For professional investors only Green Bonds March 2017
A heritage of responsible investment Leadership Launched Europe s first social and environmental screened portfolio in 1984. One of the largest Responsible Investment teams in Europe In-house expertise Separate expert teams focus on sustainable screening and portfolio management with extensive research capabilities and risk management Global coverage Environmental, social and governance (ESG) analysis on hundreds of global companies to support Responsible Investment strategies Engagement Responsible engagement and voting program led by our in-house analysts A history of innovation in Responsible Investment 1984 1987 1997 2000 2006 2007 2010 2011 2014 2016 Launch of Stewardship Growth - first ethical strategy in UK Launch of Stewardship Income & Stewardship North American strategy Stewardship North America becomes Stewardship International strategy Launch of Responsible Engagement Overlay (reo ) Founding signatory to Principles for Responsible Investment (PRI) Launch of Responsible UK Sterling Bond strategy Launch of Emerging Markets ESG strategy Launch of ESG risk tool Rebranded as Responsible strategy range Launch of Green Bond strategy 2 2
Green Bonds BMO Global Asset Management BMO Global Asset Management green bonds capability First invested in Green Bonds circa 2011 EIB green bond for rates strategies SRI funds started investing in corporate green bonds from 2014 Launched a dedicated green bond strategy in late 2015 client demand 225 million euros invested and committed in green bond strategy from Dutch institutional clients as of March 17, 2017. Dedicated green bond specialists analysing issuances and engaging issuers, stakeholders Leveraging 30 years+ track record in socially responsible investment Experienced rates, credit and ESG teams who work closely together ESG = Environmental, Social and Governance. 3
Section II Green bonds investing 4
Green bonds overview Funding the transition to a low carbon economy Green bonds are fixed income instruments aimed at clearly defined projects that have environmental benefits Projects include renewable energy, water conservation and energy efficiency amongst others These were originally pioneered by the supranational agencies as a way to assist in helping governments meet their climate change related policy goals Green bonds offer the same credit risk as the issuer as most bonds are standard recourse to issuer debt obligations Green Bond Principles As the market grew, it became important for an industry wide accepted definition of green bonds to be established In early 2014, a group of investment banks published the Green Bond Principles which provided voluntary guidelines for issuers and underwriters to follow This provided procedures for designating, disclosing, managing and reporting on the proceeds of green bonds It was a major step in the professionalisation of the market and allowed a broader range of players across the investment chain to become involved BMO Global Asset Management became a Green Bond Principles member in 2015 5
Green Bonds Resolving climate change Key financial instrument helping fund the transition to a low carbon economy Proceeds are segregated for use solely into environmental projects Rapidly growing market as challenge of raising capital for climate change increases No additional credit risk Same credit risk as the issuer as most green bonds are standard recourse to issuer debt obligations Impact investing Clearest approach to impact investment available for institutional investors at scale Powerful way for investors to align their investing activities with core principles Strong signal to stakeholders of commitment to responsible investment ESG = Environmental, Social and Governance. 6
Green Bonds Quote For investors, green bond markets offer a stable, rated and liquid investment with long duration. For issuers, green bonds are a way to tap the huge $100 trillion pool of patient private capital managed by global institutional fixed-income investors. Source: Mark Carney, 22 September 2016, Governor of the Bank of England 7
$bn Green bonds rapidly growing market 90 COP21 drove new entrants to the market such as China and India First sovereign green bond from Poland 80 70 60 50 40 30 20 10 0 EIB issues inaugural climate awareness bond First World Bank Green Bond issued 0,8 0,4 0,9 4,0 1,2 First sizeable corporate use of proceeds bonds issued e.g. EDF 3,1 11,0 Green Bond Principles published Barclays MSCI Green Bond Index launched 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 36,6 41,8 81,0 France issues 7 billion euro OAT 21,0 Source: Climate Bonds Initiative, MSCI ESG Research, Barclays Research, Bank of America Merrill Lynch. EIB = European Investment Bank. 2017 year to date 13 March 2017. 8
Green Bonds investing How to incorporate green bonds There are the following options for investors to gain exposure to green bonds: 1. Standard mandate: Treat green bonds as any other bond 2. Standard mandate with green bond target: For example 10% of mandate to be in green bonds 3. SRI/ESG funds: Green bonds as part of a SRI fund 4. Dedicated green bond mandate: Impact investment, in-depth analysis and engagement There are a number of aspects to consider Green bond market characteristics credit rating, sector, currency Primary markets: Green bonds vs non green bonds Secondary markets: Green bonds vs non green bonds Transaction costs SRI = Socially Responsible Investment ESG = Environmental, Social and Governance. 9
Green bonds Market characteristics Credit ratings High quality Issuer types SSA still dominate BBB 14% Junk 3% No Rating 2% AAA 38% Supranationals 27% Regions 10% Corporates 39% A 26% AA 17% Sovereigns 3% Financials 21% Corporate issuers are coming across currencies and from around the globe 1.75bn in Oct 2016 $1bn in Sep 2016 $1.5bn in Feb 2016 500m in Nov 2016 Source: Natixis December 31 st 2016. 10
Green bonds Primary issuance New issue premium (NIP) Do green bonds come to market with smaller NIP vs standard bonds? Suggestion is that green bonds do not come to market with smaller new issue premiums Source: HSBC Fixed Income research, September 2016. 11
Green bonds Primary issuance New issue premium Final pricing is consistently tighter than initial price talk Oversubscription may be driving green bonds to be more expensive than same normal bond Source: Climate Bonds Initiative research, March 2017. 12
Green bonds how they trade in the market Republic of Poland (sovereign) Euro bonds For now they trade in line with other debt issued Source: Bloomberg as at 09.03.2016. For illustrative purposes only. 13
Green bonds how they trade in the market Iberdrola (utility) Euro bonds For now they trade in line with other debt issued Source: Bloomberg as at 09.03.2016. For illustrative purposes only. 14
Green bonds Transaction costs Transaction costs is a concern for buyers of green bonds in secondary markets Transaction costs for green bonds in iboxx Euro Corporate Index vs the index is higher Worth noting: Differential is reducing over time Worth noting: Average size of green bonds is somewhat smaller than average size in index Transaction costs tend to be higher for smaller bonds potential explanation Source: HSBC Fixed Income Research September 2016 15
Section III Green Bonds and engagement 16
Engagement example Supranationals Concerns about fossil fuel financing International Finance Corporation (IFC), a part of the World Bank, first issued green bonds in 2010 Proceeds used to finance projects in low income countries such as energy efficiency We had concerns about use of proceeds to finance fossil fuel-based electricity plants We held an engagement call with the IFC in April 2016 and expressed our reservations IFC said that it was principally to make oil and gas-powered electricity plants more energy efficient However, we questioned the lack of internal thresholds and unambitious efficiency targets BMO Global Asset Management assessment Issuer-level: Strong overall approach and track record in financing environmental projects in low income countries No concerns nor major controversies highlighted Issuance-level: IFC did not provide sufficiently robust explanations to why and how they finance fossil fuel plants in Green Bonds We require IFC to establish clear controls, limits and transparent reporting in this area of concern We currently do not approve IFC green bonds for investment in green bond strategy We will require the issuer to respond to our engagement before reconsideration of approval rating 17
Disclaimer Past performance should not be seen as an indication of future performance. The value of investments and income from them can go down as well as up as a result of market and currency movements and investors may not get back the original amount invested. Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any products that may be mentioned. 18
Contact us BMO Global Asset Management (EMEA) Head Office Exchange House Primrose Street London EC2A 2NY Tel: +44 (0) 20 7628 8000 bmogam.com Extensive worldwide investment capabilities Total focus on clients Comprehensive range of products and solutions Defined expertise including a suite of specialist investment boutiques 2016 BMO Global Asset Management. All rights reserved. BMO Global Asset Management is a trading name of F&C Management Limited, which is authorised and regulated by the Financial Conduct Authority. 03.2017 UK NL CM12478