{"id":17232,"date":"2019-10-18T09:15:02","date_gmt":"2019-10-18T13:15:02","guid":{"rendered":"https:\/\/www.benefitscanada.com\/news\/challenges-for-institutional-investors-around-green-bonds-137032"},"modified":"2019-10-18T09:15:02","modified_gmt":"2019-10-18T13:15:02","slug":"challenges-for-institutional-investors-around-green-bonds","status":"publish","type":"post","link":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/2019\/10\/18\/challenges-for-institutional-investors-around-green-bonds\/","title":{"rendered":"Challenges for institutional investors around green bonds"},"content":{"rendered":"\n
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Martha Porado<\/span> | October 18, 2019 <\/p>\n

While an angle on environmentalism can be applied to virtually every asset class, when it comes to bonds, it\u2019s not easy being green.<\/p>\n

More specifically, there\u2019s no real standardization for what constitutes a green bond, says Colin Purdie, chief investment officer for credit at Aviva Investors.<\/p>\n

Super-national organizations, such as the World Bank, pushed forward the creation of these investment vehicles, he says. \u201cThey wanted to do these projects and I think we\u2019ve got a lot to be thankful for. And then some corporates started to follow suit. It\u2019s been a pretty positive trajectory in terms of the [assets under management], but the fixed income markets have been growing very fast as well. So people look at the AUM for green bonds and say, \u2018This is incredible,\u2019 but the whole market\u2019s been going up.\u201d<\/p>\n

Read: CPPIB issues Euro-denominated green bonds<\/a><\/strong><\/p>\n

Now that the idea has gained major traction among institutional and retail investors alike, further growth will need to come from private enterprise, says Purdie. \u201cIt\u2019s incumbent on the corporates to do more.\u201d<\/p>\n

But besides simply growing in the amount of debt raised to support green projects, further progress is required to ensure the investments genuinely qualify, in some capacity, as green, and that they stay that way, he adds. \u201cThings need to change a little bit to make sure that these are actually impactful as opposed to just a tick-box exercise and a bit of greenwash.\u201d<\/p>\n

Under current regulations, no real mechanism exists to solve for the eventuality that a corporate entity could easily change its mind around what to do with the money raised through issuing a green bond. An investor seeking to gain exposure to an environmentally friendly allocation would then have no recourse to fight against this, says Purdie.<\/p>\n

He also notes that, for the bond to be making a significant environmental difference \u2014 and therefore justifiably characterized as green \u2014 it should be raising money for something the company wasn\u2019t going to be able to do otherwise. In addition, there needs to be standardization around what to do if a project falls through, he adds.<\/p>\n

Read: Tips for avoiding greenwashed investments and service providers<\/a><\/strong><\/p>\n

\u201cYou have a lot of managers who\u2019ll buy green bonds as a way to demonstrate they\u2019re taking their ESG requirement seriously. And that in and of itself, we think, is not enough. From the issuer side, we\u2019ve spoken to a lot of corporates who\u2019re issuing green bonds and, what we really want to check is, are they issuing the green bond for something they otherwise wouldn\u2019t have done? Because that\u2019s an incremental benefit we want to support. If they\u2019re issuing a green bond, but they were going to do it anyway, they\u2019re only doing it for reputational reasons.\u201d<\/p>\n

Solutions to this program include potential mechanisms, like make-whole provisions, whereby the bond issuer would have to buy back the bond at a premium should the terms of what the capital is intended for change, says Purdie. \u201cBut the problem with that for me is it\u2019s completely misaligning my objectives, and the objectives of the issuer are then completely misaligned. Because, essentially, if a bond is trading and I know that if they don\u2019t do something [specific] with the proceeds then the bond\u2019s going to go up 15 or 20 points, then secretly, as a bond manager, I don\u2019t want them to do it, because I want to make money for my clients.\u201d<\/p>\n

Ultimately, the situation remains somewhat fraught since there\u2019s no standard definition of what\u2019s green, he adds.<\/p>\n

Read: OPTrust ups its holdings in Ontario green bonds<\/a><\/strong><\/p>\n

\u201cIt\u2019s a market that\u2019s developed in fits and starts. . . . I think the market is slowly moving towards standardization, but there are still some companies out there that issue green bonds and they\u2019re not independently verified in terms of what they say they\u2019re going to do. And then I think there are reputational issues for us as investors as well . . . if people look at it and say, \u2018Well, we don\u2019t think that\u2019s green.’\u201d<\/p>\n

For example, investing in nuclear power could be considered green since, from one perspective, it\u2019s the cleanest energy produced. However, if something malfunctions, the environmental impacts could be massive, not to mention the potential cost of human life, adds Purdie.<\/p>\n

Read the full article at BenefitsCanada.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Martha Porado | October 18, 2019 While an angle on environmentalism can be applied to virtually every asset class, when it comes to bonds, it\u2019s not easy being green. More specifically, there\u2019s no real standardization for what constitutes...<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/17232"}],"collection":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/comments?post=17232"}],"version-history":[{"count":0,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/17232\/revisions"}],"wp:attachment":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/media?parent=17232"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/categories?post=17232"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/tags?post=17232"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}