The Reserve Bank of Australia (RBA) has warned that financing for sustainable activities will need to “increase substantially” if Australia is to decarbonise and meet its net zero goals.
In a speech at the Risk Conference in Sydney on Tuesday, the RBA’s acting head of domestic markets, Carl Schwartz, suggested that Australian green and sustainable financing markets had experienced “considerable growth” during the past decade.
In particular, Mr Schwartz noted the local green bond market had grown quickly since its inception in 2014, with over $10 billion of green bonds issued last year. This record annual amount has also already been exceeded in the first six months of 2023.
“The strong growth in the market reflects strong interest from both issuers and investors. Pricing and liquidity of green bonds relative to conventional bonds is clearly an area of keen interest for both groups,” said Mr Schwartz.
But green bonds – including from foreign “kangaroo” issuers, state treasury corporations, banks, and non-financial corporations, still only account for a modest share of the overall bond market.
Meanwhile, Mr Schwartz indicated that green loans were seen as an “attractive prospect” for assisting in the green transition. Issuance patterns in the green asset-backed securities (ABS) market have followed a similar trajectory to green bonds only on a smaller scale.
“Volumes have grown following the first green ABS issuance in 2016, hitting a record $1.4 billion of green-labelled ABS in 2022,” Mr Schwartz stated.
“That said, volumes have slowed a little in 2023 to date. As a proportion of total issuance, green securitisations have also grown but remain quite low.”
Additionally, Mr Schwartz said ethical funds had grown significantly in both dollar terms and as a proportion of total managed funds, albeit with a modest share of less than 2 per cent.
“These developments across a range of markets are positive signs that issuers and investors alike are embracing green and sustainable finance in Australia,” he said.
“Market participants have developed mechanisms by which to identify environmentally beneficial activity and funding has flowed. Both green financing activity and flows to sustainable investment funds have shown strong momentum in recent years.”
Recognising the need for greater financing for sustainable activities, Mr Schwartz pointed out that activities were underway to further develop Australia’s sustainable finance framework.
Among these are the government’s proposed mandatory climate-related financial disclosures for large businesses and financial institutions and the development of an Australian sustainable finance taxonomy in partnership with the Australian Sustainable Finance Institute.
The efforts of the Australian Securities and Investment Commission (ASIC) against greenwashing and guidance from the Australian Prudential Regulation Authority (APRA) on managing the risks and opportunities arising from climate change were also highlighted.
Mr Schwartz indicated the RBA was closely following these developments and contributing through its role on the Council of Financial Regulators Working Group on Climate Change.
“We continue to increase our understanding of the implications of climate change for the Australian economy and financial system, via internal analysis and external engagement,” he noted.
“We are also committed to improving the environmental performance of our own operations. And we are also considering what sustainability and climate-related financial disclosures we can make, starting with operational emissions reporting in line with Department of Finance guidelines in our 2022–23 Annual Report.”
Concluding his speech, Mr Schwartz said the transition to net zero emissions represented a “massive challenge” and required “profound and sweeping changes across the globe”.
“Australian financial markets have taken some steps to help facilitate flows of capital to sustainable investment, although the financing task ahead looms large,” he stated.
“Improving data and transparency around climate risks and sustainability will support efforts in financial markets to align investment with climate goals for the net zero path ahead.”
