Investing
| Sector | Investing |
| Sub-sector | Fixed Income |
| Location | Australia and New Zealand |
Much of this growth has been in response to client demand and the energy transition.3 ESG-labelled bonds offer investors not only a chance to diversify their portfolios, but also to align with global ESG criteria. In anticipation of the growing breadth and depth of the ESG-labelled bond market in Australia, MAM’s Fixed Income team developed an ESG Bond Framework to assess the potential impact of each ESG-labelled bond.
The market focus on ESG-labelled bonds in Australia was magnified in 2024 when the Australian Government, through the Australian Office of Financial Management (AOFM) which issues debt on behalf of the federal government, issued its inaugural Green Bond with a 10-year maturity. This builds on active issuance from state government issuers in Australia.
As a leader in the Australian fixed income market, MAM has built strong relationships with issuers, which has allowed for open and constructive dialogue with management teams around their ESG-labelled bond issuance programs.
The MAM Fixed Income investment team utilises a scorecard approach to assess an issuer's ESG-labelled bond framework against the ESG Bond Framework scorecard. Each bond is given a score out of five. This score reflects an assessment of a bond's potential ESG impact, categorised as 'Low Impact', 'Moderate to High Impact' or 'High Impact'. The score is based on weighted criteria that align with the focus of the bond.
This methodology is important to determining the fair value4 of the bond, especially as it relates to the growing demand for ESG-labelled bonds and their inherent scarcity. This demand often results in a 'greenium’ – a premium paid for ESG-labelled bonds due to their specific use of proceeds for ESG-aligned projects.
The inherent scarcity of ESG-labelled bonds relates to two factors. First, the eligibility requirement of projects that can be funded using the bond proceeds. For example, ESG-labelled bond proceeds require a pre-committed project or pool of projects whose cost equals or exceeds the amount raised by the bond. Second, the market itself is relatively new, so a yield curve of ESG-labelled bonds is still being built out and this will only occur over time.
Outcome
Ahead of the AOFM issuing its inaugural Green Bond in June 2024 and the MAM Fixed Income team launching its ESG Bond Framework in December 2023, MAM was actively engaged in discussions with the AOFM. Reflective of MAM’s standing in the fixed income market, our feedback was sought on several issues, including the government’s framework, the eligibility requirement of projects, maturity of the inaugural bond and our general expectations of how we expect a green bond to trade relative to non-green bonds.
The ability to engage with the AOFM allowed MAM to influence the development of the AOFM’s Green Bond Framework while gaining a deeper understanding of the AOFM’s objectives and strategy to raising long-term capital. This insight allowed MAM to be confident in applying its ESG Bond Framework scorecard, and ultimately resulted in our participation in the syndication.
global issuance of ESG-labelled bonds in 20235
ESG-related engagements with issuers6
invested in ESG-labelled bonds by the MAM Fixed Income team on behalf of the funds and strategies it manages7
Our engagement with the AOFM allowed us to provide feedback on its Green Bond Framework and appropriate pricing of the deal. For us, one of the more interesting aspects of the projects underpinning the AOFM’s green bond was that it allowed us to not only back public projects that support the Australian Government’s transition to net zero by 2050, but also projects that support environmental objectives."
David Ashton
Senior Portfolio Manager – Global Fixed Income
Macquarie Asset Management
1. The MAM Fixed Income team defines ‘ESG-labelled bonds’ as bonds that have been issued to address specific environmental or social factors, which have been grouped into four categories: green or climate bonds, social bonds, sustainability bonds, and sustainability-linked bonds (each as defined as follows): ‘Green or climate bonds’: Bonds with proceeds earmarked for projects aimed at generating positive environmental impact. ‘Social bonds’: Bonds with proceeds earmarked for projects aimed at generating positive social impact. ‘Sustainability bonds’: Bonds with proceeds earmarked for projects aimed at generating positive environmental and social impact. ‘Sustainability-linked bonds’: Issuer makes a commitment to achieve pre-defined key sustainable performance targets, and the financial characteristics of the bond depend on the achievement of key performance indicators. Proceeds go towards general purposes.
2. The World Bank, ‘Green, Social, Sustainability, and Sustainability-Linked (GSSS) Bonds’, January 2024.
3. Environmental Finance, Sustainable Bonds Insight 2023.
4. Fair value is the price at which an asset is bought or sold when a buyer and a seller freely agree on a price.
5. The World Bank, ‘Green, Social, Sustainability, and Sustainability-Linked (GSSS) Bonds’, January 2024.
6. For financial year ending 31 March 2024 for engagements undertaken by the MAM Fixed Income credit research team. We note that this covers all ESG-related engagements with issuers, not only those engagements that were related to the issue of ESG-labelled bonds.
7. For the year ended 31 March 2024. These bonds have been labelled by the issuers in accordance with industry-recognised standards such as ICMA’s Green Bond Principles or the UNDP SDG Impact Standards for Bond Issuers and/or verified by an external ESG assurance provider.
