Green bond's flexibility may hide a surprise for investors

The philosophy behind the program’s lending policy is a forgiving approach toward a contentious sector

Green bond's flexibility may hide a surprise for investors

While responsible investing is gaining assets and support from investors around the world, a lack of set standards and definitions may result in surprises for some.

RBC’s recently created green bond program presents a case in point. Contrary to the expectations that environmentally oriented investors may have, the bank may offer loans to oil and gas companies under the program, reported BNN Bloomberg.

Citing Lindsay Patrick, RBC’s head of sustainable financing, the news outlet said the country’s largest bank could make loans to oil and gas firms that seek to reduce their environmental impact. “[They] aren’t specifically excluded in our framework,” Patrick told the news outlet.

The majority of the lender’s green bond funding — including its inaugural 500-million euro five-year bond offering announced last month — will be put in renewable power and green buildings. Still, that may not be good enough for investors who are expecting a total negative screen to exclude companies with significant carbon footprints.

That’s not to say that it’s an incorrect approach. Rather than avoid companies with ESG shortfalls, many large asset managers are already using their clout as large shareholders to push for improvements. A study by MSCI also suggested that ESG momentum, which measures the change in ESG rating rather than just the score itself, should be considered in the investment process for equity markets.

Fostering a green debt market that supports heavy polluters that want to change is also key for Canada. According to a draft report from a panel of experts organized by the Canadian government, oil and gas companies account for over 20% of the country’s exports and 26% of its total greenhouse gas emissions.

The Bank of Canada (BOC) has also highlighted the implications of changing weather on the Canadian financial system. In its most recent Financial System Review, it noted the larger claims faced by insurance companies as a result of extreme weather events: from 2008 to 2017, insured damage to property and infrastructure averaged some $1.7 billion per year, compared to $200 million per year from 1983 to 1992.

The BOC also noted a possible impact on banks and asset managers with stakes in carbon-intensive sectors. As investors and consumers favour lower-carbon companies, the central bank said, fossil-fuel assets may be losing “much of their value.”

According to Patrick, RBC is part of an industry-based working group looking into sectors that could be covered by a separate asset class known as transitioning bonds. That includes bonds that have been issued by Spanish oil producer Repsol SA and Japan’s Mitsui O.S.K. and Nippon Yusen Kaisha.

“We’re supportive of transition taxonomy that would allow heavy industry or resources to ring fence funding for environmental projects,” he said. “We’re at early stages of sort of crafting that.”


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