There are some success stories in Australian dollar bank GSS issuance. Bank Australia is perhaps the most notable: it priced its first sustainability bond in 2018, raising A$125 million (US$82.5 million), and has printed a total of A$700 million across five deals in the format, most recently in February 2023.

Jane Kern, head of impact management at Bank Australia, explains: “UOP [use-of­proceeds] issuance works for us because it aligns well with the overall corporate strategy, which in turn aligns with our core business. We have a target of having 20 per cent of the bank’s total assets as impact assets by 2025, with four priority impact areas: climate action, affordable and accessible housing, nature and biodiversity, and First Nations recognition and respect.”

The core business aspect is critical for GSS funding. It means Bank Australia is producing a regular supply of assets it can finance through labelled issuance. For instance, it launched a green mortgage product in 2020 with initial support from Clean Energy Finance Corporation.

Even an issuer like Bank Australia has its ambitions in the GSS market capped by asset constraints, though. The bank’s last two public deals – priced in October 2023 and February 2024, for a total of A$525 million – were in unlabelled rather than sustainability format.

Kern explains: “Bank Australia has an increased need for wholesale funding, driven largely by really strong lending growth, and this means the wholesale funding programme was growing faster than the impact assets we want to put into the pool. Some investors are attracted to Bank Australia’s sustainability credentials as an issuer while others are specifically attracted to the sustainability-bond format, so we expect to continue issuing in both sustainability and vanilla formats.”

Issuers also have to decide where best to deploy their limited supply of qualifying assets. ANZ has a sustainability bond programme aligned with the UN Sustainable Development Goals. Scott Gifford, the bank’s Melbourne-based head of group funding, says this has an asset pool of more than A$9.5 billion and outstanding issuance from this pool is about A$4.5 billion equivalent.

ANZ has claims to be the most engaged and active of the Australian big-four banks when it comes to labelled issuance, and it holds the record for the largest domestic deal from the sector – a A$1.25 billion transaction that is also the only tier-two GSS bond to be issued in Australia. But this August 2020 deal was also its most recent domestic foray.

Instead, it tends to target supply at the market where these assets are most highly valued. “We have plenty of capacity, we love the space and we are really committed to GSS issuance. We have typically done roughly one deal a year and this seems like a reasonable level of frequency. More recently, our issuance has been weighted toward euros, principally because GSS collateral is perhaps a little more highly valued by the European investor base,” Gifford explains.

A similar approach tends to apply to offshore banks that fund in Australian dollars. International banks – mainly Korean names but also one Japanese institution – have brought A$2.1 billion of GSS supply to the Australian market in total but none since November 2022.

“A lot of bank issuers have tended to reserve their assets for the market that has demonstrated that it wants this type of issuance – Europe,” says Daniel Leong, executive director, debt syndicate at Mizuho Securities in Singapore. “I don’t foresee any major structural changes when it comes to offshore bank issuance: they will issue when and if there is a strategic push or suitable demand.”

Local banks would undoubtedly have more capacity to supply GSS bonds if they were able to fund their mortgage books – which form by far the largest component of Australian banks’ assets – in labelled form. This could unlock substantial asset pools for residential mortgage-backed securities and covered bonds.

But green home loans are a niche product at best and there is no unified source of data on home emissions to allow banks to demonstrate which of their loans might qualify for this sort of funding.

“Housing data and green mortgages is something we are working really hard on,” Kern says. “Bank Australia has a very bold target to reach net zero in our operations and our portfolio by 2035. The portfolio is predominantly residential mortgages and we have the clean energy home loan product, which is delivering good data from homes. But for the other homes we fund, we are facing the same challenge as other banks – that data are not easily available.”

Gifford adds: “A lot of work is going on in the data side of residential mortgages. It is something for the Australian economy overall – a whole-of­-system approach to how we use data to estimate housing emissions. It is a big challenge but Australia is not unique – the residential housing space is a challenge with regard to emissions reporting for banks globally. I am confident it will get resolved in time, though.”

There is a note of caution, too. Gifford says having data to determine whether individual mortgages – and also sustainability-linked loan assets – could qualify for GSS pools is a “logical and sensible next step” for market development. He adds, though, that he does not think either would be an immediate game changer.

In fact, banks’ minimal presence as issuers in the Australian GSS bond market puzzles many. ANZ’s head of sustainable finance, Katharine Tapley, says: “The lack of bank issuance surprises me a little, because all the big Australian banks have sustainability strategies and we are all lending into the same corporate market, which includes green assets.”