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Green bonds: greenwash or the real deal?

Green bonds, also known as climate bonds, are designed to fund positive environmental or climate projects. They are often issued by major banks which identify qualifying assets (loans) on their books that meet the relevant criteria. The issuer then promises to maintain a pool of assets that exceeds the value of the funds raised through the bond issue.

For investors, buying a green bond helps fund projects focused on issues such as energy efficiency, recycling and waste reduction. For the sustainable sector, green bond issuance helps identify institutions likely to fund new projects.

It’s not just banks that issue green bonds. They have also been issued by governments, universities and listed companies that want to fund projects that benefit the environment. Woolworths is the latest company to issue a green bond in Australia.

Green bonds in Australian institutional portfolios

Green bonds are periodically made available to institutional investors in Australia. At the time of writing, approximately $21 million (5%) of the Australian Ethical Fixed Interest Fund is invested in a dozen international and Australian green bonds, including:

  • The World Bank Green Bond which aims to support the transition to low-carbon and climate resilient development and growth in client countries.
  • The Australian Catholic University’s Sustainability Bond which supports the energy efficient design of new buildings within the university’s capital development plan.
  • The NAB Climate Bond which is backed by NAB loans to renewable projects such as wind farms.
  • The Westpac Climate Bond which finances a number of renewable energy projects as well as low-carbon buildings.
  • The NSW Government’s Green Bond which is backed by public transport projects including the Newcastle Light Rail project and the Sydney Metro Northwest.

We do not automatically invest in every green bond that comes to market. We have declined to participate in several high-profile Australian-dollar denominated green bonds. For example, we avoided an ANZ green bond because the pool of green assets backing it was dwarfed by the bank’s ongoing fossil fuel lending; we avoided a green bond issued by the Victorian State Government because we decided the deal size was too small relative to other Victorian Government issues; and we declined to participate in a CBA green bond because the composition of the asset pool lacked transparency.

Woolworths green bond

In April 2019, we invested $3 million in Woolworths green bond, which was the first green bond to be issued by a supermarket operator in Australia. To create the bond, Woolworths worked with the UK-based Climate Bonds Institute to establish a benchmark for the carbon intensity of its supermarket sites. This benchmark will provide the bond market with a solid framework to assess Woolworths’ progress at lowering the carbon intensity of 32 of its supermarkets.

Under Woolworths Green Bond Framework, the pool of eligible assets encompasses projects covering renewable assets, energy efficiency, pollution prevention and control, clean transportation, sustainable water management and green buildings. Examples include the placement of solar panels on top of car park shade sails, retrofitting energy efficient LED lighting in stores, upgrading stores with hybrid or HFC-free refrigerators and cutting down on plastic wrapping on fruit and vegetables.

Over time, Woolworths will need to return to debt capital markets as other bonds mature. If the company has not successfully brought more stores up to the standard it agreed with the Climate Bonds Institute, or the existing portfolio does not continue to improve its carbon intensity, Woolworths will not be able to issue another green bond. As a result, the company will be likely to experience lower demand for future bond issuance and pricing due to socially-responsible investors sitting out of future non-green transactions.

Doesn’t Woolworths own pokies?

Our decision to invest in the Woolworths green bond does not mean we are invested in Woolworths shares. In fact, our Ethical Charter prohibits us from owning Woolworths shares for a number of reasons. A key factor is the revenue the company earns from poker machines as a result of its ownership of hotels across Australia. In our public advocacy, we raise awareness of the harm caused by the gambling industry and the choice people can make not to invest to support this industry. However, at the same time as we exclude investment in companies like Woolworths and Tabcorp, our ethical team has concluded it is acceptable for us to invest in Woolworths’ green bond to support its positive impact.

We did ask ourselves whether this green bond was an attempt by Woolworths to greenwash the less sustainable parts of its business. However, after assessing the company’s actions on climate change and emissions reduction, we concluded Woolworths was acting in good faith. When we looked at the company’s other behaviour, we were satisfied Woolworths was serious about supporting the transition to a low carbon economy. For example, Woolworths is reducing operational emissions, food waste and excess packaging, and also pursuing a science-based target for emissions reduction for its overall business.

We believe the green bond market has great potential to shift capital to climate-friendly technologies and infrastructure. They encourage better measurement and transparency of climate impact and create momentum for continuous improvement. Woolworths has set an expectation that future supermarkets will meet the green bond supermarket criteria.


Tim Kelly is the Fixed Income Portfolio Manager at Australian Ethical, a sponsor of Cuffelinks. This article is general information and does not consider the circumstances of any investor.

For more articles and papers from Australian Ethical, including Graham Hand's interview with AE's Managing Director, Phil Vernon, please click here.


Warren Bird
June 07, 2019

Through the discussion of ‘greenwashing’, the article highlights two important issues for investment managers who portray themselves as ‘ethical’. One is the issue of ‘materiality’, the other is how ethical principles apply across the different types of securities that a company might offer to the market. Both of these illustrate how different ethical managers can still come to different conclusions about some investments on ethical grounds. It all depends on their ethical process.

Woolworths is a great example of how these issues come up, always providing a challenge for ethical investment processes. Their core business is not a problem - we all shop somewhere, whether it's at Woolies or a competitor - but as the article points out, they own poker machines and thus profit from Australia’s gambling addiction.

How concerned an ethical manager might be about Woolworths and gambling comes down to questions of materiality. Some ethical processes rule out a business that has any exposure to an unacceptable activity; others rule out a business that exceeds a revenue threshold from the activity. Ours at the Uniting Church has a 5% materiality threshold. From our research and understanding of their business, Woolworths sometimes does and sometimes doesn't breach this threshold with its gambling revenue.

It's also important in our view to look at trends and, as the article puts it, the "good faith" of a business’ overall strategy. If there are positive things being done, particularly to reduce the contribution of the problematic activity, then that should be taken into account. Unfortunately, Woolworths shows little evidence of intending to exit their pokies, though we note the growing pressure from larger shareholders on them in this respect, so it’s a space we’re watching keenly.

Overall, we don't exclude them (for materiality reasons), but they're always on our watch list. Some of our underlying asset class managers will take some exposure to Woolworths, but others do steer clear of them.

Using the same approach, we take a different approach to ANZ than the writer of the article. Their fossil fuel lending, though one of the largest books around in dollar terms, is nonetheless not a material part of their business. (It’s less than 2% of their lending, down from just over 2% in 2015. And the steps they’re taking – which go well beyond their Green Bond program – to change their lending away from fossil fuels and towards renewable energy is significant and worth encouraging. ANZ consistently rank highly among the Australian banks for their overall ESG programs and reporting. Finally, they’re committed to the United Nations Sustainable Development Goals, currently targeting support for 10 of the 17 SDGs.

For me, a better example of blatant greenwashing was the bond issued by Flexigroup. This is a company that we have no hesitation in putting on our excluded investment list. No amount of energy efficiency enhancement at their premises can hide the fact that they are a payday lender charging usurious interest to people who can least afford it. The Uniting Church – as with most Church-based investors – takes a very dim view of this practice and does not wish to profit from it or encourage it via investing in such companies.

We apply our principles across the balance sheet of any business. One way or another, funding a company is funding that company, even if the structure of a particular asset has a bias towards certain parts of the company. While Green Bonds are a good way of encouraging ethically neutral companies to adopt practices that reduce their emissions or support other climate-sensitive initiatives, for us it’s an unacceptable compromise to allow ethically negative companies to think they can attract our investors’ capital in that way. For this reason, we didn't participate in the green bond issue by Flexigroup.

Thus, while we look to invest in green bonds and are supportive of that market, they need to be issued by companies or agencies that we don't exclude for other reasons.

Other ethical investors may take a different approach (as it seems Australian Ethical do) and I’m not saying that one is right and another wrong. My point in raising these issues is to highlight that ‘ethical managers’ can’t all be looked at as if they’re making the same ethical investment decisions as each other. Investors who wish to use an ethical investment fund still need to do some homework to find out how each manager’s ethical principles are implemented in their portfolio. Asking how this issue of ‘greenwashing’ is treated in the decision-making process is one example of the type of question to ask.

Warren Bird
July 03, 2019

Looks like Woolworths has taken a decision that will address this issue:

June 07, 2019

Glad the market is checking the 'greenwash', but I'm not convinced on the NSW Treasury Green Bond.

While the transaction adheres to the Green Bond Principles, it appears that these are another example of the industry taking advantage of the current “self regulation” model in establishing the greenness of these transactions. The Green Bond Principles are published by the International Capital Markets Association (ICMA) i.e. a group of global bond issuers interested in creating the appearance of a strong green bond market.

To assess the Greenness of the new TCorp Bond let’s ask a few questions:

• Are the bonds linked directly or legally to the green projects?
• Was the funding ring-fenced so that those funds themselves funded green projects?
• Did TCorp make any additional green investments, over those that it had already made?
• Does TCorp intend to use the funds to further “green” its loan portfolio in any way?
• Does the risk or return on the bonds reflect the risks of these green projects.

What really makes it a Green Bond?

The Green Bond Principles have very soft criteria. They only require that the allocated assets are moved to a sub account, sub portfolio or “otherwise tracked by the issuer in an appropriate manner”. Put simply someone in the back office needs to maintain a spreadsheet with a list of assets that could be classified as “green” and try to ensure that these loan assets add up to more than the volume of bonds on issue. There is no penalty if this coverage no longer exists.

This bond is legally no different to any other issue by TCorp. Specifically, there is no legal, credit or cash flow link to the underlying portfolios. The loans have already been made in accord with the normal lending decisions of TCorp and the performance of the underlying portfolio has no impact on the performance of the bond. Indeed the balance sheet of TCorp will have as many brown assets as well as green ones ones before and after the issue.

Investors in Green or Sustainable funds have a right to expect active allocations from the fund to increase the funding available for green projects. Retail Investors believe that increasing green funds are changing the amount of funding available for green projects.

More appropriate, stringent and independent assessments of the “greenness” of a Green Bond, such as those provided by Moody’s, are rarely expected by institutional investors, rather they rely on the easy and soft principle of ICMA. Investors should be demanding that such issuance is delivered together with a commitment by the underlying issuer (government or bank) to increase their lending in the target area (relative not just absolute).


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