What do Auckland Council's electric trains, Contact Energy's geothermal energy plants, and Argosy Property's 5-Star Green Star buildings have in common? All have been financed by green bonds in New Zealand over the past 12 months.

So what is a green bond? Green bonds are regular vanilla bonds that are issued to fund initiatives with positive environmental or climate outcomes, including initiatives aimed at energy efficiency; pollution prevention; the protection of nature's ecosystems; sustainable food production; clean transportation; sustainable water management; and development of green technology. They are typically issued by corporates, banks, or governmental bodies. Like vanilla bonds, they pay interest at regular intervals, are backed by the assets of the issuer, and are (usually) listed on a recognised debt market.

The value of global green bond issuances has increased exponentially in recent years, reaching US$170 billion of issuances in 2018, with a projected US$250b of issuances to take place in 2019.

With over US$45 trillion of assets globally now managed in accordance with socially responsible investment principles, green bonds play an increasingly vital part in asset managers' fixed income strategies.

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Green bond programmes are generally established under one of two frameworks — the Green Bond Principles (backed by the International Capital Markets Association) or the Climate Bonds Initiative (an international non-profit organisation). Both frameworks are voluntary, but are intended to provide prospective investors with a level of confidence that the proceeds of a green bond issue will be used in a "green" way.

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.