Demand for Labelled Bonds Continues to Grow
-
bookmark
-
print
Green, Social, and Sustainability (GSS) bonds have been growing in appeal to a broad set of investors, who are focused on the long-term viability of the market and supporting the transition to a more sustainable and inclusive economy.
When GSS bonds were first introduced, they were primarily marketed to two distinct audiences – those who prioritized investing according to their values and those looking for another strong investment to round out their portfolios. That’s no longer the case. Today, they are in demand by a broad range of investors focused on how these products support their overall climate and sustainability objectives.
With the wider acceptance, also amongst issuers with the number of GSS issuers growing over tenfold in the past 10 years, the global GSS bond market reached US$5.2 trillion as of end of April 2024, and accounted for about for 20% of all new fixed-income issuances last year while also reaching 15% of the total fixed income market. Understanding the challenges and opportunities of the GSS bond market was the focus of the “Sustainable Finance” panel that I moderated at the 2024 BMO Government, Reserve and Asset Managers Conference in Toronto. I was joined by:
-
Elizabeth Wallace, Senior Manager, Funding & Foreign Exchange, Capital Markets Division, Ontario Financing Authority
-
Ralf Nielsen, Director, Enterprise Sustainability, TransLink
-
Erik Hådén, Managing Director, Head of Investor Relations, Swedish Export Credit Corporation (SEK)
Two of the most inspiring aspects of the panel discussion was around the evolution of the GSS bond market resulting from the engagement of an increasing stakeholder base as well as the collective determination of key stakeholders to collaborate on the remaining challenges facing the GSS bond market. Here’s a look at some of the panel’s key takeaways.
Maturing market
Few know the pulse of the green bond market better than Elizabeth Wallace at the Ontario Financing Authority, currently the largest and most frequent issuer of Canadian dollar green bonds. It has completed 15 green issues totaling $18 billion, including most recently a $1.5 billion green bond under the province’s new Sustainable Bond Framework.
A lot has changed in this space over the past decade, she explained. “The level of engagement with investors has only increased through that period,” she said. “Now all investors are engaged with our green bond program.” The change isn’t only happening at the investor level; the sophistication of internal stakeholders within the government has also increased, noting that the province’s sustainable bond framework reflects the needs and priorities of a wide swath of ministries. That framework now includes 10 green categories and five social categories.
Having such a broad framework has been a concern for some investors because the wider scope can result in less visibility into how proceeds will be used. Wallace agrees that’s a challenge, acknowledging that some investors might not be comfortable with every aspect of the province’s framework, such as its inclusion of nuclear power, in which some investors are restricted from investing. To address that challenge, Ontario has strived to be as transparent as possible by providing details on the projects that will be funded upon such issuance rather than a year later.
“It’s a lot of extra work on our side in terms of getting ready to issue a bond, but it’s well worth it,” she says. “We feel that level of transparency has worked well for us with investors.”
Expanding frameworks
TransLink’s Ralf Nielsen is watching how other organizations are expanding their frameworks to meet investor demand, including whether adding a social category would broaden the appeal of their bonds. But it’s been a challenge finding something that’s strictly a social project. TransLink has instead focused on enhancing its post-issuance impact reporting, highlighting the social co-benefits of its large capital programs, as well as improving the disclosure of the funded projects.
“It’s been a journey of continuous improvement,” he said, noting that when TransLink first started reporting information on its projects, it was putting in as much information as possible about the benefits and KPIs. “It’s a matter of listening to what the investors and our financial institutions are asking us,” he said.
But maintaining that level of disclosure has been a challenge, particularly with repeat issuances. The transit authority, which serves Metro Vancouver, became the first transit authority in Canada to issue a green bond back in 2018. Its green bond framework governs the issuance of such labelled bonds, including the categories of clean transportation, renewable energy, energy efficiency and conservation.
Reflecting the fact that the majority of TransLink’s capital program is eligible under its green bond framework, labelled bonds represent a large share of financing for the transit authority’s capital program, which is supporting a major expansion of the SkyTrain rail network and the electrification of its bus fleet.
Keeping up with demand
Getting investors interested in green bonds isn’t a challenge for Erik Hådén at SEK, a state-owned company that finances Swedish exporters, their subsidiaries and foreign customers. “The problem we have is not selling our bonds…but the supply of assets that we can back them with,” he said.
SEK introduced its first green bond framework in 2015 and then expanded it to include a sustainable bond framework in 2021 that can issue both green bonds and social bonds or a combination called sustainability bonds.
The biggest challenge is finding projects that tick all the right boxes, especially if the underlying asset includes a project that can make an impact but either doesn’t quite fit into what investors are looking for or is not aligned with the EU taxonomy. Haden said SEK has started discussions about transition bonds that could fund projects that don’t quite fit the green bond or sustainable bond framework. However, having a definition of transition that can meet most expectations is challenging.
While challenges remain, with increasing demand for these securities and with the innovative ways organizations are pursuing GSS bonds, it’s fair to say that the future is bright for this part of the market. It’s encouraging to see how all stakeholders are engaged and collaborating to make it an even more robust market.
Demand for Labelled Bonds Continues to Grow
Director, Sustainable Finance
Magali Gable joined BMO’s Sustainable Finance team in early 2020. She supports BMO’s Energy and Natural Resources clients by offering advisory services,…
Magali Gable joined BMO’s Sustainable Finance team in early 2020. She supports BMO’s Energy and Natural Resources clients by offering advisory services,…
VIEW FULL PROFILE- Minute Read
- Listen Stop
- Text Bigger | Text Smaller
Green, Social, and Sustainability (GSS) bonds have been growing in appeal to a broad set of investors, who are focused on the long-term viability of the market and supporting the transition to a more sustainable and inclusive economy.
When GSS bonds were first introduced, they were primarily marketed to two distinct audiences – those who prioritized investing according to their values and those looking for another strong investment to round out their portfolios. That’s no longer the case. Today, they are in demand by a broad range of investors focused on how these products support their overall climate and sustainability objectives.
With the wider acceptance, also amongst issuers with the number of GSS issuers growing over tenfold in the past 10 years, the global GSS bond market reached US$5.2 trillion as of end of April 2024, and accounted for about for 20% of all new fixed-income issuances last year while also reaching 15% of the total fixed income market. Understanding the challenges and opportunities of the GSS bond market was the focus of the “Sustainable Finance” panel that I moderated at the 2024 BMO Government, Reserve and Asset Managers Conference in Toronto. I was joined by:
-
Elizabeth Wallace, Senior Manager, Funding & Foreign Exchange, Capital Markets Division, Ontario Financing Authority
-
Ralf Nielsen, Director, Enterprise Sustainability, TransLink
-
Erik Hådén, Managing Director, Head of Investor Relations, Swedish Export Credit Corporation (SEK)
Two of the most inspiring aspects of the panel discussion was around the evolution of the GSS bond market resulting from the engagement of an increasing stakeholder base as well as the collective determination of key stakeholders to collaborate on the remaining challenges facing the GSS bond market. Here’s a look at some of the panel’s key takeaways.
Maturing market
Few know the pulse of the green bond market better than Elizabeth Wallace at the Ontario Financing Authority, currently the largest and most frequent issuer of Canadian dollar green bonds. It has completed 15 green issues totaling $18 billion, including most recently a $1.5 billion green bond under the province’s new Sustainable Bond Framework.
A lot has changed in this space over the past decade, she explained. “The level of engagement with investors has only increased through that period,” she said. “Now all investors are engaged with our green bond program.” The change isn’t only happening at the investor level; the sophistication of internal stakeholders within the government has also increased, noting that the province’s sustainable bond framework reflects the needs and priorities of a wide swath of ministries. That framework now includes 10 green categories and five social categories.
Having such a broad framework has been a concern for some investors because the wider scope can result in less visibility into how proceeds will be used. Wallace agrees that’s a challenge, acknowledging that some investors might not be comfortable with every aspect of the province’s framework, such as its inclusion of nuclear power, in which some investors are restricted from investing. To address that challenge, Ontario has strived to be as transparent as possible by providing details on the projects that will be funded upon such issuance rather than a year later.
“It’s a lot of extra work on our side in terms of getting ready to issue a bond, but it’s well worth it,” she says. “We feel that level of transparency has worked well for us with investors.”
Expanding frameworks
TransLink’s Ralf Nielsen is watching how other organizations are expanding their frameworks to meet investor demand, including whether adding a social category would broaden the appeal of their bonds. But it’s been a challenge finding something that’s strictly a social project. TransLink has instead focused on enhancing its post-issuance impact reporting, highlighting the social co-benefits of its large capital programs, as well as improving the disclosure of the funded projects.
“It’s been a journey of continuous improvement,” he said, noting that when TransLink first started reporting information on its projects, it was putting in as much information as possible about the benefits and KPIs. “It’s a matter of listening to what the investors and our financial institutions are asking us,” he said.
But maintaining that level of disclosure has been a challenge, particularly with repeat issuances. The transit authority, which serves Metro Vancouver, became the first transit authority in Canada to issue a green bond back in 2018. Its green bond framework governs the issuance of such labelled bonds, including the categories of clean transportation, renewable energy, energy efficiency and conservation.
Reflecting the fact that the majority of TransLink’s capital program is eligible under its green bond framework, labelled bonds represent a large share of financing for the transit authority’s capital program, which is supporting a major expansion of the SkyTrain rail network and the electrification of its bus fleet.
Keeping up with demand
Getting investors interested in green bonds isn’t a challenge for Erik Hådén at SEK, a state-owned company that finances Swedish exporters, their subsidiaries and foreign customers. “The problem we have is not selling our bonds…but the supply of assets that we can back them with,” he said.
SEK introduced its first green bond framework in 2015 and then expanded it to include a sustainable bond framework in 2021 that can issue both green bonds and social bonds or a combination called sustainability bonds.
The biggest challenge is finding projects that tick all the right boxes, especially if the underlying asset includes a project that can make an impact but either doesn’t quite fit into what investors are looking for or is not aligned with the EU taxonomy. Haden said SEK has started discussions about transition bonds that could fund projects that don’t quite fit the green bond or sustainable bond framework. However, having a definition of transition that can meet most expectations is challenging.
While challenges remain, with increasing demand for these securities and with the innovative ways organizations are pursuing GSS bonds, it’s fair to say that the future is bright for this part of the market. It’s encouraging to see how all stakeholders are engaged and collaborating to make it an even more robust market.
You might also be interested in
Why Sustainability Is Good Business: Key Takeaways from IEFA Toronto 2024
Building for Tomorrow: Real Estate, Construction, and Sustainability
A First in Western Canada: Avenue Living Leverages BMO's Retrofit Program to Add 179 New Rental Units in Downtown Edmonton
Women are Leading Across the Landscape of Climate and Sustainability
How NASA and IBM Are Using Geospatial Data and AI to Analyze Climate Risks
BMO Arranges Green Financing to Fund New Lawson Centre for Sustainability, Trinity College's Most Significant Build in a Century
BMO ranked one of the most sustainable companies in North America on the Dow Jones Sustainability Indices
Canada Has an Opportunity to Become a Global Leader in Carbon Dioxide Removal
Extreme Temperatures: How North American Cities Amplify Climate Change
Three Keys to Unlocking Energy Transition: Partnerships, Permitting, and Finance
More Companies Have Plans to Address Climate Change Based on Rising Business Importance: Survey Results
BMO Climate Institute Business Leaders Survey: Nearly Half of Business Leaders in the U.S. and Canada Believe Climate Change Has Already Affected Their Businesses, but Few Have a Strategy
How the Energy Sector Is Helping Canada Achieve Its Decarbonization Goals
Transforming the Global Food System to Benefit Investors and the Planet
Why Businesses Need to Accelerate Their Efforts to Fight Climate Change
BMO Donates $3 Million to GRID Alternatives to Provide Solar Energy Solutions for Low-Income Families
Banco do Brasil and BMO Financial Group to Introduce First-of-its-Kind Program to Provide Sustainability-Linked Trade Loans Supporting Brazilian Exporters
BMO Provides Innovative New Sustainability-Linked Deposit Product to Zurn Elkay Water Solutions
Quick Listen: Michael Torrance on Empowering Your Organization to Operationalize Sustainability
Quick Listen: Darryl White on the Importance of US-Canada Partnership
BMO and Bell Canada Execute Innovative Sustainability-Linked Derivative Tied to Ambitious GHG Emission Reduction Targets
BMO Named to UN-Convened Group Providing Guidance to Global Banks on Nature Target Setting
Driving Innovations In Tech To Strengthen Climate Resilience With Climate Engine’s Spatiafi, Built On Google Cloud
BMO Celebrates Earth Day with 3rd Annual Trees from Trades Day on its Global Trading Floors
BMO Donates $2 Million to the University of Saskatchewan to Accelerate Research Critical to the Future of Food
North American Agriculture’s Role in Meeting the Global Food Insecurity Challenge – US-Canada Summit
North America’s Critical Minerals Advantage: Deep Dive on Community Engagement
Rock Legends Reflect on Mining Hits and Misses: Global Metals, Mining & Critical Minerals Conference
Exploring North America’s Critical Minerals Advantage: Global Metals, Mining & Critical Minerals Conference
The Most Valuable Commodity is Trust: ICMM to BMO Global Metals, Mining & Critical Minerals Conference
Not All Carbon Credits Created Equal: BMO Global Metals, Mining & Critical Minerals Conference
BMO Experts at our 32nd Global Metals, Mining & Critical Minerals Conference
Evolving Mining for a Sustainable Energy Transition: ICMM CEO Rohitesh Dhawan in Conversation
Public Policy and the Energy Transition: Howard Learner in Conversation
Taskforce on Nature-Related Financial Disclosure (TNFD) – A Plan for Integrating Nature into Business
Takeaways from the BMO Climate Institute Small and Mid-Sized Businesses Climate Survey
BMO Ranked North America's Most Sustainable Bank by Corporate Knights for Fourth Consecutive Year
Is Green Financing for Nuclear the Next Frontier in the Energy Transition?
BMO ranked one of the most sustainable companies in North America on the Dow Jones Sustainability Indices
BMO Climate Institute Survey Shows Costs and Competing Priorities Slowing Climate Action for Small and Mid-Sized Businesses
Managing and Monetizing Your Transition to a Net Zero World with BMO and Radicle
BMO the Top Ranked Financial Institution on New Global Sustainability Benchmark Announced at COP 27
COP27 in Focus: Will Energy Security and Economic Uncertainty Impact the Climate Transition?
BMO to Invest in Innovative Carbon Offsets from CarbonCure to Permanently Store CO2
RoadMap Project: An Indigenous-led Paradigm Shift for Economic Reconciliation
A Canadian First: BMO and Concordia University Partner for a Sustainable Future with Innovative Sustainability-Linked Loan
Sustainability Strategy and Reporting for Small and Medium Sized Companies: A Discussion at the Conference of Montreal
BMO to Acquire Calgary-based Radicle Group Inc., a Leader in Environmental Services
Investment Opportunities for a Net-Zero Economy: A Conversation at the Milken Institute Global Conference
How Hope, Grit, and a Hospital Network Saved Maverix Private Capital Founder John Ruffolo
Hydrogen’s Role in the Energy Transition: Matt Fairley in Conversation
Key Takeaways on Ag, Food, Fertilizer & ESG from BMO’s Farm to Market Conference
Exploring the Physical and Transition Risks Facing Food and Agriculture
Building an ESG Business Case in the Food Sector: The Food Institute
Forging Ahead in the Energy Transition: Darryl White to Global Reserve and Asset Managers
BMO and EDC Announce Collaboration to Introduce Sustainable Finance Solutions for Canadian Businesses
Retrofitting Canada's Building Sector: Efficiency Canada’s Corey Diamond in Conversation
The Role of Hydrogen in the Energy Transition: FuelCell Energy CEO Jason Few in Conversation
BMO proud to support first Government of Canada Green Bond transaction as joint-lead manager
Tackling Climate Change in Metals and Mining: ICMM CEO Rohitesh Dhawan in Conversation
Op Ed: Government Action Can Help Spur More Home Building To Address Canada’s Housing Shortage
BMO Launches Business Within Reach: BMO for Black Entrepreneurs and Commits $100 million in loans to Help Black-led Businesses Start up, Scale up, and Grow
The Post 2020 Biodiversity Framework – A Discussion with Basile Van Havre
BMO Announces Plan to Partner with Breakthrough Energy Catalyst to Accelerate Climate Innovation
BMO Financial Group Named North America's Most Sustainable Bank for Third Consecutive Year
Mitigating the Physical Impacts of Climate Change with Spatial Finance
BMO Helps Boralex Go Beyond Renewable Energy, with the Transition of its Credit Facility to a Sustainability-Linked Loan
A Global First: BMO Supports Bruce Power with World's First Nuclear Green Financing Framework
BMO ranked one of the most sustainable companies in the world according to Dow Jones Sustainability Indices
The Future of Remote Work and Diversity in the Asset Management Industry
North American Metals & Mining first: BMO helps Sandstorm Gold Royalties achieve ESG goals with Sustainability-Linked Loan
Education, Employment and Economic Empowerment: BMO Releases Wîcihitowin ᐑᒋᐦᐃᑐᐏᐣ- First Annual Indigenous Partnerships and Progress Report
BMO Announces $12 Billion Financing Commitment towards Affordable Housing in Canada
BMO supports Canada's bid to host the headquarters of the International Sustainability Standards Board
In support of Canada’s bid to host the headquarters of the International Sustainability Standards Board
BMO Named to Canada's Best 50 Corporate Citizens Ranking by Corporate Knights
A North American First: BMO Helps Gibson Energy Fully Transition Credit Facility to a Sustainability-Linked Loan
Understanding Biodiversity Management: Best Practices and Innovation
Episode 29: What 20 Years of ESG Engagement Can Teach Us About the Future
BMO Financial Group 2020 Sustainability Report and Public Accountability Statement Now Available Online
Episode 28: Bloomberg: Enhancing ESG Disclosure through Data-Driven Solutions
BMO Ranked Among Most Sustainable Companies on Dow Jones Sustainability Index - North America
BMO investing in a sustainable future with $1M donation to the Institute for Sustainable Finance
BMO Financial Group Reaches Key Milestone in Matching 100 Per Cent of Electricity Usage with Renewables
BMO Financial Group Recognized as One of the World's Most Sustainably Managed Companies in New Wall Street Journal Ranking
Episode 23: TC Transcontinental – A Market Leader in Sustainable Packaging
BMO Financial Group to Source 100 Per Cent of Electricity Usage From Renewables
Episode 07: World Bank: Mobilizing Capital Markets for Sustainable Finance
Episode 06: Responsible Investing – Industry Trends and Best Practices from Canada