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Growing Appetite for Investing for Purpose with Fixed Income


As the world battles its way out of pandemic, the focus on sustainability is only intensifying, with investors, in particular the millennial cohort, voting with their wallets for an equitable recovery and a viable transition to a lower-carbon world in the march toward net zero by 2050.

Social demands, investor appetite and market innovation have driven labelled sustainable bond issuance to over US$1.8 trillion, according to Bloomberg data, pushing the ESG fixed-income market toward the mainstream. As that figure continues to grow, it will create more challenges on the issuer and investor communities for clarity and transparency around labelling, as well as providing and analyzing data showing positive impact in a market that is becoming increasingly complex.

At the BMO Capital Markets annual Women in FICC (Fixed Income, Currency and Commodities) Industry Forum, we hosted a Sustainability Panel with women leaders in the ESG space to discuss sustainability, including their approach to issuing and investing in sustainable labelled debt, how investors approach emerging labels and integrating environmental, social and governance (ESG) factors in their investment decisions, and the need and challenges for transparent impact reporting.

We spoke to:

  • Anne-Marie Gagnon, Associate Manager, ESG Integration, Public Markets at BCI

  • Christine Dacre, CFO, Translink

  • Heike Reichelt, Head, Investor Relations & Sustainable Finance, World Bank

  •  Lily Shum, covered bond advisor for CMHC

  • Vera Torkot, Senior Investment Officer for the City of Ottawa

Following are some of their comments, edited for length.

British Columbia Investment Management Corp.

When Anne-Marie Gagnon came to the British Columbia Investment Management Corporation (BCI) about seven years ago, the asset manager’s responsible investing ESG team only covered public equities. The organization began covering both public equities and fixed income asset classes around three years ago, and Gagnon was mandated with formalizing a fixed income ESG strategy. Today, the majority of her responsibilities are dedicated to climate-related risks and opportunities. BCI’s fixed income bond asset class manages over $40 billion in bond assets, all of it internally and actively managed. Here are some of Anne-Marie’s comments:

On Climate-Related Goals
In February of this year, we came out with climate-related announcements for public markets assets. The first one is a 30% reduction of our public equities portfolio (GHG) footprint by 2025, and the second, and more relevant to today's discussion, is a $5 billion expectation for primary market participation in labelled sustainable bonds by 2025 (with $1.4 billion participation level as of March 2021 across CAD and USD denominated labelled bonds).

On the Influence of Labelling in Bond Offerings

For us, any labelled bonds that we would invest in, would be housed under our conventional mandates, so it's not housed in a standalone dedicated fund. We look at it in the same way as any other conventional instruments from a credit and pricing perspective, but with naturally an overlay of a more thorough ESG review, and not only the ESG profile of the issuer, but of the issuance and the framework per se. Naturally, for an investor, these instruments are attractive, increasing the investment opportunities that support environmental and/or social benefits, as long as credit quality and pricing are satisfactory. I do emphasize that having a label does not trump credit valuation or pricing, and that our portfolio managers continue to maintain their pricing discipline. Especially in the current low rate environments, it makes it even more important to generate returns for clients to maintain that discipline. We regularly end up not doing deals due to pricing, but still, we screen sustainable labelled issuance coming our way, which provides us with an opportunity to benchmark best practices when it comes to frameworks, and issuance specific disclosure, as well as the overall ESG credentials of issuers.

On Appetite for Transition Theme and Sustainability-Linked Bonds

In order to meet the Paris Agreement objectives, pure green labels are not going to be sufficient to decarbonize the economy, so we welcome these new instrument labels, be they transition, green or climate labels or the sustainability-linked bond. For a corporate issuer, issuing such instruments should come once the pieces of their sustainability strategy are in place, with a track record of disclosure and target-setting with the right governance framework and a credible structure.

What's exciting about this is it provides companies with an avenue to demonstrate that they are committed to meeting given targets, and I do feel also that these instruments will lend themselves to, and require, serious engagement between companies and investors and enhance accountability of the C-suite.

The Translink Perspective

Translink is responsible for the planning, financing and managing of Vancouver public transit, in addition to regional roads and bridges, and its service area spans more than 1,800 square kilometers. CFO Christine Dacre spoke to our panel about the company’s low-carbon fleet objectives and ESG-related debt to finance public transit. Following are some of her comments:

On Sustainability

With public transit, you can appreciate that most of what we do probably qualifies for green bonds. We issued our first green bond in 2018, for $400 million, and it was followed by a second green bond in 2019. We've done a lot since then on sustainable initiatives, with commitments including an 80% reduction of greenhouse gas emissions by 2050 and to utilize 100% renewable energy in all of our operations by 2050. On the first, we've developed a low carbon fleet strategy where we'll be replacing all of our diesel and hybrid buses with battery electric buses. On the facility side, we've completed a study of our operations and are now developing a roadmap for what options we have to move to 100% renewable energy in our operations.

On the Split Between Green and Non-Green

There’s no real science to it. As we issued our first green bond, we always said that when we can issue green, we will issue green. As we look at our capital program, we go through the whole list and look at which ones qualify for our green bond framework, and really look at making sure that we're able to do the impact reporting that investors are looking for to show the real benefits of these green projects. But there are projects that don't qualify for green … any project that supports the roads and bridges, for example.

The World Bank Perspective

The World Bank, an international development organization, raises funds in the capital market to finance projects in member countries and developing countries that help address the twin goals of eradicating extreme poverty and boosting shared prosperity. In the 20 years since she joined the organization, Heike Reichelt has seen an evolution in its approach to communicating sustainable development with investors, in terms of the environment and gender- and social development strategies, and how investors contribute to the World Bank’s mandate with their investments. The World Bank’s impact reporting for investors maps results to the Sustainable Development Goals as it engages with investors around impact. Following are some of her comments:

On Labelled Bonds

A little over 10 years ago, when a group of investors approached us looking for a bond product that specifically was dedicated towards climate action, the World Bank issued the market’s first labelled green bond. This really catalyzed this development that we see in the markets towards interest and focus on purpose. We have expanded our approach to cover everything that we do, and use the “sustainable development bond” label to show that everything the World Bank supports is to achieve sustainable development.

On the Pandemic

The pandemic has really uncovered a lot of inequalities in the world. More than 120 million people have been pushed back into poverty after decades of gains. Women are also very much affected by the effects of the pandemic, especially in developing countries, so we're very worried about how the pandemic has set things back. We are currently focused on a concept called “GRID” - green, resilient, and inclusive development. The focus on “inclusive” is especially important.

On Use of Proceeds

The Sustainable Development Bonds that the World Bank issues support the entire balance sheet. The mandate of the World Bank is focused on these twin goals, which are social goals, and environment plays an important role in achieving those goals. But because we had already created the label ‘green bonds’ for part of our program, and many eligible green bond projects also have social goals, we chose the label ‘sustainable development bonds’ as a label for the entire balance sheet. We started using it for the first time in 2015, to show that our projects support both social and green projects. We've been using the Sustainable Development Goals as a framework to report our impact. It's important to have a holistic view while looking at data and also consider individual project stories and the issuer’s overall activities to help with the big picture. It is very difficult to segregate and say, this is green, this is social, since it's all connected. For example, if you think about a school building that has solar panels, we have that in our green bond portfolio. But it also serves a social purpose – education.

On Reporting and Investors’ Checklists

One thing we've learned is that investors have very strict frameworks and models and need harmonized data. They have checklists and requirements to meet as they categorize bonds. Is it green? Or is it social? Or is it both? Then it’s considered ‘sustainable’ or referred to as ‘ESG’. It's important for investors to be able to search bonds based on certain tags, so we have designed our sustainable development bond framework to include relevant keywords for data providers to pick up. As an issuer, it's important to know how they're looking at these things and make sure that our documentation shows that we fulfill the criteria.

The CMHC Perspective

The Canada Mortgage and Housing Corporation (CMHC) is dedicated to the sole purpose of making housing affordable for everyone in Canada. The organization’s guaranteed securitization programs include the Canada Mortgage Bond and the NHA-Mortgage Backed Securities. Lily Shum, covered bond advisor for CMHC, spoke to the panel about what the organization is doing to help drive climate change adaptation in Canada. Some of her comments follow:

Last year, CMHC appointed its chief climate officer (and) is exploring ways to support climate change mitigation and climate change adaptation in the housing system. Housing plays a very central role in our ability to mitigate greenhouse gas emissions; the energy used to heat and cool housing is a major contributor of greenhouse gas emissions. The main building materials used to construct housing can also be very carbon intensive. Currently, CMHC provides a green home insurance product that has been there for a number of years, and that offers an insurance premium rebate to homes that demonstrate a certain energy consumption standard. It was also announced in the federal budget that CMHC will also be helping homeowners complete retrofits through interest-free loans.

On Mortgage-Backed ESG-Labelled Bonds in Canada

While we have not seen a mortgage-backed, ESG-labelled bond in Canada, I would say that the challenges and the steps needed to bring this product to market are not unique to Canada. Globally, overall, mortgage-backed ESG issuances still only represent a portion compared to the overall ESG bond market. There are three things that are needed.

First, there needs to be a clear definition of what green assets or social assets are, and these assets need to be packaged and securitized. The definition would ideally be applicable to a wide range of mortgage-backed instruments to help the issuer justify some of the up-front costs of setting up this program.

There also needs to be a standardized approach to data collection, especially if third-party mortgage originators are involved. Issuers would need to make system development changes to tag and identify green mortgages, for example, and also do the impact reporting.

Thirdly, there needs to be sufficient mortgage collateral to sustain the ESG issuances. In Canada, the issue rests more with identifying and finding these green homes. For example, in the UK, energy performance certificates are mandatory when a building is sold or rented, and this allows the policymakers to create regulations that can help place the building into a higher energy performance level.

The City of Ottawa Perspective

Vera Torkot, Senior Investment Officer for City of Ottawa, spoke to the panel about the rise of municipal issues and how the city’s recent experiences with disastrous flooding and a tornado accelerated the need for a response from the municipality. Following are some of her comments:

On Sustainability: Two Floods and a Tornado

Energy conservation and efficiency have been included in Council priorities for many years, and we have set targets to reduce greenhouse emission gases in the community. In the meantime, we witnessed two floods and a tornado here in Ottawa. We saw the devastating effects that those events had on the economy and on the community, so City Council passed a motion to declare a climate emergency, and then, just last year in early 2020, City Council approved the climate change master plan, with a vision to transform Ottawa into a clean and renewable and resilient city … which is kind of like a roadmap on how the city will reduce greenhouse gas emissions and meet other targets. This strategy identifies about 20 different projects that will focus on the most impactful ways to reduce emissions, and the majority of those projects will be in the transportation or in the building sectors.

On Public Transport and Real Estate

In transportation, this means that the focus will be on support for electric and charging infrastructure for private and public vehicles, the transition to zero emission commercial vehicles in Ottawa and conversion of the city fleet to hybrid and electric and replacing the current diesel buses with electric buses. The goal is also to reduce reliance on personal transportation by building a modern transit system, which includes the LRT that is currently under construction. To reduce emissions in the buildings sector, the plan will focus on retrofits for residential, commercial and municipal buildings to reduce the heating demand and influence retrofits for the private sector by leveraging local improvement charges and tax incentives. There is a sustainability requirement and a high-performance development standard to support the transition of new developments to net zero emissions by 2030, ahead of all other targets.

We finalized our green bonds framework in 2017 and it was approved by Sustainalytics. We issued our first green bonds shortly after that.

The Rise of Municipal Issues and Balancing Green vs Social

Anything we do at the municipal level is either green or social. Municipal issuers have this natural advantage in issuing green and sustainability labelled bonds, because municipalities have been conducting environmentally beneficial and socially responsible projects for generations, long before the concept of green or social even became a term. The green and sustainable bond emergence presented municipalities with this opportunity to explicitly market their bonds as socially, environmentally conscious investments, so I think that, paired with demand, is the reason why there is a rise in municipal issues. So far, we have issued green only, in 2017, under the green bond framework, but many, or a majority, of our projects, aside from road resurfacing, share both environmental and social characteristics. With this in mind, we are considering social bonds as well.

On Implementing the Green Bond Principles

It seemed like a daunting project at first, but as we started proceeding, we realized that there was already alignment with green bond principles, just naturally in the way we do things at the municipal level of government. We comply with the use and management of proceeds of the green bond principles already, because we identify the projects to be financed before we issue. And once we issue, we apply the proceeds directly to the project. So that made things a lot easier and faster.

2022 Sustainable Bond Issue

We've had discussions with dealers and second opinion providers, and we decided to amend our green bond framework to a sustainable bond framework, as we did not want to limit ourselves to just social or green. We're currently looking at Q3/Q4 of 2021 to finalize our sustainable bond framework, and then we're hoping to issue our first sustainable bond in 2022 under the new framework.

Closing Comments

On closing, our panelists underscored for current and future issuers the importance of transparency in pre- and post-issuance disclosure:

“I think we're coming to investors who are looking forward to more uniform migration of post-issuance disclosure and mapping to SDGs, but I feel that we are at a stage where investors would benefit from a little bit more granular pre-issuance disclosure on the use of proceeds, especially in and beyond a framework,” said Gagnon. “Sometimes it's very hard for an investor to get a sense as to where the proceeds are going to go.”

 “I think that there's going to be advances in standardization, harmonization and use of technology that will help investors grapple with this broad range of products in the market,” said Reichelt. “I also think that we should keep in mind a holistic view and stay flexible and not let perfect be the enemy of good.”

Read more
Magali Gable Vice President, Sustainable Finance, BMO Capital Markets

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