green bonds - cfa institute · green bonds –overview 5 funding the transition to a low carbon...
TRANSCRIPT
Green Bonds
For professional investors only
March 2017
2
A heritage of responsible investment
2
1984
Launch of
Stewardship
Growth - first
ethical strategy
in UK
1987
Launch of
Stewardship
Income
& Stewardship
North American
strategy
1997
Stewardship
North America
becomes
Stewardship
International
strategy
2000
Launch of
Responsible
Engagement
Overlay (reo® )
2006
Founding
signatory to
Principles for
Responsible
Investment
(PRI)
2007
Launch of
Responsible UK
Sterling Bond
strategy
2010
Launch of
Emerging
Markets ESG
strategy
2011
Launch of
ESG risk tool
2014
Rebranded as
Responsible
strategy range
2016
Launch of
Green Bond
strategy
A history of innovation in Responsible Investment…
Leadership
In-house expertise
Global coverage
Engagement
• Launched Europe’s first social and environmental screened portfolio in 1984. One of
the largest Responsible Investment teams in Europe
• Separate expert teams focus on sustainable screening and portfolio management with
extensive research capabilities and risk management
• Environmental, social and governance (ESG) analysis on hundreds of global
companies to support Responsible Investment strategies
• Responsible engagement and voting program led by our in-house analysts
Green Bonds – BMO Global Asset Management
3
BMO Global Asset Management green bonds capability
• First invested in Green Bonds circa 2011 – EIB green bond for rates strategies
• SRI funds started investing in corporate green bonds from 2014
• Launched a dedicated green bond strategy in late 2015 – client demand
• 225 million euros invested and committed in green bond strategy from Dutch institutional clients as of
March 17, 2017.
• Dedicated green bond specialists analysing issuances and engaging issuers, stakeholders
• Leveraging 30 years+ track record in socially responsible investment
• Experienced rates, credit and ESG teams who work closely together
ESG = Environmental, Social and Governance.
Section II
Green bonds investing
4
Green bonds – overview
5
Funding the transition to a low carbon economy
• Green bonds are fixed income instruments aimed at clearly defined projects that have environmental benefits
• Projects include renewable energy, water conservation and energy efficiency amongst others
• These were originally pioneered by the supranational agencies as a way to assist in helping governments meet their
climate change related policy goals
• Green bonds offer the same credit risk as the issuer as most bonds are standard recourse to issuer debt obligations
Green Bond Principles
• As the market grew, it became important for an industry wide accepted definition of green bonds to be established
• In early 2014, a group of investment banks published the Green Bond Principles which provided voluntary guidelines
for issuers and underwriters to follow
• This provided procedures for designating, disclosing, managing and reporting on the proceeds of green bonds
• It was a major step in the professionalisation of the market and allowed a broader range of players across the
investment chain to become involved
• BMO Global Asset Management became a Green Bond Principles member in 2015
Green Bonds
6
Resolving climate change
• Key financial instrument helping fund the transition to a low carbon economy
• Proceeds are segregated for use solely into environmental projects
• Rapidly growing market as challenge of raising capital for climate change increases
No additional credit risk
• Same credit risk as the issuer as most green bonds are standard recourse to issuer debt obligations
Impact investing
• Clearest approach to impact investment available for institutional investors at scale
• Powerful way for investors to align their investing activities with core principles
• Strong signal to stakeholders of commitment to responsible investment
ESG = Environmental, Social and Governance.
Green Bonds – Quote
7
“For investors, green bond markets offer a stable, rated
and liquid investment with long duration.
For issuers, green bonds are a way to tap the huge
$100 trillion pool of patient private capital managed by
global institutional fixed-income investors.”
Source: Mark Carney, 22 September 2016, Governor of the Bank of England
Green bonds – rapidly growing market
8
Source: Climate Bonds Initiative, MSCI ESG Research, Barclays Research, Bank of America Merrill Lynch. EIB = European Investment Bank. 2017 year to date 13 March 2017.
0,8 0,4 0,9
4,0
1,23,1 11,0
36,6
41,8
81,0
21,0
0
10
20
30
40
50
60
70
80
90
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
$b
n France issues
7 billion euro
OAT
EIB issues
inaugural climate
awareness bond
First World
Bank Green
Bond issued
First sizeable
corporate ‘use of
proceeds’ bonds
issued e.g. EDF
Green Bond Principles
published
Barclays MSCI Green Bond
Index launched
COP21 drove new
entrants to the market
such as China and India
First sovereign green
bond from Poland
Green Bonds investing
9
How to incorporate green bonds
• There are the following options for investors to gain exposure to green bonds:
1. Standard mandate: Treat green bonds as any other bond
2. Standard mandate with green bond target: For example 10% of mandate to be in green bonds
3. SRI/ESG funds: Green bonds as part of a SRI fund
4. Dedicated green bond mandate: Impact investment, in-depth analysis and engagement
• There are a number of aspects to consider
• Green bond market characteristics – credit rating, sector, currency
• Primary markets: Green bonds vs non green bonds
• Secondary markets: Green bonds vs non green bonds
• Transaction costs
SRI = Socially Responsible Investment ESG = Environmental, Social and Governance.
Green bonds – Market characteristics
10
Source: Natixis December 31st 2016.
Credit ratings – High quality Issuer types – SSA still dominate
€1.75bn in Oct 2016 $1bn in Sep 2016 $1.5bn in Feb 2016
Corporate issuers are coming across currencies and from around the globe
€500m in Nov 2016
AAA38%
AA17%
A26%
BBB14%
Junk3%
No Rating2%
Corporates39%
Financials 21%
Sovereigns3%
Supranationals27%
Regions 10%
Green bonds – Primary issuance
11
New issue premium (NIP) – Do green bonds come to market with smaller NIP vs standard bonds?
Source: HSBC Fixed Income research, September 2016.
Suggestion is that green bonds do not come to market with smaller new issue premiums
Green bonds – Primary issuance
12
New issue premium – Final pricing is consistently tighter than initial price talk
Source: Climate Bonds Initiative research, March 2017.
Oversubscription may be driving green bonds to be more expensive than same normal bond
Green bonds – how they trade in the market
13
Republic of Poland (sovereign) – Euro bonds
Source: Bloomberg as at 09.03.2016. For illustrative purposes only.
For now they trade in line with other debt issued
Green bonds – how they trade in the market
14
Iberdrola (utility) – Euro bonds
Source: Bloomberg as at 09.03.2016. For illustrative purposes only.
For now they trade in line with other debt issued
Green bonds – Transaction costs
15
Source: HSBC Fixed Income Research September 2016
Transaction costs tend to be higher for smaller bonds – potential explanation
Transaction costs is a concern for buyers of green bonds in secondary markets
• Transaction costs for green bonds in iBoxx Euro Corporate Index vs the index is higher
• Worth noting: Differential is reducing over time
• Worth noting: Average size of green bonds is somewhat smaller than average size in index
Section III
Green Bonds and engagement
16
Engagement example – Supranationals
17
Concerns about fossil fuel financing
• International Finance Corporation (IFC), a part of the World Bank, first issued green bonds in 2010
• Proceeds used to finance projects in low income countries such as energy efficiency
• We had concerns about use of proceeds to finance fossil fuel-based electricity plants
• We held an engagement call with the IFC in April 2016 and expressed our reservations
• IFC said that it was principally to make oil and gas-powered electricity plants more energy efficient
• However, we questioned the lack of internal thresholds and unambitious efficiency targets
BMO Global Asset Management assessment
• Issuer-level:
– Strong overall approach and track record in financing environmental projects in low income countries
– No concerns nor major controversies highlighted
• Issuance-level:
– IFC did not provide sufficiently robust explanations to why and how they finance fossil fuel plants in Green Bonds
– We require IFC to establish clear controls, limits and transparent reporting in this area of concern
• We currently do not approve IFC green bonds for investment in green bond strategy
• We will require the issuer to respond to our engagement before reconsideration of approval rating
Disclaimer
18
Past performance should not be seen as an indication of future performance. The value of investments and income from
them can go down as well as up as a result of market and currency movements and investors may not get back the
original amount invested. Views and opinions have been arrived at by BMO Global Asset Management and should not be
considered to be a recommendation or solicitation to buy or sell any products that may be mentioned.
Contact us
© 2016 BMO Global Asset Management. All rights reserved. BMO Global Asset Management is a trading name of F&C Management Limited, which is authorised and regulated by
the Financial Conduct Authority.
Extensive worldwide investment capabilities
• Total focus on clients
• Comprehensive range of products
and solutions
• Defined expertise – including a suite of
specialist investment boutiques
BMO Global Asset Management (EMEA) – Head OfficeExchange House
Primrose Street
London EC2A 2NY
Tel: +44 (0) 20 7628 8000
bmogam.com
03.2017 UK NL CM12478