Q1 Update – Sustainable Finance

Roman Dubczak: Hello, everyone. I’m Roman Dubczak, Deputy Chair of CIBC Capital Markets. Participants in the global sustainable finance market hold a great responsibility. On one hand, they’re mobilizing funding and investments for low carbon activities that will limit a warming climate, while simultaneously shifting the way financial decisions are made with sustainability in mind. To support decision making, investors and other stakeholders are increasingly calling on businesses to disclose their sustainability and climate related risks, and calling on governments to standardize and mandate such disclosures. As climate action becomes increasingly more ambitious around the world, many jurisdictions are introducing new sustainability disclosure standards, which are expected to come into action sooner rather than later. Sustainability reporting is thus becoming an important reality for many companies, who must prepare for the eventual shift from voluntary to mandatory requirements. But when, where and how will these new sustainability disclosure standards take effect? And what effect will this and other important trends have on the global sustainable finance market?

Roman Dubczak: To help provide further insights, I’m excited to lead today’s discussion with two of our experts, Sid Samarth, Managing Director and Head of Sustainable Finance, and Amber Choudhry, Managing Director in our Debt Capital Markets Group, who leads the charge in sustainable finance for us. Sid, Amber, welcome. Sid, over to you. Over the past quarter, we’ve heard a number of announcements

relating to sustainability disclosure standards from different jurisdictions an ‘alphabet soup’, I’ve heard it referred to in the past. Can you catch us up on these latest announcements, and where we are in this whole evolution of sustainability standards, and how it’ll be affecting the market?

Siddharth Samarth; So thanks, Roman. Yes, and certainly that ‘alphabet soup’ seems to be being simplified over here. And there’s a lot of activity which has been going across various regions, on the disclosure front. In Canada, the Canadian Sustainability Standards Board, or CSSB, as it’s called, announced for comment the Canadian Sustainability Disclosure Standards, which are CSDS-1 on general requirements for disclosure, and CSDS-2, which is focused on climate related disclosures. Now, the good news, in terms of boiling down that ‘alphabet soup’, is these guidelines largely reflect the standards released by the International Sustainable Standards Board. And so, it’s really good to see that consistency. I think it’s really going to help simplify things for a number of users within the market. Now the standards, from CSSB are expected to be finalized by the end of the year. It’s voluntary at the moment. However, one thing that I will note is that the Canadian Securities Administer is currently monitoring these standards, and we expect it will inform their final guidance on disclosure for climate related matters. So, you know, talking about that shift from voluntary to mandatory, is certainly something to keep an eye on. In the US, we’ve had an interesting series of events. First, the long awaited details from the US Securities and Exchange Commission on the rules related to mandatory climate disclosure were finally released in March of 2024. Now, there was always an anticipation of legal challenges from both sides of the aisle. On one side, people thought the disclosure requirements fell too short because it excluded the requirement to disclose Scope 3. And on the other side of the discussion, where entities thought that the disclosure requirements actually went too far. And sure enough, as soon as these rules were announced, lawsuits did come in fast and furious. So, not surprisingly, and for good reason to limit the uncertainty, the SCC has since decided to stay these rules while they’re being debated in the courts.

And it’s been it’s going to go to the courts in an expedited basis. So bigger picture here is that regionally, we’re seeing the adoption rate of sustainable disclosure continue to rise for the foreseeable future. Hence, organizations both big and small need to assess their ability to report on these metrics. As we’ve discussed in the past year, the European Corporate Sustainability Reporting Directive, as well as the reporting requirements coming out of California, not only extend to companies incorporated in those regions, but go beyond that if you’re operating those regions. So it’s certainly important to keep an eye on what’s happening globally on these disclosure requirements. As you’re thinking about building out the capabilities for your team and your organization.

Roman Dubczak: Yeah, thanks Sid. That’s a good rundown on the ‘alphabet soup’, the ‘global alphabet soup’. Just to take it up a notch. But, you know, very important for our clients and very impactful, so to speak, as these all roll out and the impact that it’ll have on their reporting requirements, and you know, what they need to do internally to get up their reporting, reporting skills, so to speak. Speaking of market developments, Amber, what kind of issuance activities have we seen in the last quarter or so, as it relates to the global sustainable finance market? That market, arguably is in a little bit of flux. Strong trends in green, some discussion about the sustainable loans and sustainable bonds. Maybe just walk us through what you’ve been seeing.

Amber Choudhry: Thanks, Roman. You know, when we do these quarterly updates, we typically do start with the global sustainable finance market, which is a small subset of the overall global debt capital markets. This quarter, before we go into that, I just want to start with overall DCM issuance first. Why? Because new issuance in the debt capital markets is at a historical high. When monitoring new issuance volumes, we tend to first focus on US investment grade primary issuance. And in Q1 2024, it was at an all time high of $540 billion. Actually, in the past, US investment grade primary issuance has never surpassed the $500 billion mark. And our New York DCM team saw new issuance crossed that $500 billion mark pre-fed announcement on Tuesday, March 19th. The only time that the US investment grade primary issuance in the first quarter of any year got close to $500 billion was Q1 2020, when global interest rates were dramatically reduced, with the onset of the COVID pandemic. So some factors driving record new issuance include, a historically low credit spread environment. A data point is the US Investment Grade Index is currently hovering around +89 basis points. Demand for new issue volume is strong. Inflows in the investment grade primary market remain healthy. For example, another data point is there was $3.2 billion of inflows recorded for the week ended April 10th, further supporting new issue performance and positive market conditions. And lastly, as if we have seen in other years where there is a US election, some issuers like to finance earlier in that election year in order to avoid any potential market volatility that could arise, from that US election. Here in Canada, for the first quarter, we had our third busiest quarter on record with corporate and bank issuance of $40.6 billion. It was not our highest first quarter like it was in the US, but it was our third highest first quarter. Q1 2022 was $7 billion higher, but still a very robust new issue market.

Amber Choudhry: So now let’s look at global sustainable finance. You mentioned there are some factors happening in that market. So according to Bloomberg, in the first quarter of 2024, they estimate that the global sustainable finance market. So this is both the ESG loans as well as the bonds, was approximately $427 billion. And this compares to $400 billion for the same quarter in 2023, Q1 2023. So global sustainable finance is similar to last year, but not seeing the same growth that we’re seeing in the US and Canadian debt capital markets. And I think this is what you were mentioning earlier. Specifically looking at Canadian dollar issuance, here in Canada, for last quarter, ESG label bond issuance was approximately $10.25 billion. The government entities were $7.95 billion via five transactions. And the corporate and financial issuers were $2.4 billion via six transactions. When we did this update the same time last year, the Canadian dollar ESG label bond issuance was $6.5 billion. So quarter-over-quarter, a substantial increase of $3.75 billion, which can all be attributed to the Government of Canada’s second green bond transaction. In our last update, we mentioned that CIBC was structuring agent for the Government of Canada’s updated Green Bond framework, released in November 2023. And most importantly, included certain nuclear expenditures, really demonstrating Canada’s commitment to being a global nuclear leader. On February 27th, Canada successfully issued a new ten-year, $4 billion green bond. So that’s the increase quarter-over-quarter. This is Canada’s second green bond, the first under their updated framework. And the transaction really saw robust demand and most specifically, or importantly, environmentally and socially responsible investors represented a majority of the buyers at 66%. And it was a strong order book at $7.4 billion, For pricing, the issue priced at a spread of half a basis-point through Canada’s conventional curve, as we know, we call that ‘the greenium’. Another important government deal last quarter, the Province of Ontario did a green bond. And I would call this an important green bond. On February 29th, they issued a new nine-year, $1.5 billion. Their Greenium was also half a basis-point. And why I call this an important green bond is it was the first under the province’s new sustainable bond framework. Ontario is the largest and most consistent issuer of Canadian dollar green bonds.To date, they’ve done $18 billion, and $15.95 billion of that, remains outstanding. On February 1st, they had a green bond framework from 2014, and they updated it with a new sustainable bond framework. And like Canada, they also now are including certain nuclear expenditures in their green categories. They also updated some social categories. Items like affordable housing, and access to essential services. And now under this new sustainable bond framework, Ontario has the flexibility to issue green, social or sustainable bonds. And for that first deal, they decided to do a green bond. And they’ve chosen five projects supporting clean transportation to receive the funding. The other government deals that got done were World Bank $1.4 billion sustainable bond issue. They were the first issuer in this calendar year. And typically world Bank is the first issuer in the calendar year. There’s an SSA communal banking, and they did a $300 million green bond. There’s another SSA, IADB, and they did a $750 million sustainable bond issue. On the corporate side, I mentioned six deals Brookfield Renewable, $400 million green notes, Hydro One two-tranche transaction $550 (million) green, $250 (million) sustainable. And the important thing about Hydro One, is after that trade, they are now the largest corporate sustainable finance bond issuer in Canada, having issued $3.075 billion since January 2023, when they started their program. Telus did another sustainability linked bond, part of a three-tranche transaction, they’ve now done six sustainability linked bonds, approximate outstanding is $5 billion. Bruce Power did a $600 million senior green notes issue. And in particular, I want to discuss Brookfield Renewable and Bruce Power’s transaction. Why? Because like the government of Canada and the province of Ontario, they also updated their framework to now include certain nuclear expenditures. The bonds deal that they did in Q1 2024 are under that framework. And then CIBC, BMO and the Bank of Nova Scotia, updated their frameworks to include nuclear expenditures. So in the last six months, starting with the Government of Canada last November, until April, we now have more data points. All these issuers, Canada, Ontario, three of the big Canadian banks who’ve updated their frameworks to include nuclear, and I think that continues to show Canada’s commitment to nuclear energy.

Amber Choudhry: For those viewing this podcast and interested in nuclear energy, our colleagues in CIBC research just published a report entitled, ‘Fission or Fizzle: A Nuclear Renaissance Bodes Well for Canada’, which discussed this nuclear resurgence. And then outside of Canada, I think it’s interesting to note that the Canadian banks have been very active in the ESG label market. Both CIBC and the Bank of Nova Scotia did their inaugural Euro green bonds this past quarter. CIBC did  €500 million in January, and they had, a we estimate a five basis-point greenium. Scotia did a €1 billion in April, in our estimate, they had a three basis-point greenium, and then Equitable Bank did a Euro covered bond, which they’ve done before. But this time their euro covered bond had a social label on it.

Roman Dubczak: That’s a terrific update Amber. So, my takeaways from what I heard you say were, I think threefold. One is, strong momentum on the energy side of the sustainable financing framework. Secondly, nuclear is here certainly being financed. Long lead times for these projects, but the market is in a position to finance that. And third, congratulations on your leadership. I know the two of you worked on the Government of Canada bond, and that was just a fantastic piece of work. And, you know, momentous for the market. So, thanks for that. Sid, I’m curious to understand, some of the drivers enabling sustainable finance, including the influence of government action. You know, we talked about the ‘alphabet soup’, and that comes from a variety of other stakeholders. But where do the governments fit in in all this? And maybe what’s the recent action from that perspective?

Siddharth Samarth: Roman, important point to raise, because I think really it’s government action which drives a lot of momentum behind sustainable finance markets and really helps drive investment in technology and the like. So what are we seeing in Canada? I think the really, the big topic of discussion that’s taking up the airways at the moment is the carbon tax on consumers. Particularly as that went up in April by $15 to $80 per ton. The tax file is a form of policy to drive behaviour, has been constrained by the manner of positioning, particularly with the messaging on rebates. And let’s face it, there’s also been inflationary pressures that the consumers are feeling as well. So I expect this will be a big part of the conversation over the next year, particularly as we lead up into the election. However, if you look south of the border, the US is really leaping forward. They’ve started now to really deploy the capital that they announced under the Inflation Reduction Act. In the last couple of months, there have been announcements for the deployment of over $10 billion of funds. About 60% of this, approximately $6 billion, is dedicated to industrial decarbonization across hard to abate sectors such as chemical, steel, cement, where they’ve just identified 33 projects to help accelerate commercial scale demonstration

of emerging industrial decarbonization technologies. This is really important because we really need to scale this, and the way they’re doing this is to try and crowd in private capital because they expect over $20 billion to be mobilized in the coming years by virtue of this announcement. In addition, they also, announced $4 billion to, about 100 projects across the US via tax credits focused purely on clean energy manufacturing as well as critical minerals. So we’re really seeing that momentum build in the US, with that policy announcement a year ago and now seeing the action of those dollars being deployed.

Siddharth Samarth: Another notable area to highlight is Japan. So on the east, they just did the inaugural climate transition bond for the equivalent of US $5.3 billion in Yen. Books for this ten-year bond were three times oversubscribed. This is the first sovereign to issue a transition label bond. And we’ve really been talking about it for some time. This transaction was issued on the back of the government issuing what they called a green transformation framework as a part of deploying, really, the resources required to transform the structure of their industrial society. And now that green transformation framework has become one of the key pillars in order to enable them to meet the Paris Climate Agreement to reduce their emissions by 46% by 2030. So it’s particularly interesting because they’ve taken the approach in some ways very similar to what Europe has done, where they’ve built a sustainable finance product on its government policy ambitions across various sectors. And what this has enabled is to signal to private sector issuers, as well as investors on how they see transition and how they’re going to be approaching with growth of the sustainable finance market in Japan, as well as the transformation of the economy as well. So really impactful and great to see that, come through the market as well.

Roman Dubczak: Thanks, Sid. So, Amber, a similar question to you, like, what sort of, exogenous themes are influencing the sustainable finance market?

Amber Choudhry: Absolutely. Thank you Roman. So all of my figures are comparing quarter one of 2024 versus quarter one of 2023. So the themes that I think are roughly the same and kind of are consistent, quarter-to-quarter, quarter-over-quarter, year-over-year is, first of all, the split for bonds and loans is is relatively the same. This year the split was 82/18 bonds versus loans. And then if we look at 2023 in total, the split was 80/20. So it’s still a similar split level of that of the types of products. The second theme is something you mentioned. Green remains the dominant force of financing. So in quarter one 2024 it was 44% of new issuance, quarter one 2023 it was 42% of new issuance. Europe remains the dominant currency. That’s consistent every quarter. 43% of issuance this quarter versus 41%, last year this time. But some, themes that I found interesting and new, in Q1 2024, the government issuance is a much more bigger part of the pie than it was in Q1 2023. So in this past quarter, it was 42%. And then in, Q1 2023, it was 37%. We talked earlier about the government of Canada’s $4 billion green bond. France did a €8 billion green bond. That’s a pretty significant transaction. Australia is currently doing a large, marketing program for their inaugural green bond issuer. So in 2024, sovereigns are always a significant part of the issuance. but we’re expecting them to really dominate new issuance this year. A second theme that I found interesting and new is the US dollar currency remained consistent, 29% this year versus 31% last year. I’ve been monitoring US dollar issuance, and there seems to be a little bit of a decline. So I thought that decline would continue further, particularly in this election year. But so far it’s remaining relatively consistent. The discussion on transition bonds has begun. Sid gave an overview of Japan’s inaugural transition bond issue. And all those comments about, issuers updating their frameworks to include nuclear expenditures, I think the theme of updating frameworks is going to continue in 2024. Not only did CIBC, BMO, and BNS update their frameworks to include nuclear expenditures, but they’ve also updated their categories, their social categories, to include items such as food security and, socioeconomic advancement.

Roman Dubczak: You know, I supposed to take away there shouldn’t come as too much of a surprise that the sovereigns and governments are becoming a bigger proportion of the market because the transition doesn’t occur without them leading the charge. The IRA, and various other programs. So I suspect we’ll continue to see that trend evolving, though, which is all great. More liquidity in the market, more themes, etc…So Sid, final question for you and that’s on sustainability reporting. We’ve seen a slew of sustainability reports released this last quarter, especially from the Canadian banks. They’ve all, in the last month or so come out with their sustainability reports. What are your top takeaways and observed themes, do we have from this last batch of sustainability reports?

Siddharth Samarth: Right Roman, we typically have all the Canadian banks rightly issuing their sustainability and climate reports. In this quarter, just in advance of the AGM season. Key themes. So in addition to the position on nuclear, which Amber’s highlighted, we have seen more detail on what and how banks are looking at their climate or sustainable finance mobilization goals. In particular, there has been an initial view on the types of activities contributing to decarbonization or transition. We’ve discussed in the past a lack of really a taxonomy or established standards, particularly within a Canadian context. With that background in mind, or let’s say, vacuum, the banks have now started to attempt to define what they would include or see as ‘transition’. I think this is a first step and will continue to evolve. And the approach that has been taken is really selecting activities that they would see us transitioning. So think of things like carbon capture, electrification, low carbon fuels. They’ve taken these activities, but they’ve also coupled it with certain performance requirements. So what do I mean by that? Let’s take carbon capture technology being used in the context of cement manufacturing facility. Now, you can do that, but there’s an expectation that, that cement plant decarbonizes to a certain performance level. And that’s what I find particularly interesting, from a couple of points. One is, it’s really going to bring institutional focus across the financial sector on important areas and driving services and capital to assist with the deployment of technology to meet some of these performance requirements, because they aren’t quite as easy as one would expect it to be. And that’s certainly been a theme. Everyone thought about, a couple of years ago these were technologies that can be deployed quite easily, but we’re seeing it’s going to take time to ensure that they’re viable and scalable. And that’s another consideration which is being considered in the last two years, the cost of capital has gone up. And as you’re thinking about sustainable projects, with that cost of capital increase, how do you balance those two? I think that’s certainly going to be a lot of focus in terms of trying to assist our clients in thinking through that, and deployment of that technology.

Siddharth Samarth: On the climate commitments, particularly as it relates to net-zero targets, we’ve seen good progress with all the Canadian banks now having set targets on at least three high emitting sectors, mainly being oil and gas, power generation and auto manufacturing. To complement these targets, the next step will be the disclosure of transition plans, which will cover the steps towards achieving these targets. A number of banks also continue to explore the data availability as they look

to extend these targets into areas such as agriculture and real estate. And on the social side, we’re seeing continued work related to enabling banking services for newcomers, affordable housing and mobilization of capital to support indigenous businesses and services. So surely good to see the breadth

and progress that the banks have been making on that front as well. And we expect that will continue to be accelerated as we move forward.

Roman Dubczak: Thanks Sid, and thanks Amber. Great conversation. I think my key takeaway to sum it all up is, it’s happening. You know, the bond markets are functioning according to what the plans are. They’re being rolled out. Liquidity exists in the market. Early innings on some of these projects and the technologies for sure, but the innings are taking place nonetheless. And, there’s the requisite recognition of the risks and disclosures that are being required. So good to see the progress. And, we will be back again, another quarter to update on what the changes have been. I’m sure it’ll be a lot to discuss. A short period of time, three months, lots going on. So thank you for a great conversation. And I want to thank all of you, our clients, for joining us here today. A very, very interesting, in-depth, exciting topic for all of us at CIBC. And I hope you’re able to join us again soon to continue the conversation. Thanks.