RIAA: Green bonds broaden investor appeal

ESG-focused financial advisers entering the industry this year are joining at the right time, with a sturdier set of green bonds for client portfolios thanks to imminent EU laws.

Sustainable investing decisions made locally are partly shaped by what's happening in Europe, particularly if the asset class is fixed income.

Late last month, the European Securities and Markets Authority (ESMA) provided more ballast for green bonds when it launched the first of only two industry consultations on how financial institutions can gain their approved status as a green bond issuer in the EU.

While the process is strictly under the so-called European Union Green Bond regulation, other countries including Australia would likely follow suit with a similar approach.

The EU Green Bond Standard (EUGBS) started off as a proposal back in 2021. ESMA will provide more details on the requirements for an external reviewer this December. Without an external reviewer's stamp of approval, a financial institution cannot issue a green bond.

"EUGBS started off as a paper, went into revision, and is now set as regulation. This will help standardise what a best-in-class green bond should look like, not just from a structural perspective but also on a host of details," said Xuan Sheng Ou Yong, sustainable fixed income lead, Asia Pacific, at BNP Paribas Asset Management.

"Bond issuers must provide exhaustive use-of-proceeds information, demonstrating how they align with the EU taxonomy. Details of how the investment will help the sustainable transition are also required to prevent green investments from being offset by unsustainable investments elsewhere," he said in an article he co-authored on the subject.

In short, the new law will leave little wriggle room for greenwashing.

In a separate development, this year marks the launch of the first Treasury Green Bond. The Australian Office of Financial Management kicked off a national roadshow, happening in-person and online, this month to help educate would-be investors.

"For the first time, the Australian Treasury is issuing a sovereign green bond. This should signal to all the bond issuers that the government is serious about the green bond market ... this will also help provide a benchmark for corporate issuers," said Ou Yong.

He explained that the higher the number of green bonds in the market, the closer investors get to the ideal situation of having a green bond curve to analyse instead of a traditional bond curve.

Financial advisers welcome the further growth of green bonds.

"Our clients want to support positive change in the world while making competitive returns. One way we do this is by recommending green bonds. Clients appreciate the stories we can tell about how their capital is supporting green projects like the Gold Coast Light Rail or Brisbane bikeways, or a Sunshine Coast Solar Farm," said Karen McLeod, financial adviser at Ethical Investment Advisers.

"As advisers, we know that clients would like to invest more in local green projects. There is certainly an appetite from investors to fund green projects, while also receiving a financial return," she said.

Xuan Shen Ou Yong will be joining the panel session 'Private Equity, Fixed Income, Real Assets... What's The Best Way Of Investing In The Climate Transition?' at the annual Responsible Investment Association of Australasia (RIAA Conference) to be held on May 1-2 at the ICC Sydney. For more details, click here.

FS Sustainability is the media partner for the event.