(6 May 2021 – Australia) Major investors are holding fast on Australian debt despite their concerted shift away from assets and issuers falling out of alignment with a environmental, social and governance (ESG) focused low-carbon world.
Over 50 percent of Australia’s A$906 billion in government bonds was owned by foreign investors at the end of 2020, up from a 16-year low in H1 2020 according to official government data. That has seen Australian debt capital markets (DCM) rank among the top performers in Asia this year while the Aussie Dollar continues to firm strongly among Group of 10 (G10) currencies.
Investors are also confident the debt will be well serviced. Australia ranks seventh out of 125 countries for its ability to repay debt according to Insight’s scoring system. Australia is one of just 11 countries with a AAA credit rating from S&P, despite warnings that climate change will impact ratings.
Australia is falling behind other developed nations when it comes to climate change. The federal government scrapped a price on carbon in 2013, and hasn’t set a net-zero emissions target unlike major trading partners Japan and China. Australia is the world’s third-biggest emitter given its resource-based economy in per capita terms, and has only pledged to cut greenhouse gases by between 26 – 28 percent by 2030. That falls behind the United States (US) with its 50 percent reduction target reinforced by the new President Biden and the 40 – 45 percent pledged by Canada, a direct comparison to Australian in many instances.
The A$2.3 billion unit of the Australian Unity finance firm, Altius Asset Management, is underweight Australian debt, favouring state governments that are more attuned to decarbonizing.
“We’re a very open economy in a global marketplace, which is going to demand better of us. It’s either going to be a challenge we rise to with conscious and early effort, or it’s something we’ll be dragged kicking and screaming to down the track” said Altius Asset Management Chief Investment Officer, Bill Bovingdon.
“You don’t want to throw the baby out with the bath water. Ultimately, you’re trying to meet both the ESG and investment objective” stated Dimensional Fund Advisors LP Head of Asia Pacific Portfolio Management, Bhanu Singh.
“As a responsible investor, we need to take action and perhaps handicap our valuation on Australia, or perhaps look for a country that looks better if more steps aren’t taken. It’s not that we’re excluding Australia per se, but we’re finding value somewhere else where the spreads look more attractive with the ESG profile as well” commented American Century Investments Head of ESG and Investment Stewardship, Guillaume Mascotto.