Green bonds and beyond

Diversifying socially responsible fixed income
Vancity Investment Management Ltd.

Market Insights: December 11, 2017


  1. Green bonds are one of the most popular and effective solutions for investors seeking fixed-income exposure that meets environmental, social and governance (ESG) criteria.
  2. While green bonds are an excellent option, the broader universe of socially responsible fixed income is expansive and diverse, offering opportunity for greater levels of diversification.
  3. For a number of reasons, active management is especially important for maintaining high standards of socially responsible investing (SRI).

More and more investors are seeing the personal and financial benefits of SRI. At the beginning of 2016, the market for SRI securities reached US$22.89 trillion – a 25% increase from 2014.1 Significant growth is expected to continue as investors increasingly look to couple social and environmental impact with financial returns.

Historically, the main focus of SRI has been on equity investments. But increased attention is now being paid to socially responsible fixed income. A key area of focus is green bonds, a relatively new type of security offered mainly by governments and corporations. In most cases, green bonds have the ESG and financial characteristics most socially responsible investors are looking for. However, to construct a socially responsible portfolio that is fully diversified, investors will likely need to look beyond green bonds, which comprise less than 1% of global fixed-income opportunities and only a fraction of fixed-income securities that meet ESG criteria.

Disciplined active managers using stringent ESG criteria are able to screen the global universe of conventional fixed income to identify a broader range of eligible securities. Many investors may be surprised to learn that companies with little in the way of immediately recognizable SRI credentials, such as retailers and banks, can boast of very strong ESG track records. Together with green bonds, these opportunities allow socially responsible investors to construct fixed-income portfolios that meet a high standard of diversification.

1. Green bonds

Green bonds are securities whose proceeds are used exclusively to fund projects that contribute to environmental sustainability. These bonds are issued by governments and corporations to fund initiatives such as clean transportation, renewable energy and energy efficiency.

Green bonds have the same characteristics as traditional bonds:

  • Par value
  • Interest at prescribed intervals
  • Rated by credit rating agencies
  • Same rating as comparable bonds issued by the same company/organization
  • Recourse in the event of default

Most green bonds adhere to the International Capital Market Association’s Green Bond Principles, the most widely recognized standard for green bonds. The Principles have four key elements2 :

  1. Use of proceeds: Projects should have clear environmental benefits
  2. Process for project evaluation and selection: Transparent procedure for determining how projects contribute to sustainability objectives
  3. Management of proceeds: Transparent accounting of invested funds
  4. Reporting: Annual reporting on projects and allocated proceeds

Demand for green bonds is driven by a wide range of investors, including institutions, governments, corporations and individual retail investors. The first green bond was issued in 2007 by the European Investment Bank and World Bank3 ; by 2013, annual issuance reached US$11 billion (Figure 1). The introduction of corporate green bonds in 2014 spurred tremendous growth, with annual issuance exceeding US$80 billion in 2016.4 Halfway through 2017, issuance appeared to be on pace for continued growth. The green bond market currently exceeds US$221 billion.5

Figure 1: Green bond issuance, 2013 – 2017

Source: Climate Bonds Initiative ( As at June 30, 2017.


An example of a green bond is the Province of Ontario 1.950%/January 2023, proceeds of which are funding environmentally friendly projects that fall into five categories:

  1. Clean transportation
  2. Energy efficiency and conservation
  3. Clean energy and technology
  4. Forestry, agriculture and land management
  5. Climate adaptation and resilience

This bond ranks equally with Ontario’s other bonds and was issued at a credit spread equal to the province’s conventional bonds.

The table below details current allocations.

Figure 2: Project allocations for Province of Ontario 1.950%/January 2023

Source: Ontario Financing Authority ( G72_R1_en.pdf)

2. Beyond green bonds

While the recent expansion of the green bond market is an exciting development, investors would still find it challenging to construct a fully diversified fixed-income portfolio solely from green bonds. Fortunately, the broader market offers a wide range of traditional fixedincome securities that meet ESG standards. Many of these securities are issued by household names that may not be immediately recognizable as socially responsible investments. On closer inspection, these companies have extensive policies in place – and track records of adherence to these policies – that most socially responsible investors would find highly attractive.

A good example is Canadian discount retailer Dollarama Inc. The company has a strong track record across all three ESG categories and has exhibited a commitment to continuous improvement (see Example 1).


Discount retailer Dollarama has a strong record across all three ESG categories:


  • Mandate to reduce emissions


  • Diverse workforce, offers employment opportunities to new immigrants and students, provides employee medical benefits and a matching retirement savings program
  • To ensure human rights are respected in its supply chain, the company has implemented a vendor code of conduct and a supplier audit program


  • Demonstrated responsiveness to shareholder engagement in the area of gender diversity in leadership, with the addition of women to the board of directors and senior executive team

The company has a number of fixed-income offerings, including Dollarama Inc., 2.203%/November 2022.

Canada-based Northland Power Inc. is another good example of an SRI fixed-income opportunity outside of green bonds. Northland Power’s line of business makes it more immediately recognizable as a potential socially responsible investment. The company produces electricity from clean natural gas, biomass and renewable energy sources such as wind and solar (see Example 2).

Many investors may be surprised to learn that companies with little in the way of immediately recognizable SRI credentials, such as retailers and banks, can boast of very strong ESG track records.

-Vancity Investment Management Ltd.


Northland Power’s ESG credentials are strong and continuously evolving:


  • Produces electricity from clean and renewable sources


  • Consults meaningfully with community stakeholders, including impacted First Nations
  • Sells electricity under long-term revenue contracts that ensure sustainable value for customers, shareholders and communities


  • Majority of independent directors
  • Written code of business conduct and ethics for directors and officers

Northland Power issues project-related bonds such as the Northland Solar Finance One 4.397%/June 2032. Proceeds are directed to the company’s solar projects across Ontario and general corporate purposes.

A Barclays study has found that bond portfolios with high ESG scores generally performed better than those with low ESG scores (Figure 3).

Figure 3: Return difference (% per year) between portfolios with high and low ESG scores

Source: MSCI ESG research, Barclays Research, October 30, 2016. Portfolios constructed from securities in the Bloomberg Barclays US Corporate InvestmentGrade Index.


3. Why active

An active approach is particularly important for investors committed to SRI. Active managers are able to optimize portfolios for investors’ income needs by scouring the entire global fixed-income universe for investments that satisfy both ESG standards and the requirements of conventional fundamental analysis. This comprehensive, integrated approach can reduce or eliminate any financial tradeoffs that could arise from investment selection based primarily or solely on ESG criteria.

Active managers are also able to monitor the companies they invest in to ensure they continue to uphold the ESG standards that qualified them for inclusion in the fund. If they deviate from these standards, portfolio managers can use their influence as debtholders and/or shareholders to hold company management to account.

Another important advantage of active management is the ability to screen out potential green bond opportunities issued by companies that are otherwise ineligible as ESG investments. For example, it is entirely possible that a tobacco manufacturer – which many would suggest should be ineligible for inclusion in an SRI portfolio – could issue a green bond for a cost-saving energy-efficiency initiative. Active management can provide the more granular level of analysis that would remove such a green bond from consideration.

For an actively managed, fossil fuel-free, responsible approach to fixed income, investors can look to IA Clarington Inhance Bond SRI Fund.

1 Global Sustainable Investment Alliance, 2016 Global Sustainable Investment Review. 2 International Capital Market Association – 3 Climate Bonds Initiative – 4 Climate Bonds Initiative –, data as at June 31, 2017. 5 Climate Bonds Initiative, Bonds and Climate Change: The State of the Market, September 2017 – https://www.climatebonds. net/files/files/CBI-SotM_2017-Bonds&ClimateChange.pdf. Definition of terms: Asset-backed security (ABS) – A security backed by assets such as loans or a company’s receivables. Spread – The yield difference between two types of bond or credit instrument, typically expressed in percentage points or basis points. Corporate bond – A fixed-income offering from a company, as opposed to a government. Credit rating – Issuer credit quality is assigned a rating by rating agencies such as Standard & Poor’s and Moody’s, usually taking the form of a series of letters (e.g., A, BBB, BBB-, BB+). Please see the definitions of Investment grade and High-yield bond, below. Default – When a bond issuer fails to make interest or principal payments. Environmental, Social and Governance (ESG) – Some portfolio managers will only invest in companies with progressive environmental, social and corporate governance policies. Fundamental analysis – The process of analyzing and selecting securities based on their fundamental characteristics. Par value – The face value of a bond. Sovereign bond – A bond issued by a government. The information provided herein does not constitute financial, tax or legal advice. Always consult with a qualified advisor prior to making any investment decision. Commentaries are provided by the portfolio manager or sub-advisor responsible for the management of the fund’s investment portfolio, as specified in the applicable fund’s prospectus (“portfolio manager”). Statements by the portfolio manager represent their professional opinion, do not necessarily reflect the views of iA Clarington, and should not be relied upon for any other purpose. Information presented should not be considered a recommendation to buy or sell a particular security. Specific securities discussed are for illustrative purposes only. Mutual funds may purchase and sell securities at any time and securities held by a fund may increase or decrease in value. Past investment performance of a security may not be repeated. Unless otherwise stated, the source for information provided is the portfolio manager. Statements that pertain to the future represent the portfolio manager’s current view regarding future events. Actual future events may differ. iA Clarington does not undertake any obligation to update the information provided herein. The information presented herein may not encompass all risks associated with mutual funds. Please read the prospectus for a more detailed discussion on specific risks of investing in mutual funds. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Trademarks displayed herein that are not owned by Industrial Alliance Insurance and Financial Services Inc. are the property of and trademarked by the corresponding company and are used for illustrative purposes only. The iA Clarington Funds are managed by IA Clarington Investments Inc. iA Clarington and the iA Clarington logo are trademarks of Industrial Alliance Insurance and Financial Services Inc. and are used under license.