By Erik Sherman
Pension funds like many other institutions have made it abundantly clear that environmental concerns are important to them and their stakeholders.
Corporate advisory service Millani in its most recent ESG sentiment study of Canadian institutional investors found that 43% of asset managers interviewed planned to launch impact products in 2024. Over time, it has seen “substantial increase in the number of participants moving towards sustainability outcomes, from one participant to 51% of participants indicating that they had begun to embrace it.”
The shift suggests that investors want to see not generalized goals that are hard to measure — when do they know when, or if, their money has helped safeguard the climate? An example is CalSTRS or the California State Teachers’ Retirement System. This institution which is the largest teachers’ retirement fund and second-largest pension in the U.S., can’t easily calculate the carbon footprint of its investments because the necessary data from equity investments aren’t available on a timely basis.
This is one possible reason why green bonds have become so popular. They are debt instruments, issued by public and private entities, to fund sustainability-related projects. Green bonds have been around for years; the World Bank has been issuing them since 2007. Bloomberg reported that sustainability bond issuance was over $1 trillion in 2023. Green bond issuance in particular reached $575 billion last year.
Corporations are active in the area. In 2021, the Wall Street Journal reported, “Corporate green-bond issuance has reached new highs as U.S. companies including chip maker Micron Technology Inc., retailer Walmart Inc. and data-center company Equinix Inc. add the bonds as part of larger traditional bond offerings.”
The primary driving force has been pressure from investors and regulators to prove efforts to help the environment. Green bond funding of specific projects allows an organization to point to something concrete rather than often fuzzy claims about greenhouse gas emissions reductions.
Canada’s federal government has issued green bonds since 2022. “The federal government recognizes that sustainable finance plays a key role in accelerating the transition to a cleaner, greener economy,” they wrote. “Mobilizing capital is a crucial part of Canada’s work to meet its 2030 emissions reduction targets and to achieve net-zero emissions by 2050.” The first issuance was a 7.5-year, $5 billion green bond. The final book order was $11 billion, with a 55% to 45% domestic to international investor ratio.
Another example: Québec established its green bond program in February 2017.
Even Canadian pension funds have issued green bonds in addition to investments in them. Caisse de dépôt et placement du Québec, Ontario Teachers’ Pension Plan, and Public Sector Pension Investment Board all have green bond frameworks and have issued them.
Financial planner Michael Ryan tells CAiP that he’s worked with institution investors and that “green bonds have become a key player, especially for the big fish like pension funds and insurance companies.”
“For institutional investors, it’s opened up a rapidly expanding universe of new potential investments,” he adds.
But there are potential twists in green bonds. Last year, Granite Real Estate Investment Trust completed a C$400 million green bond offering, according to Business Insurance, and provided an example of how these bonds can be complex. “Granite LP intends to finance or refinance, in whole or in part, expenditures associated with Eligible Green Projects as described in the Framework,” the publication noted.
“Initially and prior to the full allocation, the net proceeds from the Offering will be used to refinance existing debt, including its Series 3 senior unsecured debentures due November 30, 2023, on maturity, and for general corporate purposes. The failure to allocate funds to Eligible Green Projects will not constitute a default under the terms of the Debentures.”
So, technically a green bond also could be used to fund non-green activities.
“You’re really aligning your impact goals with investments that are considered to be environmentally sound,” says Miriam Legrand, portfolio manager and director of research at Community Capital Management.
Some challenges she points out are lack of standardization in data and potential timeliness issues. As with a municipal bond, there should be information in the disclosure about data and how timely reporting should be.
“If they’re not abiding by what they have committed to in the document, that’s an opportunity to engage with the issuer or company to make sure they adhere to the level of disclosure they said,” Legrand says. Her firm had one instance where an issuer missed deadlines for using proceeds. “After not getting the responses we needed, and their not being aligned with our processes and procedure, we had to divest.”
Investors buying green bonds should regularly plan on the time and personnel resources necessary to examine the use of proceeds. “Just as a credit review takes time, this also takes time,” Legrand says. Sometimes her firm will choose to participate in a secondary rather than primary issuance if they lack the time for the necessary research.
“That’s why it’s important to read through the documentation and how the issuer is outlining exactly how they’re defining what they’re doing,” Legrand says.
