Appetite grows for green bonds

Demand from institutional investors thus far has been greater than market supply, says Radi Annab, vice-president of credit ratings, infrastructure, power and utilities, Canada, with Toronto-based DBRS Morningstar Inc.

In October, Canadian Imperial Bank of Commerce (CIBC) issued its first five-year green bond with an offering of US$500 million. The proceeds will be used to finance environmental projects and businesses that mitigate the effects of climate change by focusing on sectors such as renewable energy and clean transportation.

CIBC became the latest major bank to issue a green bond. The asset class reached a record issuance level of US$76.5 billion worldwide in the third quarter of 2020, according to New York–based Refinitv.

Canada ranks eighth in the world in issuance of green bonds as of Sept. 30, says Annab. These issuances, however, remain largely in the domain of institutional investors.

Sucheta Rajagopal, investment advisor and portfolio manager with Toronto-based Mackie Research Capital Corp., says this is largely due to the expense of creating such products.

“If you look at what’s involved in launching a retail product, you’re going to see that costs will eat up a lot of the small amount of interest you’re going to be getting, which is a problem for fixed income in general,” she says.

Green bond funds are available to retail investors in Canada. Options include the iA Clarington Inhance Bond SRI fund, the NBI Sustainable Canadian Bond ETF and the iShares Global Green Bond ETF.

When investing in green bonds at the retail and institutional levels, the key is to know the criteria for how projects are selected for financing. In the case of a retail ETF, for example, its underlying index probably encompasses the entire green bond universe, says Rajagopal, which could include fossil fuel–focused companies. That may bother some clients.

To avoid such problems, Rajagopal uses funds managed by portfolio managers who are doing their due diligence. She also makes sure clients understand that while some funds may not be perfect, the instruments still work to help the environment.

“I think we compromise in many other areas of our life, and sometimes [we] have to compromise a bit too, in terms of [an investment] portfolio,” Rajagopal says.

Diligence is also due at the institutional level, as there is no global standard for green bonds. That, Annab warns, can lead to “greenwashing” — the practice of using unsubstantiated or misleading claims to market something as being environmentally friendly.

Issuers around the world are increasingly following the Green Bond Principles established by the International Capital Market Association (ICMA) in 2014. The principles, which are updated periodically, are voluntary guidelines that focus on four components: the use of the bond’s proceeds, the process for project evaluation and selection, how the proceeds are managed, and reporting.

“There’s a lot of transparency,” says Annab, who adds that a third party usually verifies whether a green bond adheres to the principles.

The CIBC bond follows the ICMA Green Bond Principles of 2018 and has been reviewed by Netherlands-based rating firm Sustainalytics.