds are equal when it comes to use of proceeds, cautions Murray Ackman, a credit ESG analyst with Pendal’s income and fixed interest team.

Pendal takes a relatively refined view, focusing on social bonds where the proceeds benefit the underprivileged.
Social bonds “don’t always meet our criteria”, says Ackman.

“For example, in the Netherlands around 70 per cent of the population is eligible for social housing. So, a Dutch Housing Authority ‘social bond’ isn’t going to fit our criteria.

“Our view is that a social bond should be an instrument to serve the underprivileged in society.”

Sustainable fixed interest: How to weigh up WA’s new green bond

Australians invest some $25 billion a year in local green, climate and social impact bonds, according to the Responsible Investment Association’s latest benchmark report.

But only some meet the highest standards of sustainable investors. And it’s not always obvious which ones.

Consider these three examples of recent issuers:

You may be surprised to learn that only the WA bond – announced last week – met with the approval of Pendal’s income and fixed interest team, including ESG credit analyst Murray Ackman.

WA’s green bond “reflects the focus of the government to green up their economy and their energy use,” says Murray.

What Sun Cable’s collapse means for renewable investing

What does the collapse of the ambitious Sun Cable solar project say about investing in renewables?

Backed by Atlassian’s Mike Cannon-Brookes and Fortescue’s Andrew Forrest, Sun Cable had grand plans to supply electricity to Singapore from a vast solar array in the Northern Territory.

But the pair disagreed over the method of export – undersea cable versus green hydrogen and ammonia – and the venture is now in voluntary administration.

“The main takeaway is that Sun Cable collapsed over a dispute about exporting – not over the idea of a huge solar array in the NT,” says Pendal ESG credit analyst Murray Ackman.

But it raises questions about a potential Australian energy export industry and the role of green hydrogen.

“Historically, governments and private entrepreneurs are typically best placed to carry the risk of these types of early-stage innovations,” he says.

“For most investors, it’s too early to be going all in on hydrogen.”

Could polluting companies be forced to pay a climate tax?

War, floods and China policy changes pushed this year’s COP27 climate change conference off the front pages.

But there was one thing investors should note, says Pendal Credit ESG analyst Murray Ackman.

COP27’s main achievement was an agreement that bigger polluting countries would compensate developing countries for the effects of climate change.

Some are now calling for this same logic to be applied to companies. 

“This has obvious implications for investors,” says Murray.

“If the logic is high emitters bear responsibility for mitigating the impacts of climate change, this adds credit risk.”

Take care when investing in sustainability-linked bonds

More companies are issuing “sustainability-linked bonds” — debt securities that pay a coupon linked to environmental or social outcomes.

These bonds typically don’t fund a specific project — instead they set overarching goals such as reducing emissions or improving corporate diversity.

If an issuer fails to hit its goal, usually it pays a penalty in the form of a higher coupon.

Sustainability-linked bond issuance hit US$103 billion globally last year — a yearly increase of 803 per cent, according to World Bank research.

But investors should take care that issuers are genuinely making changes and not simply greenwashing, says Pendal Credit ESG analyst Murray Ackman.

“In theory, they are great — but we’re starting to see some things we are not happy about with these structures.”