As ice melts at the poles, glaciers retreat, and pollution smears our skies, public opinion is forcing big businesses and local governments to think differently. Worldwide, shareholders are demanding higher standards, and investors are seeking guilt-free ways of investing. ‘Green’ bonds are the newest device in New Zealand’s sustainability toolbox. Four organisations have kickstarted a green bonds revolution in New Zealand.

What is a green bond?

A ‘bond’ is simply a debt. It’s like an IOU issued by a company, council or organisation wanting to finance a project. Investors buy the bonds because they provide a guaranteed rate of return (coupon rate or interest), with the principal repaid on a set maturity date. Investors use bonds to help balance their portfolios. They can offer more certainty than shares, but generally give you lower returns because of the reduced risk.

‘Green’ bonds are just like ordinary bonds, with one important difference: the funds can only be used for environmental or sustainable assets. The first green bond in New Zealand was released by offshore issuer International Finance Corporation, a member of the World Bank Group, in 2017, to finance climate change investments.

A flood of offerings

Recently there has been a flood of green bonds from Kiwi organisations Auckland Council, Contact Energy, and Argosy Property. Auckland Council was the first local issuer and its first NZ$200 million of green bonds were so popular, it had a second release of NZ$150 million earlier this year.

Treasurer John Bishop says: “The proceeds from the first issue of green bonds went to refinance electric trains, and the most recent one was to refinance electric trains and cycleways.” He says there were two key reasons for the council’s first green bond.

“The first is to deliver on our sustainability objectives, it’s ‘walking the talk’. The second is to assist in the development of a green bond market in New Zealand.”

Generating green power

The first corporation to issue a green bond in New Zealand was energy generation company Contact Energy. Louise Tong, Contact’s head of capital markets and tax, says she was sceptical about green bonds at first, thinking they meant ‘a lot of hoops to jump through’ to certify the debt as green with the Climate Bonds Initiative.

“But I changed my mind,” she says. “I could see the signs, not in New Zealand so much, but offshore. Markets were trending more towards investing in assets that have environmental and social characteristics. “And then I realised that the hurdle for proceeding wasn’t really as high as I’d thought.”

Contact certified all debt

So, Contact certified all its debt green in one go, against its renewable power generating assets. It was part of a larger plan, Tong says.

“Contact as a business – and the industry – was decarbonising. We shut down one thermal plant, we’d built a new geothermal plant and we’ve reduced emissions by more than 50 per cent since 2012. “You could see that electricity was a large part of the solution for decarbonising the broader economy.”

Contact certified all its existing debt green in 2017, then this year a new green bond attracted investors from around the world All future debt is likely to be certified green.

Green buildings

Property company Argosy is a member of the New Zealand Green Building Council. It’s one of New Zealand’s largest diversified property companies, and listed on the NZX. Argosy issued a green bond in April this year. The offer was oversubscribed, at NZ$100 million, says chief financial officer Dave Fraser.

Argosy sees green buildings as a successful strategy, he says. Its environmental strategy reflects a long-term ambition to create vibrant, sustainable workplaces for its tenants.

“It was all about creating value for shareholders. Green buildings contribute to value, have higher occupation, higher rents, and are a really good business.” Bonds are usually issued for a short time, but they can be bought and resold on the New Zealand Stock Exchange.

The way of the future

The momentum is growing. In June, Westpac was the first bank in New Zealand to issue a green bond to support the funding of climate change solutions, raising NZ$860 million.

Meanwhile, Auckland Council group chief financial officer Matthew Walker says green bonds are a natural market for the council. “The growth in ESG mandates from the investment side is clear and obvious, and we think is only going one way. The ability for us to expand our pool of green assets is also pretty significant, so it’s something that we feel we can be involved in for a long time.”

Definitions:

Decarbonising: Reducing the carbon or carbon components released as a result of a process.

ESG (Environmental, Social and Governance): A way of measuring the sustainability and ethical impact of a company – its effect on the planet, people, its staff, suppliers, and management.

Published 25 November 2019

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