Can sharper financial tools provide an edge in the global green race?

Australia must align sustainable finance and regulation to compete globally in the energy transition and drive green capital at scale

Global investment in clean energy is now nearly double that of fossil fuels, as countries vie for economic and security advantages in a renewable future. But can Australia keep up?

Bill Bovingdon, the first UNSW Institute for Climate Risk & Response (ICRR) Industry Fellow, says Australia needs to adapt its financial levers to support the “massive mobilisation” of capital needed – a projected $6.3 -$6.7 trillion globally a year by 2030 to meet Paris targets. And a late or disorderly transition, he notes, risks not only the environment but also financial stability, as warned by central banks and financial regulators worldwide.

Mr Bovingdon is a co-founder of Altius Asset Management and, since September last year, head of cash and fixed income for Australian Ethical, with expertise in green bonds, which are a fixed-rate debt tool used to finance climate and environmental projects. He is also an Adjunct Fellow at the UNSW Business School. He is bringing his 25 years’ experience in sustainable finance to a collaborative project with ICRR that aims to help the financial industry fine-tune the financial infrastructure supporting Australia’s energy transition.

Playing to our strengths

Mr Bovingdon outlined Australia’s opportunity to become a sustainable finance hub in the Asia Pacific in a recently-published research paper.

He notes that, to do so, Australia must leverage its strengths as the third-largest savings industry in the world and its deep financial expertise. In addition, Australia can “piggyback on 10 years of global development” by learning from Europe’s sustainable finance infrastructure, which has helped fuel the global US$3.2 trillion green bonds market.

Read more: Three climate risk challenges (and solutions) for industry

Several policy initiatives are set to help these funds flow. The government is rolling out its own green bonds as part of its Sustainable Finance Roadmap, which envisions a key role for green bonds, with an initial $7 billion released mid-last year. Meanwhile, an Australian sustainable finance taxonomy is set for release later this year.

Hurdles on the horizon

However, Mr Bovingdon says challenges like greenwashing, regulatory uncertainty, and inconsistent policies still need to be addressed. He points out that current carbon reporting and accounting practices that include emissions from the entire value chain – both upstream (parent companies) and downstream (suppliers) – can give green bonds a misleadingly high carbon profile, and that’s creating problems for investors with net-zero ambitions.

“As an example, the South Australian Electricity Transmission Authority issued a green bond to support renewable energy projects and cut emissions. However, because CKI, the parent company, runs coal and gas plants in Asia, the bond is often bundled up with the parent company's debt and labelled as having high carbon emissions," he said.

“We think that’s misguided. You can’t grow the green bond market if investors are put off by having to report a bad outcome regarding carbon and net-zero alignment.”

Mr Bovingdon is currently collaborating with the ICRR on a project to improve reporting and carbon accounting frameworks for green bonds. The project team will explore various approaches and methodologies to identify best practices for green bond reporting, and a newly developed framework will then be refined through workshops with industry groups and other fund managers.

This collaboration is critical, he says, if the framework is going to be adopted by industry.

Paving the way to a transition

“There are multiple models that policy makers and market practitioners, all involving some kind of suasion, regulatory, financial or moral. Currently, none are operating effectively,” he says.

“Regulators could mandate a quota for regulated entities to invest in ‘climate solutions’, but this is politically unpalatable. Alternatively, there could be financial incentives in terms of additional margin on returns – a greenium.”

Read more: Why Australia holds the roadmap to lead the energy transition

However, he says, “as an investor, it's a fine line to tread because one of the key elements of mainstreaming sustainable investment is proving to investors that it won't come at the cost of competitive returns. If the "greenium" becomes too big, it becomes an issue for potential investors. A small premium is probably good because it highlights scarcity and preference. Given there's a secondary market in these bonds, active managers can take advantage of the waxing and waning of those premiums.

“That leaves moral suasion, which is the low-touch, least controversial approach to supporting sustainable finance. That requires good regulation and disclosure so that the growing pool of capital looking for transition investments finds the right home. Investment products and funds that are designed to meet this demand need to be made available, and investors need to be able to trust that they are true to label. This brings us back to the sustainable finance roadmap and the role of disclosure, governance and taxonomy.”

Silver lining in market upheaval

Demand for responsible investments has grown in recent years, with Australian responsible investment managed funds growing 24% to A$1.6 trillion in 2023.

He suggests that there is a change in mindset beginning to form that will support the substantial, direct investments in renewable energy and decarbonisation infrastructure being made by super funds.

“Investment in energy has traditionally enjoyed a higher return to compensate for volatility in supply, prices and profitability. Once derisked by the government’s enabling infrastructure upgrades, renewable energy investments are more predictable for big investors, thereby generating safer, but lower returns on the capital they put to play in decarbonisation activities.”

The upside of market downturns

Meanwhile, recent upheaval in equity markets and higher risk debt, particularly in private debt in property development, may yet hold a silver lining by highlighting the “true” risks of these higher-return investments, he says.

“We may see investors become more cautious and realistic, potentially spurring interest in reliable, sustainable finance.” Meanwhile, a more disengaged US means less competition for decarbonisation projects, which can also mean better deals, for investors taking a long-term view, he says.

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Mr Bovingdon emphasises that maintaining a longer-term strategy is crucial for success in green investments. “We have noticed an acceleration in 'green hushing' – a term describing a company deliberately keeping quiet about their sustainability efforts and goals – in the wake of the current US administration’s retraction of climate initiatives. 

Green hushing began as a reaction to regulators clamping down on unrealistic or unsubstantiated claims of greenwashing. Now, it has morphed into a reluctance to be identified with green initiatives if your core business isn't sustainability or ethical investing. But if you’re ignoring ESG considerations, which are driven by economic and environmental realities, you’re being wilfully ignorant with other people's money. Changing your investment philosophy based on political winds that might last only two or four years is just bad business.”

Mr Bovingdon emphasises that collaboration between government, academia, and industry will be a core driver of the regulatory conditions that encourage that investment. “Finance drives the beating heart of the climate transition. This is a crucial area for all our futures. We can’t afford political games, and we can’t afford to be complacent and assume it will all just happen eventually," he concludes.