Green bond issuance is slowing down this year, with Moody's revising down its forecast for 2018 from $250 billion in new bonds to as little as $175 billion in an August 1 report.
But that doesn't mean everyone is losing faith in green bonds. For governments anxious to meet their commitments under the Paris Climate Accords, or simply to burnish their environmental credentials, they remain a key source of funding.
Take the Australian state of Queensland. The state government issued what was then the biggest ever Australian-dollar green bond in March 2017, and is preparing to dip its toe into green funding waters again.
But it faces questions common to many green bond issuers ... and that also pose a dilemma to investors with environmental mandates: just what is a green bond? How broad can you make the criteria for green bond issuance without diluting its environmental qualities? And how does one burnish ones green credentials when a significant part of a business – or in this case a state economy – is dependent on fossil fuels?
QUEENSLAND GREEN BONDS
The Queensland Treasury Corporation's inaugural green bond, its A$750 million ($576 million) seven-year green bond, was certified by the Climate Bonds Initiative and became a FinanceAsia award winner. But the corporation’s 2018 Green Bond Report shows the government has now allocated all the proceeds. And with a state budget heavily dependent on debt, Queensland is again turning to an investor base in Asia as it borrows heavily and seeks private sector input as it builds its renewable energy capacity to cut carbon use.
“We are an economy that welcomes private sector investment into renewable energy projects,” said Jackie Trad, Queensland's deputy premier and treasurer. She was speaking in Hong Kong during an investor roadshow that also took in Tokyo. The roadshow involved one-on-one meetings with a number of Asian debt investors keen to satisfy their socially responsible investing mandates.
And a new round of green bonds is now on Queensland's agenda.
But future green bond issuance will not rely only on the Climate Bonds Initiative framework. The Queensland Treasury Corporation has expanded it Green Bonds Framework to cover a broader range of eligible projects, based on the International Capital Market Association’s Green Bond Principles.
Queensland says that projects under the ICMA principles will support a transition to an economy better able to cope with climate change, though some experts argue a broader mandate can lead to ambiguity about how "green" funded projects actually are. Meanwhile according to the Moody's report, the rise of alternatively-branded social or sustainable bonds may have taken a chunk out of green bond margins.
Dilution of standards is a particular worry in China; around $14 billion worth of Chinese Green Bonds do not conform to international standards, largely due to differences in green eligibility definitions and a lack of public disclosure, according to the Climate Bonds Initiative’s 2017 China Green Bond Market Report.
While Chinese green bonds have been used to fund projects such as upgraded coal-fired power stations, Queensland's Green Bonds Framework includes provisions to direct proceeds to flood defence and the preservation of the Great Barrier Reef – a cause for international environmental concern and the gem of Queensland’s tourist circuit.
By contrast, Queensland's first round of green bonds was purely focused on infrastructure. More than A$630 million was used on rail infrastructure, including a fleet of new generation electric trains for Southeast Queensland. A further A$80 million went to 56 cycleway projects, while the remaining A$34.6 million funded the completion of the Sunshine Coast Solar Farm. That made Sunshine Cost Regional Council the first in Australia to offset its entire electricity consumption against renewable energy, putting it at the forefront of Queensland’s push to be carbon-neutral by 2050.
Yet the latest figures from Australia's central government show Queensland is responsible for 29% of Australia's carbon emissions, more than any other state despite the fact it is only the third-largest by population.
But Trad, the state treasurer, considers her state to be leading the way towards this ambitious target of carbon neutrality.
Indeed, Moody's expects state issuance of green bonds to increase in volume over the coming years because, as analyst Matt Kuchtyak says: “Green bonds are key to financing a government's commitment to the Paris Agreement."
ADANI PRESSES ON
However despite the push to be carbon neutral, Queensland will continue to be a prolific exporter of coal and gas. Such exports do not count against a government's commitments under the Paris Climate Accords — standards which Queensland itself is not a signatory to, but which the government aims to match.
As such, the state is continuing to pursue long-term contracts for commodity exports and throwing its support behind projects such as Indian firm Adani's A$16.5 billion ($12.2 billion) Carmichael coal mine.
“Adani has all the approvals from the State Government that they require,” Trad said, admitting the pace of development had been slowed by concerns over the validity of the Indigenous Land Use Agreement, as well as financing shortfalls.
Trad is also confident Adani's experience hasn’t dampened interest in Queensland’s resource sector generally. Trad points to investor interest in 30-year liquified natural gas (LNG) contracts, and a general uplift in investments to bring mothballed projects into use.
Following a surge in coal prices, mining royalties brought Queensland A$1 billion more than originally forecast in the 2017-18 budget. Coal alone was worth A$32.8 billion to Queensland in the year ending May 2018. It’s not hard to see why the state has not chosen to prioritise renewables just yet.
Nevertheless, Queensland’s new budget does commit to a diversified economy, intended to protect the state from volatile commodity prices.
The state's Labor government, now in its second term, forecasts an increase in state debt from A$71 billion to A$83 billion over the next four years amid heavy investment in infrastructure. Already with the second-highest debt burden of its domestic peers, any prospect of a return to a AAA credit rating from Moody's, which the state lost in 2009 in the aftermath of massive flooding in Brisbane, has taken a back seat.
But the Treasury team is keen to instil confidence in Queensland’s viability as an investment destination. Philip Noble, Queensland Treasury Corporation’s chief executive, is confident the state’s diversified economy is stable enough to weather a storm.
The state has had to cope with everything from the 2008 global financial crisis to last year's devastating Cyclone Debbie. But Noble said: “If you’re asking what makes me sleep at night? The fact that we have lots of maturities across the yield curve now and we’ve diversified that risk.”
This is in part due to a change of approach from the Queensland Treasury Corporation, which this year celebrates its 30th anniversary.
The corporation has gone from issuing bonds with a maximum maturity of 10 years to debt with a tenor of up to 30 years, opening the door to more investment from Asia, particularly from life insurers interested in yield curves over 10 years or more. The corporation estimates foreign funds hold approximately 30% of its bonds.
Noble says green bonds play a role here too. With the previous issuance attracting domestic and foreign capital from both green-mandate companies, and traditional investors with ESG (environmental, social and governance) frameworks, Noble believes green bonds are a great way for the state to diversify its investor base. “Green bonds have a very large part to play in our funding requirements over the next generation,” Noble said.
BORROW TO BUILD
Trad, the treasurer, also defended her budget’s focus on road and rail infrastructure as necessary to keep up with the demands of higher-than-ever population growth. “We can’t continue to have only one heavy rail crossing for a network that services five million people,” Trad says, referring to the state’s cornerstone transport infrastructure project: the Cross-River Rail Network.
More than a year after committing to fully funding a A$5.4 billion railway plan intended to alleviate motorway and commuter traffic around Brisbane, the state government continues to face difficult decisions about its private sector partnerships.
Five consortiums are still bidding for the construction leg (“Tunnel, Stations & Development”) of the project. One of these includes French civil engineer Bouygues, in cooperation with the Queensland Investment Corporation. Dr Peter Power, senior economic adviser to the state government, says the Cross-River Rail Development Authority has been impressed by the innovation demonstrated across the consortiums, and that overseas know-how has played a role in identifying risk factors for the construction.
The chosen consortium’s budget is expected to come in at around half the total planned project cost. And learning a lesson from the Sydney light rail, which has seen its budget mushroom amid construction difficulties, Trad said early investment into workshops studying technical challenges with each of the tenderers will help shield the project from unnecessary risk.
Trad expects the tender process to be finalised early next year, with construction commencing in the second half of 2019. Tendering for the technical side of the railway network should be finalised this year.
CHINESE COASTAL TOURISM
Meanwhile, overseas investors – especially from China – are piling into Queensland's infrastructure.
Chinese tourists are flocking to the state's golden beaches, world-class theme parks and, particularly, its air-conditioned shopping malls, buoyed by a fall in the Australian dollar. A record number of Chinese tourists have chosen to holiday in the Sunshine State, with some 470,000 arriving in 2016/17.
In April, fresh from hosting the Commonwealth Games sporting mega-event, the city of Gold Coast welcomed a 7,000-strong delegation of healthcare professionals from Guangzhou, part of the state’s continuing strategy to attract Asian business tourism into Queensland.
It is no surprise then that deep-pocketed Chinese investors are pouring billions into Queensland’s hotel and recreational infrastructure. The A$3 billion Queen’s Wharf Casino and Resort in the state capital Brisbane is a joint venture between Hong-Kong based partners Far East Consortium and Chow Tai Fook Enterprises.
Earlier this year, the Gold Coast’s equivalent project Jewel Resort & Casino was sold, mid-construction, by a Hong-Kong listed agency of China's Dalian Wanda to another Chinese-backed investment group for A$1.13 billion.
China’s Ministry of Culture also lists Songcheng’s proposed A$400million Australian Legend World on the Gold Coast as a “key cultural trade and investment project” under its Belt and Road Initiative.
Although Queensland’s place in Belt and Road is unclear, the state has a solid history of encouraging Chinese investment. In 2016, Trad – in her previous role as trade and investment minister –visited China to open a government trade office in the southern city of Chengdu, and to renew a sister-state memorandum of understanding with Shanghai.
“We are a state that is very much reliant on direct foreign investment,” Trad said during her visit to Hong Kong last month.