Green waves down under: Australia's journey with sustainable RMBS

Much like the European market, Australian ABS has started 2024 with considerable momentum, with over AU$12bn in issuance year-to-date and a significant pipeline building. Investor demand remains strong, evidenced by solid coverage levels seen in recent new issues and the substantial upsizing of many deals. 

Notably, the last weeks saw the pricing of five prime residential Australian deals, which upsized from an initial amount of AU$2.65bn to a substantial AU$5.65bn at pricing. One of these deals offered a green bond that comes before any European offering year-to-date, so it’s a good time to compare progress of these two markets. 

The bond in question was from Columbus Capital from its longstanding Triton platform (TRTN 2024-1). The deal priced on the February 15, upsizing from AU$500m to AU$1.4bn, with the equal ranked senior tranches being split into an A1-AU, and green labelled A1-AUG, both priced at BBSW1M+120bp. The green tranche was sized at AU$140m, considerably smaller than the non-green labelled equivalent at AU$854m, and although both bonds were covered after the significant upsize, demand was tilted towards the A1-AU tranche. This marks the platform's second green issuance and the first publicly placed green tranche, with both senior tranches being preplaced in the previous deal.

In Australia, data quality regarding the efficiency of homes has lagged behind compared to Europe, driven by several factors. One significant challenge is the vast geographic diversity across Australia, spanning from densely populated urban areas to remote rural regions. This diversity makes it difficult to implement standardised data collection methods and assessment criteria, resulting in fragmented and inconsistent data on home efficiency, which results in a small focus on this by lenders. 

In Europe there are various government initiatives in place to support the collection and disclosure of energy performance data for residential properties, whilst Australia lacks comprehensive policies and regulations in this regard. This lack of standardised data on home efficiency impacts our ability to analyse the ESG credentials of Australian deals, and therefore limits investment in funds with a sustainable objective.

Despite these challenges, green issuance in Australia is possible. In 2022, green RMBS issuance reached its peak at AU$1.3bn, primarily led by NAB's placement of an AU$500m green tranche. Subsequently, green issuance has been subdued, with only one AU$200m green tranche issued by Columbus Capital, which was not publicly available. It is therefore encouraging to see green issuance return, especially from non-bank issuers, publicly placing these tranches for the first time. 

Like many others, Columbus Capital has established its Green Bond Framework by specifying the use of proceeds will be funding green mortgages in Australia. Its approach aligns with the International Capital Markets Association Green Bond Principles (2021), which was verified through Sustainalytics Second-Party Opinion . We believe that the eligibility criteria provided, which is based on specific regional standards and certifications, are adequate to help provide financing that will provide a positive environmental impact. 

Additionally, the second-party opinion and assessment from Sustainalytics provide further reassurance. Sustainalytics has concluded that investing the proceeds of the green tranche into eligible housing is expected to contribute significantly to the decarbonisation of Australia's residential building stock, considering the eligible criteria to be in the top 15% of housing stock for energy performance.

Defining green collateral in Australia is more difficult due to the previously mentioned data issues. However, by setting out specific regional requirements, Columbus Capital, and many other issuers in Australia, have been able build a set of criteria with sufficient potential collateral to place a green tranche. This was the first public placement of a green tranche by Columbus Capital and was the second publicly placed green issuance to come out of Australia in 2024. It is encouraging to see green issuance originating from Australia, and shows issuers being proactive in driving forward the ESG standards, despite data limitations compared to Europe and the UK.