Bullish about green bonds

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International bank HSBC is bullish about the prospects for so-called "green bond" offers in New Zealand, which could be used to fund sustainable business projects.

Although this country is yet to see its first green bond offer, the London-based lender was involved in Australia's first issue of sustainable bonds last month.

Aussie real estate trust Stockland priced 300 million ($482 million) of seven-year bonds, which will fund property developments with ratings from the Green Building Council of Australia.

Green bonds are fixed interest securities which are issued specifically to fund environmentally-friendly projects. HSBC Australia's director of capital financing, Andrew Duncan, sees plenty of potential for such bond offers on this side of the Tasman.

New Zealand electricity companies, for example, could issue such bonds to fund renewable energy projects, he says. "Hydro and wind are natural candidates for this."

Duncan says local councils could also offer green bonds, while manufacturers could potentially use them to fund plant upgrades to more energy efficient technology.

HSBC has been making approaches to potential Kiwi issuers of green bonds, he says.

"We think New Zealand is a prime candidate for them. I think it ties in nicely with the 100 per cent pure ethos and the green brand that New Zealand enjoys globally."

Ulrik Ross, managing director of HSBC London, says green bonds are the fastest growing segment of the fixed-income market. He believes green bond issuance has the potential to rise from the current US$32 billion ($41 billion) a year to US$60 billion annually by next year.

"I can easily see that we could surpass US$100 billion in annual issuance in three to five years from now," Ross says. "I would say that on a broad basis [green bonds] are applicable to the main industries we see across corporates, local governments ... and financial institutions."

Ross says fund managers, especially in Europe, are driving much of the investor demand for green bonds.

Many institutional investors need to demonstrate to clients that they are meeting ethical investment guidelines.

"Investors are now starting to mobilise their portfolios around [green bonds] as managers see this as a business opportunity," says Ross.

One of the biggest risks facing the green bond market, he says, is "green-washing" - issuers promising to invest capital raised into environmentally sustainable projects, but not delivering on that promise.

"You need to have traceability in your process all the way from bond issuance to disbursements," Ross says.