Green bonds to the fore as investors hedge against climate risk

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Green and sustainable bond issues hit record-breaking levels in Canada in 2019 with attractive financing levels, appealing to a more diversified investor base.

Source: Financial Post

Growing pressure across financial markets to consider environmental impact and risk as a major plank in investment decisions helped push green and sustainable bond issues to record-breaking levels in Canada.

There were 21 issues in 2019 that raised close to $12 billion, led by a one-billion euro issue from the Canada Pension Plan Investment Board (CPPIB), a first in the currency for a global pension fund.

Jim Logush, managing director of financing, capital and trading at CPPIB, said the 10-year euro-denominated green bond issued in January was marketed extensively in Europe, the United Kingdom, and the Nordic region, and attracted 3.2 billion euros’ worth of demand — more than double what the pension management organization was attempting to raise.

That demand came from more than 100 investors in 22 countries, according to Logush.

“The result was a highly successful, well oversubscribed transaction,” he said. “Of the 109 investors, 36 were new to the CPPIB name.”

Logush said the green bonds, a growing yet still small segment of the overall market, are being used to finance a portfolio of green-eligible assets, such as renewable energy including solar and wind, sustainable water and wastewater management, and “green” buildings.

“To fulfil our mandate, we consider and integrate environmental considerations into our investment decisions,” he said.

“Green bonds provide attractive financing levels and reach a more diversified investor base.”

In 2018, CPPIB became the first global pension fund to issue a green bond.

In April, Royal Bank of Canada said it would issue its first-ever green bond, a five-year, 500-million euro offering.

“That’s a theme that is resonating both with the issuers, who want to improve their sustainable finance scores — and by moving scores they get cheaper cost of funds — and investors, who are being pushed by their stakeholders to demonstrate where they’re putting their capital in sustainable investments,” said Michael Bowick, the president of RBC Capital Markets.

Bank of Montreal also launched its inaugural sustainability bond in the U.S., a three-year senior bail-in for US$500 million in October.

“The market expanded to encompass broader forms of sustainable finance,” said Richard Sibthorpe, the Toronto-based managing director and head of global investment grade origination, debt capital markets at BMO Capital Markets.

In all, the $11.96 billion in green and sustainable bond issues in 2019 reflected a 76 per cent jump from $6.78 billion in 13 deals a year earlier, according to Financial Post Data.

Canada’s tally since 2015 is 45 issues at nearly $25 billion.

Green bonds were first introduced in 2007, with annual global issuance reaching a record US$168.6 billion in 2018, and topping US$200 billion by October of 2019.

Sun Life Financial Inc. was among last year’s issuers and, in August, the Toronto-based insurer became the first insurance company globally to launch a sustainability bond.

Leigh Chalmers, senior vice-president and head of investor relations and capital management at Sun Life, said the insurer chose to issue a $750 million, 10-year sustainability bond rather than green bond because it provides flexibility to target investments that reach beyond the environment to include other areas of corporate interest, such as the long-term health of communities.

The focus of eligible investments in the latter area will be access to essential services, facilities and equipment, and could include, for example, infrastructure investments for hospitals and childcare centres.

David Mathews, Sun Life’s assistant vice-president of capital markets and ratings agencies, said the evolution of this segment of the bond market was appealing to the insurer because green and sustainability bond issuers are now able to “tag” eligible assets in their portfolios, rather than having to raise money and then use it all to make a string of new investments.

“Under our framework, our investment colleagues continue to buy assets in the normal course for Sun Life’s general account to support policyholder obligations,” he said.

“Then when we issue a sustainability bond, we will tag a pool of those assets, which meet our sustainability bond framework criteria, to support the bond.”

Past investments within a pre-determined timeline are eligible to be tagged, in keeping with terms of the sustainability bond framework published by Sun Life last March.

“This means that some of the funds raised from the debt issuance can be used for general corporate purposes… not to acquire the assets,” Mathews said.

“This is important to us as we have a finite amount of debt capacity (due to regulatory requirements and ratings agency and market expectations) and need to retain financial flexibility to support our strong capital position.”

The bond was sold by a syndicate co-led by RBC Capital Markets, CIBC Capital Markets, and HSBC Securities (Canada) Inc.

National Bank of Canada also issued a sustainability bond last year, declaring itself the first North American bank to issue a U.S. dollar-denominated sustainability bond on the international stage. The US$750-million, three-year sustainability bond was issued in October, with net proceeds earmarked to finance or refinance existing and future eligible “green” or “social” projects, such as renewable energy, low-carbon transportation and affordable housing. (Toronto-Dominion Bank issued a US$1-billion green bond in 2017, which matures this year on Sept. 11.)

Jean-Sébastien Gagné, National Bank’s treasurer, said the sustainability bond — sold by a syndicate co-led by National Bank Financial — allowed the bank to capitalize on its interest in innovative financial products and their development in Canada, and to show its “willingness to have an impact on the way the capital markets can contribute to environmental and social good.”

Over the past year, there has been concern in some quarters that the green bond market could suffer as part of a backlash over “greenwashing” — where products or investments are billed as more environmentally focused than they are in order to derive a benefit.

However, the clout of those pushing for more sustainable investment was evident this month when BlackRock Inc., the world’s largest fund manager, responded to criticism it was not taking enough of a stand on climate change by announcing a series of measures targeting environmental concerns, including a plan to cut from BlackRock’s actively managed portfolios any company that derives a quarter or more of its revenues from thermal coal.