Wesfarmers breaks green bond ground

Glenn Freeman

Livewire Markets

Australia’s sustainable bond universe blew past $15 billion in 2020, but still lags the European market by four or five times on a relative basis, says Realm Investment House’s Adrian Chow.

Locally, sustainable bonds comprise just 1% of the total bonds outstanding, versus around 5% of their total bond market in Europe. “So there’s still some catching up to do here in Australia,” Chow says.

What is a sustainability-linked bond?

So, what exactly are sustainability-linked bonds (SLBs) and are they different to green bonds? Green bonds have a defined remit where issuance proceeds are to be used for environmental or “green” projects. The other major difference is that green bond issuers aren’t held accountable in the same way as sustainable bond issuers. As Chow explains, the lack of contractual protections for the bondholder of green bonds means the company faces no direct repercussions if they fail to deliver on the defined remit.

On the other hand, SLB issuers agree to link the bond directly to various sustainability targets. And if they fail to do this, the company incurs a higher coupon, in favour of the investor.

Sustainability-linked bonds (SLBs) are a new type of general corporate purpose bond in which investor coupons are tied to an issuer’s sustainability key performance indicators such as decarbonisation.

SLBs have four core components:

  1. A credible KPI
  2. Ambitious sustainability performance targets
  3. Meaningful changes in bond characteristics
  4. Verification and reporting mechanisms

Australia’s first SLB issuance was that of Wesfarmers in June this year, an offer that was 2.5-times oversubscribed. Chow chalks this up to a couple of things:

  • The strong fundamental view on Wesfarmers as a company, having proven highly resilient to the pandemic
  • The scarcity premium around Wesfarmers bonds, which have not been available locally since 2015
“And for us, the sustainability-linked element was the cream on top,” Chow says. Though Chow and his team participated in the initial book-build, the fixed income fund manager was ultimately priced out. But while this was just the first such issuance in the Australian market, he is confident it is far from the last.

Especially given the noise that accompanies the popularity of ESG, it’s important not to lose focus of the fundamentals. This is a point emphasised by BNP Paribas, one of the lead managers in a sustainability-linked bond issued by another Australian company, engineering firm Worley (ASX: WOR), last month.

Like the Wesfarmers issuance, the Worley SLB was oversubscribed, this one by around 3-times, achieving a final size of around 500 million Euros. A key distinction here is that the Worley example sees an Australian company tapping the European market for capital, while the Wesfarmers bond is the first-of-its-kind in the Australian market

“The reception to the transaction was aided by the sustainability-linked element but also by investor assessments of Worley’s credit and overall transition strategy,” says Kate Stewart, managing director and head of debt capital markets at BNP Paribas Australia.

The Worley SLB ticked all the boxes of the company’s stringent sustainability framework, which includes a KPI based on Scope 1 and 2 emissions for entities and assets controlled by Worley, and a sustainability performance target to reduce absolute Scope 1 and 2 emissions by 50% by 2025 from a 2020 baseline. This aligns with Worley’s 2030 net-zero emissions target.

Speaking more broadly about the outlook for SLBs in the local market, Realm’s Chow believes the Wesfarmers issuance is just the first of many.

“This is a definite positive for investors, in seeing issuers held accountable for their sustainability goals,” Chow says.

“Over time, we will see more sustainability-linked bonds in the local market and greater diversity of issuers in this space.”

Realm is your partner

Our clients are our lifeblood. With deep experience investing in Australian Credit and Fixed Income markets, Realm Investment House is result-oriented. We are always focused on delivering client outcomes. Click the 'CONTACT' button below for more information.

Livewire gives readers access to information and educational content provided by financial services professionals and companies ("Livewire Contributors"). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.

2 stocks mentioned

1 contributor mentioned

Glenn Freeman
Content Editor
Livewire Markets

Glenn Freeman is a content editor at Livewire Markets. He has almost 20 years’ experience in financial services writing and editing. Glenn’s journalistic experience also spans energy and automotive, in both Australia and abroad – including the...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.


Sign In or Join Free to comment