First in the league: Australia's Green Bond Fund in Ethical Investment Market

Summary

• Clean Energy Finance Corporation (CEFC) has pledged to put in at least $70 million to a fund of green bonds that are first of a kind in Australia.
• The practice of adopting ESG framework has been rising while making any investment decision, as they affect risk and return of investments.
• BHP's Ok Tedi mine mishap and Rio Tinto's destruction of indigenous sites are some disasters that happened in the past.
• Financing is now shifting towards renewable energy ventures than fossil fuels.

Australia has the capital to fulfill its green infrastructure related difficulties and build a strong and climate-ready economy. Investing in low carbon transition can help in creating jobs, enhance productivity and economic growth of Australia. A large number of green bonds are being issued in Australia.

A Green bond fund is a fixed-income investment, reserved to raise money for climate and ecological projects. The Green bonds are asset-linked and supported by the balance sheet of the issuer.

Altius, which forms a part of Australian Unity stable, has unveiled a fund for institutional and investors (institutional) that gives access to thirty corporate and government bonds, the earnings of which are reserved for projects aimed at decreasing carbon emissions.

The Clean Energy Finance Corporation (CEFC) has committed to put in at least $70 million to this managed fund of green bonds that are the very first of its kind in Australia and holds 35% of the growing fund's total assets under management.

CEFC is a government of Australia maintained Green Bank formed to simplify the enhanced movement of money into the clean energy space. It addresses Australia's emission challenges in agriculture, property, energy generation and storage, infrastructure, etc. CEFC can put in more money, which stays dependent on the growth and performance of the fund.

COVID-19 highlighted the relationship between people and nature amid a halt in economic activity globally, which resulted in a drop in greenhouse gas emissions across the world. Also, coronavirus induced shutdowns in China resulted in a 25% reduction in China's emission in February this year.

The need for the ESG framework

Every business is extremely interconnected with ESG (Environmental, Social and Governance) related matters. Social norms tend to coincide with environmental norms and governance when entities abide by environmental laws and wider concerns about sustainability.

ESG has grown and shifted from the sidelines to front of decision making. ESG issues are prominent when investors have to put up with significant, and instant losses on listed equities accredited to bad management of risks caused by 1 or more than one of these issues. Looking at the individual elements of ESG, companies are incorporating environmental concerns like climate change, fossil fuels in their shareholder resolutions at annual meetings.

Further, social issues like labour relations, diversity and inclusion can have a direct impact on the financial performance and reputation of a company. Governance implies measures and practices adopted by the firms to administer itself, take decisions, obey laws, and fulfil requirements of external shareholders.

The growing importance of sticking to ethical standards

Rio Tinto Limited (ASX:RIO), the mining behemoth, destroyed an important historical site about 46,000 years old in May this year. Rio had blown up a portion of the Juukan Gorge area, damaging 2 prehistoric rock shelters, causing devastation among Puutu Kunti Kurrama and Pinikura natives. The Company later asked for forgiveness from conventional owners in the north of Western Australia region for the incident.

Similarly, last year there was the emergence of a row over the control of a fund arrangement to help several villagers impacted by the OK Tedi mine disaster that happened in Papua New Guinea, over 2 decades earlier. The OK Tedi mine discharged tens of millions of mine waste into the local river system in the 1980s and 1990s that polluted both fish and trees, destroying the region's economy.

A special trust account was set up to compensate landowners of the affected communities in which dividends from the mine's profits were accumulated. The fund had been managed by PNG government officials till September 2019 when allegations of misappropriation of funds were imposed by OK Tedi and Fly River Development Foundation.

Further, looking at the investment trend, renewable energy ventures are getting substantial amount of money when compared to fossil fuels. The largest financiers in the world like Goldman Sachs, Citigroup, Blackrock, etc have declared their decisions on not making any investment in thermal coal projects. Similarly, 3 out of 4 major banks, barring ANZ, have announced that no further investments would be made in the thermal coal projects.

About 70% of the world's clean energy investments are government-driven, and now governments are redirecting resources to keep businesses and economies buoyant amid COVID-19. Low oil prices and coronavirus are the biggest setbacks to the global energy transition. While BIS (Bank of International Settlements) has cautioned that climate changes can result in the next financial crisis, APRA (The Australian Prudential Regulation Authority) has asserted banks to think about future risks, with climate change.