Green bond market challenge

Investors don’t want to sacrifice returns

Erin Bigley, a senior portfolio manager in the fixed- income group at New York- based Alliance Bernstein, has a message to Canadian green bond issuers: keep bringing transactions to the market because under the right terms her institution will be a buyer.

Alliance Bernstein didn’t participate i n the recent $ 102- million borrowing by the City of Ottawa, a transaction that closes on Friday, because the offering was too small. But the firm, which at end of September had US$ 535- billion of client assets under management, is firmly committed to development of the green bond market.

“Green bonds are a great way to try to finance solutions for climate change,” said Bigley, also a member of the firm’s responsible investment group. Alliance Bernstein is a member of the Climate Bond Initiative, which describes itself as “an international, investor- focused not-for-profit.”

According to the CBI’s website, US$ 95.7- billion of green bonds have been issued this year, ( bringing the outstanding issuance to more than US$ 200 billion) with the vast bulk of that issuance being aligned with CBI definitions. “We believe climate change is real and are proponents of the (green bond) market,” said Bigley, who added a qualification in deciding whether to participate in a green bond offering.

Such offerings have to make sense, which Bigley defined as a situation where the investor “is not sacri- ficing” return. “A meaningful number of our clients have encouraged us to buy green when we can, but none of them are willing to say ‘ buy green at a big premium,’” she added.

And that situation — a desire to buy green bonds but not receive a l ower yield than otherwise from a non– green bonds leads to “tension” in the market. That tension occurs because green bond issuers incur extra costs in receiving all the appropriate sign-offs stating that the bond is green. ( In Ottawa’s case, the borrower obtained a second opinion on the greenness of the issue, an opinion that turns on four main principles.)

“For serial issuers, that extra cost is not significant,” a cost that has to be offset against the benefit of broadening of the investor base for the issue, said Bigley, whose firm’s portfolio includes more than US$ 500 million of green bonds.

Included in that portfolio are green bonds issued by the government of Quebec (which closed a $ 500- million deal in February) and Ontario ( which has completed three such offerings that raised $2.05 billion.)

The fixed- income manager positioned the green bond dilemma this way: for the market to grow, smaller issuers are required, but are they willing to pay the extra costs of being green given that some institutional investors are not allowed to sacrifice return?

“That’s the rub in terms of growing the market,” said Bigley, who mused about the possibility of governments with Paris Accord goals providing issuers with incentives to bring green bonds to market.

Dedicated green investors presumably don’t have such concerns about accepting lower- than- otherwise returns. For them, the environmental, social and governance factors that help the investor decide whether to participate are so strong that they more than counter the financial return factors.

According to a deal highlights report from the underwriters on the City of Ottawa’s green bond financing, the issue, from a market perspective, was noteworthy for a few reasons: it was placed with 23 investors (which means an average allotment of about $ 4.4 million); 96 per cent of the investors either had green mandates from clients or were signatories to the UN’s principles for Responsible Investment; and the vast bulk ( 99 per cent) was placed with Canadian investors.

WAY TO TRY TO FINANCE SOLUTIONS FOR CLIMATE CHANGE.