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NAB in residential green bond first

NAB's residential mortgage-backed bond includes $300 million of mortgages that meet the Climate Bonds resi standard.
NAB's residential mortgage-backed bond includes $300 million of mortgages that meet the Climate Bonds resi standard.

National Australia Bank has launched a $2 billion residential mortgage-backed bond that, for the first time in Australia, includes $300 million of mortgages that meet the Climate Bonds Standard for low-carbon residential buildings.

NAB said the green tranche attracted socially responsible funds and mainstream investors from Australia and internationally, and was almost two times oversubscribed.

A cornerstone investor was the Clean Energy Finance Corporation, which put in $25 million to the NAB Class A1-G Notes.

“This transaction is a big leap forward for the Australian green bond market,” CEFC chief executive Ian Learmonth said.

“NAB’s green bond offering has attracted interest from local and global investors, demonstrating the strong investor appetite for green securitisations.”

Securitisation involves the pooling of mortgages and selling cash flows to third party investors as securities. CEFC debt markets lead Richard Lovell said the success of the NAB transaction could spark further development in green residential home loan products.

“We have already seen the emergence of the securitisation of green consumer loans in Australia, which has resulted in increased availability of green consumer lending products,” he said.

“In the long run, we anticipate further innovation in consumer lending products that will drive better energy efficiency outcomes for Australian households.”

How green is green?

The Climate Bonds Standard for residential buildings necessitates that mortgages included are in the top 15 per cent of the market for carbon emissions, and that they adhere to a linear net zero pathway by 2050, so as to align with Paris Agreement goals of limiting global warming to no more than two degrees above pre-industrial levels.

Because Australia’s building stock has woefully low efficiency, being in the top 15 per cent isn’t a particularly high hurdle. In fact, for the three jurisdictions approved by CBI (NSW, Victoria and Tasmania) it means simply meeting minimum standards. Buildings built after 2005 and which meet BASIX 40 are acceptable for NSW; buildings built after 2011 that meet the building code are acceptable in Victoria; and building built after 2013 are acceptable in Tasmania.

The midpoint of the bond tenor is used to assess whether the mortgages are in line with the net zero 2050 goal. Any building is eligible if it meets the emissions intensity target for the mid-point of its bond. For example, if you have a bond with a 10-year tenor, you need to look at the midpoint at five years to see if the carbon profile still meets the standard.

For each jurisdiction there’s a different time (maximum tenor) at which minimum standards will no longer cut it.

NAB head of group funding Eva Zileli told The Fifth Estate the maximum tenor was eight years for NSW, 12 years for Tasmania and six years for Victoria.

“The maximum duration for each relevant state under the criteria is to ensure that the relevant security properties continues to sit within the top 15 per cent performing properties (in terms of emissions) as building codes evolve and as the trajectory to zero emissions by 2050 narrows,” Ms Zileli said.

There are a few issues that have made setting the standard difficult. The Climate Bonds Initiative acknowledges there are problems with the verification method, particularly as BASIX and NatHERS assess design not as built, and there is a well-known performance gap between modelling and reality.

“Both BASIX and NatHERs assess design potential and do not predict operational energy consumption,” its Eligible Residential Buildings Australia brochure says.

“There is acknowledgement that there is often a performance gap between the rating and actual performance caused by both limitations in the methods of assessment and also limitations in compliance assurance through the construction process.

The CBI said it would review the proxies for residential in Australia on a bi-annual basis to ensure they remain the best available in the market.

Flux Consultants’ Che Wall, who sits on the CBI’s Low Carbon Buildings Technical Working Group, told The Fifth Estate that reliance issues with the NatHERS system in hot climates like Queensland was part of the reason why only NSW, Victoria and Tasmania had been approved for the Climate Bonds residential standard.

He also criticised the “glacial pace” of change to the National Construction Code’s minimum efficiency standards, saying the pace of improvement was not nearly good enough to align with meeting the Paris Agreement targets to limit climate change to 2°C.

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