Western Australia’s first green bond a significant step in the right direction

By Dr. Kylie-Anne Richards, Deputy CIO and Fund Manager at Fortlek Asset Management bloom

Western Australia (WA) and Queensland have been in the international spotlight for a perceived lack of concerted effort towards climate change mitigation. This criticism was underlined in 2019 when Sweden’s central bank outlawed bonds from these states due to high emissions and perceived climate inaction. Notably, these states have the highest per capita greenhouse gas emissions globally.

Recently, however, a shift in the narrative is evident. The growing desire among investors to align their capital with sustainable and environmental initiatives is changing the financial landscape. This growing demand for eco-conscious investments is anticipated to have a substantial price impact as more investors begin to redirect capital away from non-sustainable ventures.

In response to these changing market dynamics, several Australian states, including Queensland and WA, have begun issuing “green” and “climate” bonds. Queensland currently leads among states as the largest green bond issuer, with bond proceeds dedicated to environmentally beneficial projects and properties.

The issuance of green bonds is much more than symbolic gestures towards sustainability. In an era where climate risks play an increasingly important role in determining the value of government bonds, countries falling behind on their green commitments risk higher borrowing costs. Advanced economies struggling to manage their climate change may face liquidity crunch and financial challenges to recover from severe climate shocks or natural disasters.

A notable step in this direction is the successful issuance of Western Australia’s first green bond, raising $1.9 billion to finance the state’s transition from fossil fuels to renewable energy. The oversubscription of the bond offering underscored strong investor appetite for sustainable investments. The higher credit rating of Western Australian Treasury Corp further boosted investor confidence.

Despite the debate surrounding the “greenium” or green premium and questions about whether low issuance yields will offset the additional cost of green bonds, WA’s experience suggests that in the absence of greenium, green bonds can still attract significant interest. Can Their issuance serves a variety of purposes, from signaling commitment to the market and enhancing reputation to meeting investor demand and paving the way for future Greeniums. The successful bond offering attracted more than $6 billion in bids from more than 60 investors, despite having the same yield as state common bonds.

In a broader perspective, this successful green bond auction by the Western Australian Government signals a growing commitment to sustainable investment. This potentially initiates a shift toward financial solutions that address climate change and promote renewable energy, setting a precedent for other governments or organizations to consider similar green initiatives.

The Australian Government is set to strengthen this commitment by partnering with energy investors to introduce the country’s first sovereign green bond by mid-2024. The initiative aims to promote institutional investment in the transition to net zero emissions by providing a vehicle for large investors, such as superannuation funds and banks, to finance public projects in line with this target.

By providing another way for investors to engage with public projects oriented towards the energy transition, the bond program is expected to attract more green capital to Australia and increase the scale and credibility of the country’s green finance market. As such, the success of the Western Australian Green Bond auction and the proposed Sovereign Green Bond initiative together serve as a step in the right direction for sustainable finance in Australia.