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

The WA government – a mining superpower – just announced a green bond. Here Pendal’s MURRAY ACKMAN explains how to size up obvious, and not-so-obvious, sustainable fixed interest opportunities

• Not all green bonds are equal
• Find out about Regnan Credit Impact Trust
• Find out about Pendal Sustainable Australian Fixed Interest fund

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 of these bonds meet the highest standards of sustainable investors. And it’s not always obvious which ones.

Consider these three examples of recent sustainable bond issuers:

1. A national electricity network connecting renewables to the grid
2. A telco giant reducing power consumption on its network
3. Mining super-power Western Australia — the only Australian state that emits more carbon now than it did in 2005

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.

“The key to investments like this is understanding the ‘but for’ test,” says Murray Ackman, a credit ESG analyst in Pendal’s Income and Fixed Interest team.

When assessing a new sustainable bond, Murray likes to ask “but for my investment, would this project exist?”

In other words, is the bond simply funding “business-as-usual” activity? Or is it truly making an impact?

“We target green bonds with greater impact,” Ackman says. 

Example: electricity distribution network 

Ackman uses the example of an electric power distributor where the answer to the “but for” test was “no”.

In this case, the raised funds were earmarked for the replacement of decades-old copper wire, and installation of new high-voltage lines and substations.

That activity supports the transition away from fossil fuels to renewables and reducing carbon emissions. 

“But the problem for us is this: connecting generation to the grid, while very important, is very much business-as-usual for a grid owner,” says Ackman.  

“Their job is to connect things to the grid.  

“Claiming it’s green is kind of like a highway boasting about higher EV usage.” 

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.

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Example: NBN’s green bond

At the National Broadband Network, a $2 billion-plus green bond has been issued to fund a reduction in the emissions generated by Australia’s broadband internet infrastructure.

“Their argument is that fibre optics are more efficient than copper, and so replacing copper with fibre reduces emissions,” says Ackman.

“That may well be true, but it just so happens that their business model also relies on fibre optics, because that means higher internet speeds that they can charge more for.

“There is also the Jevons Paradox to consider — the more efficient something is, the more usage it generates, paradoxically leading to an increase in consumption.

“The NBN’s assumption is electricity usage will go down because the network is more efficient. But if we all watch more Netflix with our higher speed internet, than usage will go up.”

WA’s green bond

So where does that leave WA?

Find out about

Regnan Credit Impact Trust

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WA’s green bond is raising $1.9 billion to decarbonise the state’s electricity grid by investing in battery storage and wind farms alongside charging infrastructure and rebates for electric vehicles.

“For WA, the complaint we get is ‘how can you invest when they dig up so much stuff?” says Ackman.

“The first thing we say is that the stuff that they are digging up is very different to the coal mining that happens in the east coast states. WA’s miners are producing metals like iron ore and lithium spodumene that are essential resources for the transition.

“And the projects funded by the green bond are going to move the dial on the energy transition.

“WA’s policies have progressed significantly, and this green bond is a reflection of that.”

Ackman says the WA projects pass the ‘but for’ test.

“The newness is a huge component of it,” he says.

“A green bond needs to be evidence of your policies — not an apology for them.

“WA’s green bond follows a year after the government’s new sustainability plan and is reflective of the focus of the government to green up their economy and green up their energy usage.

“That’s something that we want to support.”