SYDNEY (Reuters) - When National Australia Bank launched the country’s first ever “green” mortgage bond last week, it kept its expectations for demand in check with price guidance at a similar level to a non-green bond it was also selling.

Global interest in so-called green bonds has soared as banks and companies look to tap the appetite for climate-friendly investments, which can increasingly sell at a premium - dubbed “greenium” - over regular deals.

But the Australian market is less confident. While it is growing quickly from a low base, bankers say that issuers and investors tend to approach deals with caution, rather than optimism.

For a country with the world’s fourth-largest pool of retirement funds and a high level of awareness of green issues, the market is underperforming its potential, they say.

Just A$3.2 billion ($2.5 billion) of green securities were sold in Australia last year compared with more than $40 billion in both France and Germany by governments and private companies. Globally, $155.5 billion of green bonds were sold last year.

The Australian government has never sold a green bond and currently has no plans to do so. There are only two off-the-shelf bond funds who label themselves as sustainable.

POLICY HURDLES

The biggest hurdle to developing the Australian market is perceived flip-flopping on environmental policy by the federal government, according to bond market sources.

“[Australian] corporate issuers are not in the same position as European issuers because there are no clear guidelines of the policies and what cost-benefits will accrue to them,” said S&P Global Ratings Senior Director Parvathy Iyer, who said Australian fund managers were otherwise keen on green projects.

“If you had a carbon tax or an emissions trading scheme, and it became a cost to companies, then they would progress the green approach and issue green bonds. It would be a chain reaction,” she said.

Australia introduced a carbon pricing scheme in 2012 only to repeal it two years later and then in 2015 reduced its renewable energy target for 2020. Policy beyond 2020 is unclear.

Other governments have been more proactive. Poland and France have sold sovereign green bonds to help finance state-backed renewable power projects and to subsidize energy-efficient buildings, tree planting and other projects. Other countries have offered tax breaks to bondholders, such as in Brazil, where income from green bonds that finance wind projects is not taxed.

Sydney-based Yen Wong, the head of credit research at Altius Asset Management, which is one of the only two local sustainable bond funds in the country, said investors needed a stable policy outlook.

“What is supporting the growth, for instance of renewables, when we have a political environment that doesn’t support it and where the regulation for de-carbonising the economy is uncertain,” she said.

“GREENIUM”

NAB’s proposed A$112.5 million residential mortgage-backed securities (RMBS) will finance loans on properties certified as low-carbon buildings. Its three-year deal is expected to price in coming days. Depending on demand, the bank could increase the size of the sale but key will be the pricing.

If NAB can command a “greenium”, where demand is strong enough to lower the interest rate it offers compared to non-green securities, it would be an encouraging sign for the Australian green bond market.

Green bond issuers in Europe and the United States are increasingly benefiting from greeniums as investor demand rises, according to a study by the London-based Climate Bonds Initiative (CBI), an international organization that promotes investment in green securities.

Australia’s QBE Insurance Group secured such a premium when it sold the world’s first green insurance bond last year. However, it was the demand from European investors, not local ones, that helped lower the interest rate, according to QBE Group Treasurer Paul Byrne.

Australian companies’ lack of interest in borrowing green has not stopped its state governments from getting involved.

The CBI expects the Australian market to double or even triple in size this year with the help of state government deals.

Victoria and Queensland states sold green bonds in 2016 and 2017, respectively, worth a combined A$1.05 billion. They funded transportation and renewable energy projects, and both states are considering fresh deals.

New South Wales, which has never issued green bonds and currently has little need for funding following a series of privatizations, says it is following its neighbors’ progress closely.

“What is really encouraging is the willingness for investors, issuers and representative bodies to work together to develop the standards and expectations in the sector,” said Katherine Palmer, a senior manager at the NSW Treasury Corporation, the state’s funding body.