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What is NZX’s role in accelerating green bond growth in New Zealand?

The NZX supports the development of the green bonds market in NZ. The NZX lists bonds compliant with certain green criteria, tracks performance of green assets and provides guidance on green securities to market participants. Specifically, in the future the NZX may:

  1. Set up green bond lists or segments
  2. Develop guidelines for green bond listings
  3. Support green bond indices and ETFs
  4. Promote market education

What is the green bond market?

  • A green bond is where proceeds are used to finance or refinance projects with clear environmental benefits
  • The market has been in existence since 2007, and as at the end of 2017 reached USD$221 billion of labelled green bonds issued globally, of which 72% are listed on stock exchanges
  • The cumulative issuance of green bonds since 2007 is USD521bn with USD167.6bn issued during 2018
  • The market is open to many types of issuers: corporates, governments and semi-government bodies, financial institutions and asset owners
  • The International Capital Markets Association’s green bond principles serve as the most universally accepted basis for green bond issuance in the global market

What are the benefits of a green bond?

  • Investor diversification
  • Application across multiple asset classes which demonstrate environmental benefits
  • Establish/reinforce green credentials
  • Potentially longer tenor

What is the potential investor appetite?

Consideration
Description

Investor Type

  • Institutional: insurance companies, fund and asset managers, superannuation funds: greening portfolios
  • Middle market: councils, education bodies, religious groups, ethical funds which may have specific mandates or strong appetite
  • Bank balance sheets: emerging as an investor class with increasing focus by banks on sustainability funding targets as they respond to macro trends such as disclosure and regulatory signalling
  • High-net-worths and family offices: emerging strongly especially amongst millennials who actively seek social and environmental return on top of economic return
  • Typically investors are long-term buy-and-hold investors

Investor Rationale

  • Increasing exposure to ‘green assets’
  • Recognition of role in mobilising capital in response to Paris Agreement targets and to addressing environmental (and social) challenges generally
  • Consciously allocating larger segments of their portfolios to climate change investment activities
  • Responding to demand from clients and beneficiaries around investment practices and Environmental, Social And Governance (ESG) of fund managers

Issuer

  • NZ: Energy companies, high energy users, property, transportation & logistics, integrated supply chains
  • Overseas kauri issues
  • Growing interest from the public and corporate sector
  • Diversity of issuer type welcomed by investors

Tenor

  • In line with traditional market: five years
  • Appetite for up to seven years, and longer if appropriately priced

What is the basis on which to issue green bonds?

The most universally accepted basis on which to structure green bonds is ICMA’s Green Bond Principles (GBPs). The GBPs outline four key pillars of issuance in addition to suggesting asset classes.

Both provide a sound framework for identifying and applying bonds proceeds to a range of green expenditure categories.

These four pillars are:

  • Use of proceeds
  • Project selection
  • Management of proceeds
  • Reporting

The asset classes currently listed in the GBPs include (but are not limited to):

  • Renewable energy
  • Energy efficiency (including efficient buildings)
  • Sustainable waste management
  • Sustainable land use (including sustainable forestry and agriculture)
  • Biodiversity conservation
  • Clean transportation
  • Sustainable water management (including clean and/or drinking water)
  • Climate change adaptation

In addition, issuers are encouraged to seek an independent review of their green bond structure and investors are generally accepting of the following forms or a combination thereof:

  • Second party opinion
  • Assurance
  • Ratings agency evaluation
  • Climate Bonds Initiative Certification

The Climate Bond Initiative standards also provide a sound framework for identifying and applying bonds proceeds to a range of green expenditure categories.