“This suggests that the impact on total public debt interest from a marginal yield advantage would be negligible,” he said.
Mr Nicholl said there was no need to access green bond investors to meet its borrowing requirement or to increase the diversity of its investors by tapping the growing pool of environmentally conscious fixed income funds.
A matter for the government
The sustainable bond market is expected to top $850 billion this year, according to Moody’s Investor Services. It involves borrowers being certified based on a range of measures of environmental impact, social impact and sustainability.
A decision to issue sovereign green or social bonds, he said, was a matter for the government.
“However, that is not the same as saying there won’t be debt management motivations for this in future; we just don’t see this at present.”
Mr Nicholl was asked about the related issue of climate disclosure amid growing pressure from the G-7 nations for sovereign bond issuers to improve their disclosure about climate risk amid a push for mandatory reporting.
He replied that the AOFM was getting “a range of responses particularly from the European investors that ranges from curiosity to finger waving to a bollocking”.
“We haven’t had any direct sense that investors are unhappy about holding Australian sovereign paper at this point,” he said.
This issuer rating rather than the instrument rating in particular will be something that might take on more prominence.
— Rob Nicholl, AOFM chief executive
But over the next few years, he said, there would be an increased focus from fixed income investors about what governments are doing to react to the challenges ahead.
He said the AOFM had discussed the efforts of major credit rating agency S&P Global Ratings to incorporate Environmental, Social and Governance risks into their sovereign ratings.
“As that develops, all countries including Australia will have to make sure that they’re aware of what the criteria are and how we are going to sit relative to other countries. Because sovereign issuer ratings through the core ratings agency process will tend to gather more attention than other measures,” he said.
S&P this week dropped its negative outlook on Australia’s AAA rating as it expected a sustained high iron ore price to reduce deficits while the nation’s response to the pandemic demonstrated it could retain the support of foreign financiers in a shock.
Mr Nicholl said there were disparate measures and standards in assessing ESG risks, but adoption by the credit rating agencies may narrow down the criteria.
“This issuer rating rather than the instrument rating in particular will be something that might take on more prominence,” he said.