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Amanda McPherson. I’m with CIBC Asset Management, and I’m responsible for fixed income credit research.
ESG investing — or environmental, social and governance investing — is not just for equity investors. Bond investors can also participate in ESG investing. Green, social, or sustainable development bonds can be part of the high grade component of any Canadian fixed income portfolio. There are a few that have been issued by corporations, but also many have been issued by provinces, municipalities and supranational organizations.
Generally, they’ve performed very well to date. There’s not been a meaningful pricing difference, such that the pricing of the green bond issued by the province of Ontario is the same as a non-green bond. Furthermore, there’s anecdotal evidence that the green bonds are actually less volatile than non-green bond instruments. This is because investors that buy the green bonds tend to have a buy-and-hold strategy. So all other things being equal, if you were looking to invest in province of Ontario bonds anyways, there’s no reason not to buy the province of Ontario green bond over the non-green bond.
When considering the status or prevalence of green bonds in Canada, we first need to define green bonds. So green bonds are a type of instrument where the proceeds will be applied to finance new or existing green projects. There must be clear environmental benefit. Some of the common examples of projects include renewable energy as used in green bonds issued by, for example, the Brookfield Renewable Power to finance hydro electricity generation projects.
Also energy efficiency. Proceeds from the province of Ontario green bonds can be used, at least in part, to pay, for example, energy improvement in public sector buildings. Ontario is the largest green bond issuer in Canada with about five bonds outstanding for more than $4 billion. Then we’ve got clean transportation. That was seen in the issue of green bonds by the City of Toronto. Proceeds go, in part, to financing renewal of electric rail infrastructure and they have two bonds outstanding.So clearly many of the issuers of green bonds are very high grade, with the province of Ontario rated AA low by DBRS, and the City of Toronto rated AA.
Globally, green bond issuance is up 59% through 2019 compared to 2018. However, in Canada, issuance is actually tracking about 20% behind last year with only $5 billion worth of new deals.
So green bond issuance has not really taken off as hoped for three main reasons. First, there’s cost. There is a cost to the issue or to establish a green bond program. It’s not overly cumbersome, but there’s some hoops they have to jump through. All the Canadian green bonds have been issued according to the green bond principles that were established by the ICMA. That’s the International Capital Markets Association. They provide guidelines in the areas of the use of proceeds, evaluation process, management of the proceeds and reporting.
A second issue is actually the scarcity of eligible projects that qualify as green under the current guidelines. And the biggest reason that they haven’t really taken off is actually the advent of new products. The fixed income market is always evolving and initiatives in ESG issues are no exception.
So there aren’t just green bonds; there are social bonds in which the proceeds are used to finance social projects. There’s currently only one in Canada, but there are a lot more globally. The one in Canada was issued last year by CIBC and used the proceeds to fund companies that have demonstrated leading practices in fostering gender diversity in management teams. It’s called a Women in Leadership Bond.
There’s also climate awareness bonds. They’re very similar to green bonds, but with a slightly more narrow focus. We’ve only seen one of these so far in Canada. You’ve got sustainability bonds. It’s a bit like a combination of green bonds and social bonds. Their structure is generally aligned with the green bond principles as well as social bond principles and Sun Life has issued some of these bonds.
And the biggest area of growth is actually in sustainable development bonds. These are bonds which are aligned with the sustainable development goals. As a nation, Canada has committed to the SDGs, which means the country is working to meet 17 global sustainable development goals by 2030. And there have been eight sustainable development bonds issued in Canada this year alone, and their issuance has exceeded green bonds. So these bonds offer the issuers a little bit more flexibility in the application of the proceeds.