Demand for Labelled Bonds Continues to Grow
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.
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Magali Gable
Director, Sustainable Finance, BMO Capital Markets
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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.
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