ESG options in fixed income

Green bonds have exploded globally, with issuance up 59% last year over 2018, says Amanda McPherson, vice-president, global fixed income, at CIBC Asset Management. But the Canadian market is lagging.

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Canadian green bond issuance was about 20% lower in 2019 compared to the previous year, she said in a December interview, with about $5 billion in new deals last year.

“Green Bond issuance has not really taken off as hoped for three main reasons,” she said.

The first is the cost to the issuer. “It’s not overly cumbersome, but there are some hoops they have to jump through,” McPherson said.

All Canadian green bonds issued to date meet the International Capital Markets Association’s principles, including valuation process, management of the proceeds and reporting, she said.

The second reason is the scarcity of green projects in Canada that qualify under the guidelines for green bonds.

The biggest reason for green bonds stalling, though, is competition from new products.

“The fixed income market is always evolving and initiatives in ESG — or environmental, social and governance issues — are no exception,” she said.

While green bond proceeds are applied to finance new or existing green projects — “There must be clear environmental benefit,” McPherson said — there are a number of new products with a slightly different emphasis.

Social bonds, where the proceeds are used to finance social projects, have been catching on globally. McPherson said there’s only one in Canada, which funds companies with women in management roles.

Climate-awareness bonds are similar to green bonds but with a narrower focus, and there’s only one of those in Canada, too, she said.

Sustainability bonds combine elements of green and social bonds, while sustainable-development bonds support the United Nations Sustainable Development Goals (SDGs).

The latter are the greatest growth area, McPherson said. “These bonds offer the issuers a little bit more flexibility in the application of the proceeds.”

Canada has committed to the SDGs and is working to meet 17 goals by 2030. The eight new sustainable-development bonds issued in Canada last year exceeded green bond issuance, she said.

“Green, social, or sustainable development bonds can be part of the high-grade component of any Canadian fixed income portfolio,” McPherson said.

A few have been issued by corporations and there are a variety of options from provinces, municipalities and supranational organizations.

There isn’t “a meaningful pricing difference” compared to other bonds, she said, adding there’s “anecdotal evidence” that green bonds are less volatile than other bonds.

“This is because investors that buy the green bonds tend to have a buy-and-hold strategy,” she said. “So all other things being equal, if you were looking to invest in province of Ontario bonds anyway, there’s no reason not to buy the province of Ontario green bond over the non-green bond.”

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