Green Treasury Bonds: Financing Australia’s net-zero transition

Over the past two decades, Australians have increasingly heard about government debt. They understand that debt increased as governments responded to the Global Financial Crisis and the COVID-19 pandemic. Most do not give much thought to the form of debt, or where it comes from. This is where the Australian Office of Financial Management (AOFM) comes in.

The AOFM borrows for the Australian Government by issuing bonds. Investors receive interest payments every six months until their bonds mature, when their capital is repaid. This is the extent of the arrangement for most bonds. The Government uses investors’ funds for whatever purpose it chooses; investors are satisfied that they will get their money back, but do not know how it is used in the meantime.

Green bonds work differently. Investors receive the same payments, but the issuer allocates borrowed funds to projects with climate and environmental objectives, and reports back on how the projects proceed.

So, why would Australia issue green bonds? Green Treasury Bonds will finance eligible government projects that address climate-change mitigation and adaptation, or other environmental objectives. The size of these projects facilitates large-scale issuance of green bonds. By acting as a ‘best in class’ borrower, the Government adds credibility and transparency to Australia’s sustainable finance market.

When establishing the program, the AOFM and Treasury consulted investors about the types of projects we should finance. Investors suggested that projects should reflect Australia’s unique identity and were pleased to see green bonds finance the significant renewable-energy transmission challenge through Rewiring the Nation.

Investors also understood the importance of supporting water-management activities in the Murray-Darling Basin. Many were keen to back Australia’s unique wildlife through investments in the Great Barrier Reef and the Saving Koalas Fund.

Our first Green Treasury Bond was issued in June 2024: a $7 billion 10-year bond. Demand for the bond was hot – investors bid for more than three times the available volume. Participants included managers of ‘green’ investment funds as well as offshore central banks and Australian super funds.

Pleasingly, 17 of the investors had never participated in an AOFM transaction before, adding to the breadth of our investor base. A diverse, global investor base increases the resilience of the bond market and safeguards the Government’s access to finance in a crisis.

Green bonds are already widely used – more than 30 other countries issue them. The first was Poland in 2016. Fortunately, being a later entrant to the market helped us stand on the shoulders of giants, and as a result, Australia’s approach reflects the best qualities of other countries.

From next year, the Government will publish annual reports on projects financed by green bonds, which will inform investors where their funds have been allocated and provide detail on the climate and environmental outcomes of the projects. I believe this process will contribute to improving sustainability‑related reporting in the public sector.

Investor focus on environmental issues has increased dramatically in recent years. Many now have dedicated ‘green’ funds or incorporate environmental considerations into investment decisions. They are responding to pressure from members, who are concerned about the impacts of climate change and want their portfolios to reflect their values.

Consistent with the desire for more ‘green’ investments, some investors are prepared to accept a slightly lower rate of return for green bonds. The difference between interest rates for green bonds and standard bonds is known as a ‘greenium’. A greenium represents interest cost savings to a borrower.

For the first Green Treasury Bond issue, the AOFM estimates a greenium of approximately two basis points, or 0.02 per cent. While this might not sound much, when spread over $7 billion and 10 years, it equates to around $11 million of interest savings. Perhaps not overly meaningful in the context of the Federal Budget, but a positive government program that pays for its own implementation is something to be acknowledged. The program would be a worthy initiative even without a greenium.

Green bonds are only one per cent of Australia’s government debt, but the volume will grow over time. Our new bond is already the biggest green bond in the Australian market.

We predict a bigger, liquid market will attract more investors, some of whom need confidence they can buy or sell enormous volumes of bonds at short notice. A highly rated sovereign green bond provides a low-risk investment opportunity for global fixed-income investors, who may later broaden their activities to other Australian green investments.

Australia’s first green bond is to be celebrated. It will support the massive amount of private and public investment our net-zero transition requires.

Attracting global investors to the Australian sustainable finance market will reduce the cost of financing the transition and protecting our environment.