Q2 Update – Sustainable Finance

Roman Dubczak: Hello, everyone. I’m Roman Dubczak, Deputy Chair of CIBC Capital Markets. I’d like to welcome you to another quarterly review of the sustainable finance marketplace with our leading experts at CIBC. Sid Samarth, Managing Director and Head of Sustainable Finance, and Amber Choudhry, Managing Director, on our Debt Capital Markets team.

Most recently, the wave of complexity in this corner of global finance has not abated. For example, regulators continue to take aim at corporate greenwashing, creating new avenues to challenge companies’ public statements on environmental protection and climate change mitigation, whether it be in marketing or advertising or in their voluntary disclosures, such as in sustainability reports.

Today, we’ll once again explore the impact of these latest developments, as well as issuance trends and volumes, which continue to grow every single quarter. Sid, let’s start with you. In the past, there’s been a continued focus on green and transition finance, but now there’s some nuances and trends that may be shaping our clients’ plans for the future. Maybe shed light on some of these developments.

Sid Samarth: Thanks Roman and thanks for having us again this quarter. It’s certainly been a busy quarter since we last spoke, and it feels like a quarter is equal to a year in the world of sustainability. There are two topics, which I think are important to raise. The first being this concept of Enabling Green Finance and the second is, Transition Finance, because they’re both pertinent in the ability to increase the size of the sustainable finance market. So let me start with green enabling activities.

For the longest period of time, up until now, the contribution of green financing has typically been limited to the end assets. So as an example, when I think about clean or renewable energy projects, it’s typically been the wind farm or the solar farm financing, which has received the green label.

Now, we all know that there are a number of other activities along the value chain that contribute to the development of that solar farm or wind farm, which hasn’t necessarily received a green label and when I think of it, an example being lithium mining, which really contributes to the development of batteries, which support the green energy market.

So to assist with driving financing to the value chain, which is necessary for green projects, the International Capital Markets Association, which is really the organization which oversees the green bond principles, released guidance on the topic in June, this year. The guidance really provides what I call “guardrails” around what type of activities in the value chain that could qualify for green financing. The upshot here is that we expect this would provide the foundation for more sectors, such as mining and services, to enter what we call the use of proceeds market.

Now, in addition to driving capital into areas which support green, an ancillary benefit to this is that it’s also helping an ancillary benefit to this is that it’s also helping investors diversify their green or sustainable portfolios into new sectors, as historically the majority of the use of proceeds issuances have really come from a handful of sectors.

That’s the first development. The second development that I want to touch upon is the concept of transition finance, which we’ve discussed on this webcast on a few occasions. the concept of transition finance has not developed broadly in the Western economy since there has been a lack of guidance as to what really constitutes transition. since there has been a lack of guidance as to what really constitutes transition.

In this regards, Australia recently released an initial draft for consultation – the Transition Tax arm, which really covers three sectors at the moment: it covers electric generation, mining and real estate. So quite exciting to see that and stay tuned for more on that front, because I find the Australian economy has a number of similarities to that of the Canadian economy, particularly from the resources lens and so guidance from that region could inform the development of transition markets over here.

So overall, the combination of guidance and enabling green activities and transition finance could be the next catalyst for driving new capital. However, we will need to see the appetite of investors and issuers on the topic.

Roman Dubczak: Thanks, Sid. Those are very good insights and it does seem as though in the last quarter or so there’s quite a bit of clarity, which is probably the biggest takeaway I would say right now. Amber, over to you for, some insights on volumes and activity in the last quarter, because like I said at the opening, it’s continues unabated, so to speak.

Amber Choudhry: Last quarter we talked about both the new issue market in general, as well as the global sustainable finance market and both markets, even in Q2, continue to remain very busy. As my colleagues in our US Debt Capital Markets group said just the other day, “the market really seems to be treating 2024 as a nine-month issuance window rather than a 12-month issuance window.”

The market really will be focused as we get closer to November on the US election and we find clients, primarily issuing clients, they like to stay away from any volatility around the US election and pre-fund prior to this event. around the US election and pre-fund prior to this event. So, last quarter we talked about how the US investment grade market hit an all time high of $540 billion.

In the second quarter of 2024, the US investment grade market is approximately $353 billion. So, while it’s not equal to the all time high of Q1, it is still higher than Q2 of 2023, let’s say, in the area of 12%, and overall in the first half of 2024, the US investment grade market is approximately 30% higher than it was last year. And to me, what’s really important to note about the US investment grade market is in calendar 2024 to date, the US investment grade market has hit $1 trillion of issuance and typically they don’t hit $1 trillion until September or October.

But here we are, it’s not even August and they’ve hit $1 trillion. In the global sustainable finance market, every quarter we talk about In the global sustainable finance market, every quarter we talk about both loans and bonds. First half 2024 issuance is $715 billion.

We had $377 billion in Q1, and then we had $337 billion in Q2. So we’re kind of seeing similar themes in the global sustainable finance market, as compared to the market overall. Green continues to remain the most popular product. What’s interesting to note about green, though, as a label, is we’re really starting to see green loans gain traction. and now in the first half of 2024, if you look at the different sustainable finance products, green loans are 10% of the product mix as compared to the prior year, where green loans were only 3% of the product mix, and I would say one of the products that we see, is a little bit decreased and I would say one of the products that we see, is a little bit decreased than prior years is sustainability linked bonds, where the volume this year, in the first half, is approximately half of what it was for the same period in 2023.

And if we look at this kind of decline in sustainability linked bonds, it’s probably a good example of where the market concerns are, and one of the concerns is greenwashing, which we’ve talked about on prior calls. But, in Q2 of 2024, we did have an important event in the sustainability linked bond product. The market was tested in April when an Italian utility, Enel S.p.A., which is based in Rome, missed their sustainability targets on approximately $11 billion of sustainability linked bonds. Enel was the first sustainability linked bond issuer in 2019 and is by far the largest issuer to date.

They published their 2023 sustainability report in April and even though they noted that they were in line and even though they noted that they were in line with their decarbonization strategy, they weren’t going to meet the targets that were in some of their sustainability linked bond contracts. But interestingly enough, this event is considered a positive for the market because given that Enel, the largest SLB issuer, missed their targets, it was assigned to the market that yes, these KPIs – Key Performance Indicators – are ambitious, I think gave a little more credibility to the product. And then in June, after they missed their targets, Enel then went to the US market and did another $2 billion sustainability link bond.

Roman Dubczak: Great. Thanks, Amber. What about the label issuance in Canada?

Amber Choudhry: Q2 was $6.065 billion of issuance, the government issuance was CAD$3.215 via four transactions, and the corporate issuance was CAD$2.85 billion via four transactions.

So looking at the deal specifically, if we first look at the government sector, the four deals are as follows: MFABC, who is a repeat issuer in our market, issued $415 million, Asian Development Bank issued $1.25 billion gender bond, a type of label bond product we don’t always see in the Canadian debt capital markets, the province of Ontario reopened a previous issued green bond for $1.25 billion, and TransLink issued $300 million where their use of proceeds was for clean transportation in the Metro-Vancouver region.

For the corporate issuers in Canada, the four deals are as follows: Sun Life issued $750 million sustainable subordinated notes, this deal was done under Sun Life’s New Sustainability Bond framework, which they updated from their March 2019 framework, Aimco Realty issued $900 million of green bonds, this is Aimco Realty’s second green bond issue and almost double their inaugural green bond issue, which was $500 million, and Lower Mattagami Energy Limited Partnership issued $200 million, 30-year green bond.

Ontario Power Generation is also a deal I want to talk about. They issued a $1 billion, two tranche transaction, 10s & 30 years at the end of June. Similar to Sun Life, OPG issued under their updated framework. Their previous framework was dated November 2021. They, like Ontario, also moved from green to sustainable, and they also included nuclear newbuild projects, and nuclear is a topic that we’ve discussed on many of our previous calls, and great to see another issuer include new nuclear in their framework.

Last quarter, we also talked about how active the Canadian banks have been in Europe for green bond issuance. it’s great to see that in this quarter, in the second quarter, that trend continued. Last quarter we talked about how CIBC did their inaugural green bond in Europe at the end of January, and then in Q2, both Bank of Nova Scotia and Royal Bank of Canada did green bond deals, either on their own or as part of a larger transaction.

Roman Dubczak: Thanks, Amber. Thanks for that update. So, Sid, Bill C-59 certainly caught everybody’s attention here in Canada, I’m sure globally as well. attention here in Canada, I’m sure globally as well. Maybe walk us through the impact of what Bill C-59 is going to have on issuance in Canada.

Sid Samarth: Great question. Before I get into responding, I should say that I am not a lawyer and this does not constitute legal advice. So with that advisory out of the way, so, what is Bill C-59? By way of background, it in part references updates to Canada’s Competition Act, which aims to modernize Canada’s competitive regime.

The act, which by the nature of its name, typically deals with companies’ dominance in the marketplace, including a review of mergers and acquisitions which could lead to that outcome. In addition, the Competition Act also oversees the concept of deceptive marketing claims, including false, misleading, the concept of deceptive marketing claims, including false, misleading, or unsubstantiated representations made by products.

So, pursuant to the amended law, this concept has now been expanded not just from products but to businesses as well, and indicates that environmental, social and ecological misrepresentations not based in accordance within our “court”, internationally recognized methodologies, can result in fines of up to 3% of global revenue.

So, really quite impactful in respect of the liability. Our research team has put out a report on this matter as well and has indicated concern of the law potentially stymieing corporate ESG disclosure in the near term. So, I’ll just say, the law has brought about a level of uncertainty in the world of sustainability in the short term. Now, the good news is that the Competition Bureau has indicated that it’s going to act on an accelerated basis to develop guidance on the interpretation of the new provisions, which are aimed at greenwashing.

It has launched a public consultation process at the moment to gather input on the provisions, and, in addition, has provided to gather input on the provisions, and, in addition, has provided that general perspective on environmental claims. Another point to raise on the amendments, and this is potentially a positive one, comes from a provision on the ability for companies to collaborate with one another to protect the environment, with the bureau granting permission if it is satisfied that the agreement between the organizations is for the purpose of protecting the environment and will not harm competition.

Now, this provision is certainly positive as progressing climate mitigation is going to require collective action, and there was some level of a concern around this about a year ago, which led to the cessation of organizations, such as the Net-Zero Insurance Alliance. So overall, a mixed bag, but certainly something to keep a close eye on in the future.

Roman Dubczak: Thanks, Sid. Hopefully we get some resolution very soon, you know, for everybody’s sake. Amber, I want to talk to you a bit more about sustainable finance market and fund flows, the demand for the bonds and the flows into it. We’ve got some CIBC research, always top rated, you know, maybe walk us through, what some of the results are for the past quarter.

Amber Choudhry: ESG and Portfolio strategy, the published report states that for the first half of 2024, the general conclusion was global ESG Mutual Funds and ETFs continue to see positive inflows, and in line with the level of inflows over the past two years, which is good news. The specifics that I found interesting, particularly pertaining to issuance, is the ESG flows continue to be, I would say, heavily supported by Europe. So, that’s actually a same theme we see when we’re looking at issuance.

So, what can help other jurisdictions, increase their fund flows so that we could be similar to Europe? One of the items is mandatory regulation and/or accounting principles. Regulation can assist with greenwashing concerns, we talked about greenwashing concerns with sustainability linked bonds, and I really do believe will help to, increase sustainable finance issuance going forward. Yeah, no. I agree.

Roman Dubczak: Thanks, Amber. Thank you once again for your comments and leadership in the sector. Certainly, CIBC has had a great track record of issuance in the last quarter or so, a lot of innovative transactions so congratulations on those, and look forward to reviewing the markets with you in another three months or so.

So thank you, Amber and Sid. And would like to thank all of you for having joined us today on this important discussion in evolution in finance, both in Canada and globally. And if you have any questions, observations, concerns or ideas for us, please reach out to the CIBC team. observations, concerns or ideas for us, please reach out to the CIBC team. We’d be more than happy to engage. Thanks for joining us.