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Innovative impact bonds

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In today's market, capitalising on your investment is no longer the singular concern. More and more we are seeing investors seeking opportunities that will have a positive community and environmental impact, in addition to positive returns. Partners John Eagleton and Anne-Marie Neagle have pioneered some of the most innovative impact bonds available to Australian institutional investors and we asked their opinion on the future of green and social impact bonds issued by both government and the private sector.

Societal change through impact investing - the rise of green and social bonds

While initially lagging behind the global market, recent years have seen a significant uptake in social impact bonds across Australia. Since the first social impact bond, Newpin SBB, was issued in 2013, the impact community has gone from pioneers through early adopters and toward mainstream players in just a few short years. Recent calculations place the Australian market for investments that result in social and/or environmental improvements at A$6 billion; a fourfold increase since 2015 (85% of this increase however was made up of green specific bonds). KWM has advised contract creators on XX% of this value.

Last year, KWM advised NAB on the world's first social bond that specifically promotes workplace gender equality, offering investors a novel way in which they can ensure equal opportunity is a focus of those companies to which they direct their capital.

While NAB have previously issued a number of green bonds, the move to a social benefit bond, meant that legal precedents pioneered by KWM in its creation have paved the way for similar issuances by other mainstream organisations. Since the Gender Equality bond we have been involved in the creation of similar contracts by QBE, ANZ, ACU and the World Bank.

Given the issuance of these recent innovative benefit bonds in the last 18 months, will we see social bonds catch up with the popularity of their environmentally friendly counterparts? And will we look to them when "existing policy interventions and service delivery aren't getting the outcomes we want"?

Federal vs state – leading the way in the uptake of responsible investing

The Climate Bonds Initiative (CBI) recently released a report on opportunities in green infrastructure bonds globally. Despite acknowledging Australia as the second largest source of green bond issuance in the Asia Pacific, the report warned that our commitment did not result in capital sufficient to the task of meeting international emissions and climate adaption obligations.

Federally, the government has made moves to fulfil the social impact investment commitments made in the 2017 budget, in the form of the National Housing Finance and Investment Corporation, however it seems that driving impact initiatives, whether green or social, has fallen largely to the states.

Most recently advising NSW Treasury Corporation (TCorp) on its first green bond, with a total value of A$1.8 billion, John Eagleton has been a part of a number of state government issuances in recent years. TCorp's commitment makes NSW the third state to issue a significant green bond, in addition to a number of existing impact investments. John has also advised the Queensland and Victorian Treasuries on their benefit bonds for a number of years, including their template documentation. With the majority of these bonds being fully subscribed within days, investor appetite for impact investments does not seem to be slowing down, which begs the question – when will the federal government take advantage of the potential in this still un-tapped debt market?

Should the Australian government formalise the guidelines and regulatory involvements in the social and green bond markets?

Despite the existence of a number of guidelines with regard to the green and social bond market, there is little formal regulatory oversight or standard to which issuers must adhere. Leading standards include CBI's Climate Bonds Standard as well ICMA's Social Bond Principles, which are updated on a regular basis to account for advances in the market.

Having acted on the largest number of green and social bond transactions in the Australian market and number of impact bond 'firsts', precedents set by Anne-Marie and KWM's Financial Markets team have also gone to establish guidelines that are now followed by subsequent issuers.

The enforcement of these guidelines however is only on a voluntary basis, and given the growing popularity of impact investment, investors run the risk of being what has become known as being 'greenwashed'. This occurs when a corporation labels a bond as green, while subsequently investing funds in places with questionable environmental benefit.

As the market continues to develop in Australia, is there a possibility of dedicated impact bond exchange, as exists in Luxemborg, or will we go the way of China and India and establish mandatory regulations to which issuers must adhere?

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