BNP Paribas issues A$140 million green bond linked to Australia's first forward-looking climate index, identifying climate transition risks and opportunities for Australian companies in a 2°C future.
As investors seek to align their portfolios with a low-carbon future, supporting the right companies presents a serious challenge. Most data on climate performance is based on historical information, pushing investors towards companies that are already at least a shade of green. But this approach means investors may be missing out on opportunities to make the biggest impact on the planet – and on their valuations – by helping transform carbon-intensive industries.
As governments and regulators step up their low-carbon ambitions with more aggressive targets at COP26, the 26th UN Climate Change Conference of the Parties, in Glasgow, investment instruments with a more concrete impact on the economy’s transition will most likely take centre stage as the investment community has a crucial role to play to help accelerate the transition to net zero.
The Australian Climate Transition (ACT) index was launched in 2020 to provide investors with a forward-looking sustainable investment strategy. Developed by BNP Paribas in collaboration with ClimateWorks Australia, ISS ESG and Monash University’s Centre for Quantitative Finance and Investment Strategies, the new benchmark features dynamic scenario modelling to track the 100 top Australian companies that are most likely to perform well in a 2°C future.
A A$140 million equity-linked green growth bond was subsequently issued on the back of the index in July 2020, with three prominent Australian institutions – the Clean Energy Finance Corporation, Aware Super and QBE Insurance – backing the deal as cornerstone investors.
Over the succeeding 12 months, the ACT index has delivered a return of close to 30%, compared to 23% for the ASX 200 index – a difference of 7.3%. In 2021, the ACT index is up 15.6% compared to up 13.45% ASX 200.
The first year’s performance provides an early validation of the concept, supporting the theory that investors can realise gains by investing in companies with strong emissions-reduction programmes.
“Our primary purpose is to deliver strong and sustainable returns to our members, and so we are really pleased with the first 12 months of returns from the index,” said Damian Graham, Chief Investment Officer at Aware Super. “Influencing companies we invest in to make real and sustainable changes will help protect our members’ returns for decades to come.”
For the 100 companies incorporated in the index, inclusion is based on the likelihood that they contribute to a 2°C trajectory or adapt and thrive under that scenario. Their selection entails a rigorous scoring process based on five dynamic scenarios that track different paths to net zero by or before 2050.
Companies that have comprehensive emissions-reduction programmes and make detailed, transparent disclosures of their ESG risks are most likely to have a profile that merits selection. Conversely, the lowest scoring companies are those whose products and business models face meaningful risks, or who have not yet developed sufficient mitigating future strategies.
“The Clean Energy Finance Corporation welcomes the publication the first Australian Climate Transition index,” said CEFC CEO Ian Learmonth. “It’s a great initiative that we hope encourages all ASX-listed companies to consider what actions they can take to be included in the Index, including by reporting their climate-related risks and opportunities and providing greater transparency. This is a significant incentive for listed companies to accelerate their decarbonisation efforts.”
Companies stand to benefit from inclusion in the index by attracting capital from climate-focused investors, providing an incentive for corporates to continue meeting or surpassing the criteria underlying their selection. As the index shows those companies outperforming, this positive dynamic will encourage other ASX-listed corporations to take action that will qualify them to become constituents of the benchmark.
The ACT index is a timely innovation that clearly demonstrates the positive outcomes for all when companies act decisively on their emissions-reduction programmes.Timothy Parker, Head of EQD Institutional Sales, Asia-ex Japan, BNP Paribas
“Corporates and investors in Australia are beginning to think of decarbonisation as an opportunity, not just a challenge,” said Timothy Parker, Head of EQD Institutional Sales, Asia-ex Japan, BNP Paribas. “The ACT index is a timely innovation that clearly demonstrates the positive outcomes for all when companies act decisively and communicate clearly on their emissions-reduction programmes.”