The frameworks provide for external certification of a green bond programme and ongoing verification of compliance with that programme (typically carried out by an external auditor).
The increasing threat of climate change and the response of the global community to that threat will continue to fuel increased demand for green bonds. The long-awaited Climate Change Response (Zero Carbon) Amendment Bill (also known as the Zero Carbon Bill) was introduced into Parliament earlier this month, with the headline objective of reducing New Zealand's net carbon dioxide emissions to zero by 2050.
The Zero Carbon Bill aims to reduce New Zealand's net emissions by the implementation of 5-yearly reduction targets set by the Minister for Climate Change.
The UK's groundbreaking Climate Change Act 2008 (on which the Zero Carbon Bill is based) introduced mandatory environmental reporting on environmental issues. Since 2013, UK listed companies have been required to disclose details of their carbon dioxide emissions in their annual report.
Although the Zero Carbon Bill doesn't include similar reporting requirements at this point in time, it's likely that such requirements will be introduced at a future date as a result of related policy development being undertaken by the Productivity Commission.
The framework of the Zero Carbon Bill is likely to be supplemented by increasingly onerous regulations over the coming decades in order to ensure emissions targets are met. Coupled with the increased transparency of mandatory emissions reporting, this is likely to result in the re-allocation of capital away from traditional emissions-heavy industries into low-carbon and green industries.
Green bonds have an obvious part to play in funding the transition towards a low-carbon economy. Other public and private sector organisations in New Zealand will undoubtedly follow Auckland Council, Contact Energy, and Argosy Property in establishing their own green bond programmes to facilitate allocating capital toward low-carbon activities.
For all the potential benefits that green bonds offer, there are some obstacles. Yields on green bonds remain similar to vanilla bonds, suggesting they are difficult to offer at a discounted yield unless issuers can clearly demonstrate an above-average benefit of the "green" element. There has also been criticism from some quarters that some green bond issuances are a form of "greenwashing" — in other words, a PR attempt by organisations that are not taking a holistic approach to sustainability in other parts of their organisation.
Taken too far, greenwashing also raises potential fair dealing issues for green bonds under the prevailing financial markets conduct regime.
Those concerns aside, it is clear that green bonds will become an increasingly common feature of New Zealand's debt capital markets. New Zealand public and private sector organisations with a strong commitment to sustainability have an exciting opportunity to leverage off our clean, green global reputation. Global developments show that green bonds can be successfully used to finance initiatives that will generate positive environmental and social benefits.
● David Ireland is partner, Financial Services, Kensington Swan.
