Make America Green Again
-
bookmark
-
print
As the world looks toward a new administration in the United States, BMO Capital Markets Fixed Income Strategy Director, Dan Krieter, looks at the potential for growth in the issuance of, and investment in, green, social and sustainability bonds. In the run-up to the new presidency, Dan, who focuses on sustainable fixed income investments and leads the Group’s research in the green bond space, penned a recent report, Make America Green Again.
Following is a conversation with Dan, edited for length, on the main findings of the report, and the likely future of U.S. sustainability debt issuance.
Q: You recently issued a report titled “Make America Green Again”. What are the key takeaways from the report, and why the title?
Why the title? Basically, I just wanted to draw an explicit link and underscore how important the relationship is between the presidential administration and the incorporation of sustainability initiatives into the financial system. And what the report was really trying to do was to highlight how President-elect Biden seems to be making it an objective of his administration to increase environmental consideration. During his campaign, he was running on a platform of infrastructure spending of $2 trillion and there’s a large green component of that. Now, even if that construction plan doesn’t come to pass, it shows that sustainability is at the top of Mr. Biden’s platform.
As well, since the election, we’ve seen Janet Yellen be named Treasury Secretary and she is a staunch supporter of environmental issues and has already started to talk about some of the measures she wants to take. And even away from the election, the Federal Reserve has recently started taking a much stronger interest in taking climate change factors into account in their role as bank regulators in the U.S. There’s been increasing chatter for environmental stress tests for banks that has already resulted in a letter from congressmen to the FED to talk about where the FED is with these efforts.
Q: And that is as a risk mitigation measure?
Yes, in their role as bank regulator to the financial system and amid an increasing sense that, not only does environmental risk pose a threat to the world but poses a threat to insurance companies and major players in the financial system, as climate change results in more natural disasters and the financial system is left exposed.
Q: What are the most important drivers you see for increased sustainable debt issuance?
Green infrastructure. It’s really a change in the new administration’s attitude, because what it comes down to is investment options. In sustainable investing, there is the fear of “green washing”, and the government must get involved at some point to try to help solve those problems. There are international organizations like ICMA that have made tremendous progress, but if you also look at other jurisdictions like Europe, other places like Canada and China, a lot of them have their own government sustainable investing frameworks that guide the investment process in the individual jurisdictions, which currently doesn’t exist in the U.S.
With a new administration in charge, and with the experiences of the rest of the world to show the way, it might help the U.S. drive toward more sustainable investment in the corporate sector; if companies have to start disclosing exposure to environmental issues, and investment dollars flow to corporations that perform best, it could become a driving force behind change in attitude from the top down.
As it stands today, if you look at the share of debt issuance in the world, the U.S. comprises about 40 percent of that, but the U.S. share of sustainable debt is only about 15 percent.
Q: You have seen an explosion in the social/sustainability debt market. Is that in terms of demand? To what do you attribute this, and do you see it continuing?
I think it is partly demand, but I also think another reason for the explosion in sustainability debt lies in the desire on the part of companies and corporations around the world to issue in the sustainable debt market, but who may lack the types of projects that would traditionally see them issue green bonds.
The sustainable debt market as a whole started with Green Bonds about 10 years ago, but Green Bonds are those specifically focused on projects that have environmental outcomes, so, for example trying to avoid greenhouse gas emissions and the like. Well, not all companies have a project that is going to be considered as having an environmental outcome. Green bonds tend to be mostly, but not exclusively, for government-led projects like electricity grids or transportation infrastructure, which is mostly done at the governmental level, or quasi-governmental level, with some exceptions, like solar panel projects and the like.
With social and sustainable bonds, the definition of what you can use those proceeds for is much broader. It’s more applicable to corporates, where the bond is not going to have an environmental impact, but it will have a human impact and a social impact.
Q: How does COVID-19 weigh into the equation?
I think more and more we are seeing a shift in sustainable bonds to investment along the Sustainable Development Goals as expressed by the UN, and one of those is health. Obviously, COVID-19 underscored the threat to health under this pandemic and how we have to change our infrastructure to really achieve better results and better impacts from a health perspective. COVID-19 has resulted in a massive response from governments around the world to avoid some of the worst possible economic and health impacts of the pandemic. We’ve seen pandemic-response bonds, we’ve seen governmental borrowers, needing more funding to invest in PPE and things of that nature. All of these projects can be seen as sustainable and used for social or sustainability bonds. The pandemic resulted not only in greater recognition, but also a greater response in the market as governments try to fight the pandemic.
Q: Are we entering a new era in big deals in sustainable debt issuance? What will drive that? What could derail it?
I think we are entering into a new era of bigger deals in sustainable debt issuance, and that’s really a lot to do with the engagement in the market on the governmental level. Some of the leading borrowers in the world, for example Germany, issued their first green bond this year. Governments are increasingly turning to sustainable debt markets to fund programs … The EU, having issued zero green bonds prior to 2020, will become the largest ESG borrower in the market in the next few years, so you are just seeing greater governmental issuance around the world. The government bond market is the largest bond market in the world by a lot; governments typically lend themselves best to environmental and sustainable objectives, whether it’s helping the poor or sustainable infrastructure and things of that nature. It’s really important that governments continue to engage the market now, and in the years ahead. Maybe not in the next year or two, but it wouldn’t be impossible to see a green bond from the (U.S.) Treasury maybe five years from now.
Q: And why would that be important?
It’s like what we see happening in France or in Germany. France and Germany are two of the other largest bond issuers in the world, behind the U.S., and they’ve just carved out a certain portion of their issuance that is going to be considered green, sort of like how the U.S. government now issues a slice of its debt profile that is inflation protected. It’s a smaller portion of the debt borrower program, but it’s there and you can see how they might carve out for green treasuries some day. Maybe not in the next year or two years for sure, but maybe four or five years from now, that could be something the Treasury does. You’ve seen Treasury innovate even in the last couple of years. Treasury monitors financial markets and they evolve their product following to be in line with trends, so as demand builds (for sustainable bonds) here, Treasury could certainly adapt issuance in line with that trend.
Q: Can you describe and discuss the concept of a “Greenium”, how it applies to Sustainable Debt Issuance and why it’s important?
When we say “Greenium,” we are referring basically to higher prices for sustainable investing, and in the bond market what that means is lower yield. So, if you have, say, a five-year bond at 1 percent, if there is a “Greenium,” an investor would pay a higher price for a similar security with sustainable characteristics. This means the investor earns lower return, say 0.95 percent. That 0.05 percent or five basis points increase would be the Greenium.
It’s a crucially important topic in sustainable finance because it really is the incentive for borrowers of money to look to the sustainable market. Issuing in the sustainable market does come with more cost. Due to the fears of green washing, there has to be more structure around it: you have to pay for an auditor to come and audit the issue, and assure investors that you are following sustainable protocols; and you have to hire environmental experts to monitor projects and report back to investors. So, there is an actual increased monetary cost to issue sustainable debt and that has to be offset by savings in the capital markets. Otherwise, why would you do it? If investors are truly trying to help change the world with their sustainable investments, they are going to have to be able to accept lower financial returns in exchange for a better sustainable return or environmental return.
Q: What has your research into Greeniums shown?
Because it’s such an important topic, I’ve done a study of trends every year over the past five years in various currency markets, and what’s notable is that in 2020 for the first time, we did see significant and observable evidence of a Greenium in the Euro markets. It’s not a surprise that the Euro is first as Europe is at the forefront of all the sustainable financial markets, but it goes to show that, for this to work, there needs to be sufficient support to have sustainable investments trading sustainably and durably at higher prices. There is no Greenium in the U.S. yet, but some day there will be, and what that means is if you are one of the first buyers of sustainable assets, then you have the opportunity to see your price appreciate more than others. I think the existence of a Greenium around the world will only work to increase interest in sustainable debt markets here in the U.S., how to build demand and how to build markets, so it’s a very, very crucial topic.
Green Finance has been a reoccurring topic on our Sustainability Leaders podcast. You might enjoy these episodes:
Dan Krieter co-hosts a weekly High Quality Credit Spreads show on Macro Horizons podcast.
Make America Green Again
Director, Fixed Income Strategy
Dan Krieter is a Director in the BMO Capital Markets Fixed Income Strategy Group. His primary focus is the high quality USD spread market, including interest rate d…
Dan Krieter is a Director in the BMO Capital Markets Fixed Income Strategy Group. His primary focus is the high quality USD spread market, including interest rate d…
VIEW FULL PROFILE- Minute Read
- Listen Stop
- Text Bigger | Text Smaller
As the world looks toward a new administration in the United States, BMO Capital Markets Fixed Income Strategy Director, Dan Krieter, looks at the potential for growth in the issuance of, and investment in, green, social and sustainability bonds. In the run-up to the new presidency, Dan, who focuses on sustainable fixed income investments and leads the Group’s research in the green bond space, penned a recent report, Make America Green Again.
Following is a conversation with Dan, edited for length, on the main findings of the report, and the likely future of U.S. sustainability debt issuance.
Q: You recently issued a report titled “Make America Green Again”. What are the key takeaways from the report, and why the title?
Why the title? Basically, I just wanted to draw an explicit link and underscore how important the relationship is between the presidential administration and the incorporation of sustainability initiatives into the financial system. And what the report was really trying to do was to highlight how President-elect Biden seems to be making it an objective of his administration to increase environmental consideration. During his campaign, he was running on a platform of infrastructure spending of $2 trillion and there’s a large green component of that. Now, even if that construction plan doesn’t come to pass, it shows that sustainability is at the top of Mr. Biden’s platform.
As well, since the election, we’ve seen Janet Yellen be named Treasury Secretary and she is a staunch supporter of environmental issues and has already started to talk about some of the measures she wants to take. And even away from the election, the Federal Reserve has recently started taking a much stronger interest in taking climate change factors into account in their role as bank regulators in the U.S. There’s been increasing chatter for environmental stress tests for banks that has already resulted in a letter from congressmen to the FED to talk about where the FED is with these efforts.
Q: And that is as a risk mitigation measure?
Yes, in their role as bank regulator to the financial system and amid an increasing sense that, not only does environmental risk pose a threat to the world but poses a threat to insurance companies and major players in the financial system, as climate change results in more natural disasters and the financial system is left exposed.
Q: What are the most important drivers you see for increased sustainable debt issuance?
Green infrastructure. It’s really a change in the new administration’s attitude, because what it comes down to is investment options. In sustainable investing, there is the fear of “green washing”, and the government must get involved at some point to try to help solve those problems. There are international organizations like ICMA that have made tremendous progress, but if you also look at other jurisdictions like Europe, other places like Canada and China, a lot of them have their own government sustainable investing frameworks that guide the investment process in the individual jurisdictions, which currently doesn’t exist in the U.S.
With a new administration in charge, and with the experiences of the rest of the world to show the way, it might help the U.S. drive toward more sustainable investment in the corporate sector; if companies have to start disclosing exposure to environmental issues, and investment dollars flow to corporations that perform best, it could become a driving force behind change in attitude from the top down.
As it stands today, if you look at the share of debt issuance in the world, the U.S. comprises about 40 percent of that, but the U.S. share of sustainable debt is only about 15 percent.
Q: You have seen an explosion in the social/sustainability debt market. Is that in terms of demand? To what do you attribute this, and do you see it continuing?
I think it is partly demand, but I also think another reason for the explosion in sustainability debt lies in the desire on the part of companies and corporations around the world to issue in the sustainable debt market, but who may lack the types of projects that would traditionally see them issue green bonds.
The sustainable debt market as a whole started with Green Bonds about 10 years ago, but Green Bonds are those specifically focused on projects that have environmental outcomes, so, for example trying to avoid greenhouse gas emissions and the like. Well, not all companies have a project that is going to be considered as having an environmental outcome. Green bonds tend to be mostly, but not exclusively, for government-led projects like electricity grids or transportation infrastructure, which is mostly done at the governmental level, or quasi-governmental level, with some exceptions, like solar panel projects and the like.
With social and sustainable bonds, the definition of what you can use those proceeds for is much broader. It’s more applicable to corporates, where the bond is not going to have an environmental impact, but it will have a human impact and a social impact.
Q: How does COVID-19 weigh into the equation?
I think more and more we are seeing a shift in sustainable bonds to investment along the Sustainable Development Goals as expressed by the UN, and one of those is health. Obviously, COVID-19 underscored the threat to health under this pandemic and how we have to change our infrastructure to really achieve better results and better impacts from a health perspective. COVID-19 has resulted in a massive response from governments around the world to avoid some of the worst possible economic and health impacts of the pandemic. We’ve seen pandemic-response bonds, we’ve seen governmental borrowers, needing more funding to invest in PPE and things of that nature. All of these projects can be seen as sustainable and used for social or sustainability bonds. The pandemic resulted not only in greater recognition, but also a greater response in the market as governments try to fight the pandemic.
Q: Are we entering a new era in big deals in sustainable debt issuance? What will drive that? What could derail it?
I think we are entering into a new era of bigger deals in sustainable debt issuance, and that’s really a lot to do with the engagement in the market on the governmental level. Some of the leading borrowers in the world, for example Germany, issued their first green bond this year. Governments are increasingly turning to sustainable debt markets to fund programs … The EU, having issued zero green bonds prior to 2020, will become the largest ESG borrower in the market in the next few years, so you are just seeing greater governmental issuance around the world. The government bond market is the largest bond market in the world by a lot; governments typically lend themselves best to environmental and sustainable objectives, whether it’s helping the poor or sustainable infrastructure and things of that nature. It’s really important that governments continue to engage the market now, and in the years ahead. Maybe not in the next year or two, but it wouldn’t be impossible to see a green bond from the (U.S.) Treasury maybe five years from now.
Q: And why would that be important?
It’s like what we see happening in France or in Germany. France and Germany are two of the other largest bond issuers in the world, behind the U.S., and they’ve just carved out a certain portion of their issuance that is going to be considered green, sort of like how the U.S. government now issues a slice of its debt profile that is inflation protected. It’s a smaller portion of the debt borrower program, but it’s there and you can see how they might carve out for green treasuries some day. Maybe not in the next year or two years for sure, but maybe four or five years from now, that could be something the Treasury does. You’ve seen Treasury innovate even in the last couple of years. Treasury monitors financial markets and they evolve their product following to be in line with trends, so as demand builds (for sustainable bonds) here, Treasury could certainly adapt issuance in line with that trend.
Q: Can you describe and discuss the concept of a “Greenium”, how it applies to Sustainable Debt Issuance and why it’s important?
When we say “Greenium,” we are referring basically to higher prices for sustainable investing, and in the bond market what that means is lower yield. So, if you have, say, a five-year bond at 1 percent, if there is a “Greenium,” an investor would pay a higher price for a similar security with sustainable characteristics. This means the investor earns lower return, say 0.95 percent. That 0.05 percent or five basis points increase would be the Greenium.
It’s a crucially important topic in sustainable finance because it really is the incentive for borrowers of money to look to the sustainable market. Issuing in the sustainable market does come with more cost. Due to the fears of green washing, there has to be more structure around it: you have to pay for an auditor to come and audit the issue, and assure investors that you are following sustainable protocols; and you have to hire environmental experts to monitor projects and report back to investors. So, there is an actual increased monetary cost to issue sustainable debt and that has to be offset by savings in the capital markets. Otherwise, why would you do it? If investors are truly trying to help change the world with their sustainable investments, they are going to have to be able to accept lower financial returns in exchange for a better sustainable return or environmental return.
Q: What has your research into Greeniums shown?
Because it’s such an important topic, I’ve done a study of trends every year over the past five years in various currency markets, and what’s notable is that in 2020 for the first time, we did see significant and observable evidence of a Greenium in the Euro markets. It’s not a surprise that the Euro is first as Europe is at the forefront of all the sustainable financial markets, but it goes to show that, for this to work, there needs to be sufficient support to have sustainable investments trading sustainably and durably at higher prices. There is no Greenium in the U.S. yet, but some day there will be, and what that means is if you are one of the first buyers of sustainable assets, then you have the opportunity to see your price appreciate more than others. I think the existence of a Greenium around the world will only work to increase interest in sustainable debt markets here in the U.S., how to build demand and how to build markets, so it’s a very, very crucial topic.
Green Finance has been a reoccurring topic on our Sustainability Leaders podcast. You might enjoy these episodes:
Dan Krieter co-hosts a weekly High Quality Credit Spreads show on Macro Horizons podcast.
You might also be interested in
Why Sustainability Is Good Business: Key Takeaways from IEFA Toronto 2024
Building for Tomorrow: Real Estate, Construction, and Sustainability
A First in Western Canada: Avenue Living Leverages BMO's Retrofit Program to Add 179 New Rental Units in Downtown Edmonton
How NASA and IBM Are Using Geospatial Data and AI to Analyze Climate Risks
BMO Arranges Green Financing to Fund New Lawson Centre for Sustainability, Trinity College's Most Significant Build in a Century
BMO ranked one of the most sustainable companies in North America on the Dow Jones Sustainability Indices
Canada Has an Opportunity to Become a Global Leader in Carbon Dioxide Removal
More Companies Have Plans to Address Climate Change Based on Rising Business Importance: Survey Results
BMO Climate Institute Business Leaders Survey: Nearly Half of Business Leaders in the U.S. and Canada Believe Climate Change Has Already Affected Their Businesses, but Few Have a Strategy
How the Energy Sector Is Helping Canada Achieve Its Decarbonization Goals
Why Businesses Need to Accelerate Their Efforts to Fight Climate Change
Transforming the Global Food System to Benefit Investors and the Planet
Banco do Brasil and BMO Financial Group to Introduce First-of-its-Kind Program to Provide Sustainability-Linked Trade Loans Supporting Brazilian Exporters
BMO Donates $3 Million to GRID Alternatives to Provide Solar Energy Solutions for Low-Income Families
BMO Provides Innovative New Sustainability-Linked Deposit Product to Zurn Elkay Water Solutions
Quick Listen: Michael Torrance on Empowering Your Organization to Operationalize Sustainability
BMO and Bell Canada Execute Innovative Sustainability-Linked Derivative Tied to Ambitious GHG Emission Reduction Targets
BMO Named to UN-Convened Group Providing Guidance to Global Banks on Nature Target Setting
Driving Innovations In Tech To Strengthen Climate Resilience With Climate Engine’s Spatiafi, Built On Google Cloud
BMO Celebrates Earth Day with 3rd Annual Trees from Trades Day on its Global Trading Floors
BMO Donates $2 Million to the University of Saskatchewan to Accelerate Research Critical to the Future of Food
North America’s Critical Minerals Advantage: Deep Dive on Community Engagement
Exploring North America’s Critical Minerals Advantage: Global Metals, Mining & Critical Minerals Conference
The Most Valuable Commodity is Trust: ICMM to BMO Global Metals, Mining & Critical Minerals Conference
Rock Legends Reflect on Mining Hits and Misses: Global Metals, Mining & Critical Minerals Conference
BMO Experts at our 32nd Global Metals, Mining & Critical Minerals Conference
Evolving Mining for a Sustainable Energy Transition: ICMM CEO Rohitesh Dhawan in Conversation
Public Policy and the Energy Transition: Howard Learner in Conversation
Taskforce on Nature-Related Financial Disclosure (TNFD) – A Plan for Integrating Nature into Business
Takeaways from the BMO Climate Institute Small and Mid-Sized Businesses Climate Survey
BMO Ranked North America's Most Sustainable Bank by Corporate Knights for Fourth Consecutive Year
Is Green Financing for Nuclear the Next Frontier in the Energy Transition?
BMO ranked one of the most sustainable companies in North America on the Dow Jones Sustainability Indices
BMO Climate Institute Survey Shows Costs and Competing Priorities Slowing Climate Action for Small and Mid-Sized Businesses
Managing and Monetizing Your Transition to a Net Zero World with BMO and Radicle
BMO the Top Ranked Financial Institution on New Global Sustainability Benchmark Announced at COP 27
COP27 in Focus: Will Energy Security and Economic Uncertainty Impact the Climate Transition?
BMO to Invest in Innovative Carbon Offsets from CarbonCure to Permanently Store CO2
RoadMap Project: An Indigenous-led Paradigm Shift for Economic Reconciliation
A Canadian First: BMO and Concordia University Partner for a Sustainable Future with Innovative Sustainability-Linked Loan
Sustainability Strategy and Reporting for Small and Medium Sized Companies: A Discussion at the Conference of Montreal
BMO to Acquire Calgary-based Radicle Group Inc., a Leader in Environmental Services
Investment Opportunities for a Net-Zero Economy: A Conversation at the Milken Institute Global Conference
How Hope, Grit, and a Hospital Network Saved Maverix Private Capital Founder John Ruffolo
Hydrogen’s Role in the Energy Transition: Matt Fairley in Conversation
Key Takeaways on Ag, Food, Fertilizer & ESG from BMO’s Farm to Market Conference
Exploring the Physical and Transition Risks Facing Food and Agriculture
Building an ESG Business Case in the Food Sector: The Food Institute
Forging Ahead in the Energy Transition: Darryl White to Global Reserve and Asset Managers
BMO and EDC Announce Collaboration to Introduce Sustainable Finance Solutions for Canadian Businesses
Retrofitting Canada's Building Sector: Efficiency Canada’s Corey Diamond in Conversation
The Role of Hydrogen in the Energy Transition: FuelCell Energy CEO Jason Few in Conversation
BMO proud to support first Government of Canada Green Bond transaction as joint-lead manager
Tackling Climate Change in Metals and Mining: ICMM CEO Rohitesh Dhawan in Conversation
Op Ed: Government Action Can Help Spur More Home Building To Address Canada’s Housing Shortage
BMO Launches Business Within Reach: BMO for Black Entrepreneurs and Commits $100 million in loans to Help Black-led Businesses Start up, Scale up, and Grow
The Post 2020 Biodiversity Framework – A Discussion with Basile Van Havre
BMO Announces Plan to Partner with Breakthrough Energy Catalyst to Accelerate Climate Innovation
BMO Financial Group Named North America's Most Sustainable Bank for Third Consecutive Year
Mitigating the Physical Impacts of Climate Change with Spatial Finance
BMO Helps Boralex Go Beyond Renewable Energy, with the Transition of its Credit Facility to a Sustainability-Linked Loan
A Global First: BMO Supports Bruce Power with World's First Nuclear Green Financing Framework
BMO ranked one of the most sustainable companies in the world according to Dow Jones Sustainability Indices
The Future of Remote Work and Diversity in the Asset Management Industry
North American Metals & Mining first: BMO helps Sandstorm Gold Royalties achieve ESG goals with Sustainability-Linked Loan
Education, Employment and Economic Empowerment: BMO Releases Wîcihitowin ᐑᒋᐦᐃᑐᐏᐣ- First Annual Indigenous Partnerships and Progress Report
BMO Announces $12 Billion Financing Commitment towards Affordable Housing in Canada
BMO supports Canada's bid to host the headquarters of the International Sustainability Standards Board
In support of Canada’s bid to host the headquarters of the International Sustainability Standards Board
BMO Named to Canada's Best 50 Corporate Citizens Ranking by Corporate Knights
A North American First: BMO Helps Gibson Energy Fully Transition Credit Facility to a Sustainability-Linked Loan
Understanding Biodiversity Management: Best Practices and Innovation
Episode 29: What 20 Years of ESG Engagement Can Teach Us About the Future
BMO Financial Group 2020 Sustainability Report and Public Accountability Statement Now Available Online
Episode 28: Bloomberg: Enhancing ESG Disclosure through Data-Driven Solutions
BMO Ranked Among Most Sustainable Companies on Dow Jones Sustainability Index - North America
BMO investing in a sustainable future with $1M donation to the Institute for Sustainable Finance
BMO Financial Group Reaches Key Milestone in Matching 100 Per Cent of Electricity Usage with Renewables
BMO Financial Group Recognized as One of the World's Most Sustainably Managed Companies in New Wall Street Journal Ranking
Episode 23: TC Transcontinental – A Market Leader in Sustainable Packaging
BMO Financial Group to Source 100 Per Cent of Electricity Usage From Renewables
Episode 07: World Bank: Mobilizing Capital Markets for Sustainable Finance
Episode 06: Responsible Investing – Industry Trends and Best Practices from Canada