Green Bonds

For professional investors only

March 2017

2

A heritage of responsible investment

2

1984

Launch of

Stewardship

Growth - first

ethical strategy

in UK

1987

Launch of

Stewardship

Income

& Stewardship

North American

strategy

1997

Stewardship

North America

becomes

Stewardship

International

strategy

2000

Launch of

Responsible

Engagement

Overlay (reo® )

2006

Founding

signatory to

Principles for

Responsible

Investment

(PRI)

2007

Launch of

Responsible UK

Sterling Bond

strategy

2010

Launch of

Emerging

Markets ESG

strategy

2011

Launch of

ESG risk tool

2014

Rebranded as

Responsible

strategy range

2016

Launch of

Green Bond

strategy

A history of innovation in Responsible Investment…

Leadership

In-house expertise

Global coverage

Engagement

• Launched Europe’s first social and environmental screened portfolio in 1984. One of

the largest Responsible Investment teams in Europe

• Separate expert teams focus on sustainable screening and portfolio management with

extensive research capabilities and risk management

• Environmental, social and governance (ESG) analysis on hundreds of global

companies to support Responsible Investment strategies

• Responsible engagement and voting program led by our in-house analysts

Green Bonds – BMO Global Asset Management

3

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.

Section II

Green bonds investing

4

Green bonds – overview

5

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

Green Bonds

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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.

Green Bonds – Quote

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“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

Green bonds – rapidly growing market

8

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.

0,8 0,4 0,9

4,0

1,23,1 11,0

36,6

41,8

81,0

21,0

0

10

20

30

40

50

60

70

80

90

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

$b

n France issues

7 billion euro

OAT

EIB issues

inaugural climate

awareness bond

First World

Bank Green

Bond issued

First sizeable

corporate ‘use of

proceeds’ bonds

issued e.g. EDF

Green Bond Principles

published

Barclays MSCI Green Bond

Index launched

COP21 drove new

entrants to the market

such as China and India

First sovereign green

bond from Poland

Green Bonds investing

9

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.

Green bonds – Market characteristics

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Source: Natixis December 31st 2016.

Credit ratings – High quality Issuer types – SSA still dominate

€1.75bn in Oct 2016 $1bn in Sep 2016 $1.5bn in Feb 2016

Corporate issuers are coming across currencies and from around the globe

€500m in Nov 2016

AAA38%

AA17%

A26%

BBB14%

Junk3%

No Rating2%

Corporates39%

Financials 21%

Sovereigns3%

Supranationals27%

Regions 10%

Green bonds – Primary issuance

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New issue premium (NIP) – Do green bonds come to market with smaller NIP vs standard bonds?

Source: HSBC Fixed Income research, September 2016.

Suggestion is that green bonds do not come to market with smaller new issue premiums

Green bonds – Primary issuance

12

New issue premium – Final pricing is consistently tighter than initial price talk

Source: Climate Bonds Initiative research, March 2017.

Oversubscription may be driving green bonds to be more expensive than same normal bond

Green bonds – how they trade in the market

13

Republic of Poland (sovereign) – Euro bonds

Source: Bloomberg as at 09.03.2016. For illustrative purposes only.

For now they trade in line with other debt issued

Green bonds – how they trade in the market

14

Iberdrola (utility) – Euro bonds

Source: Bloomberg as at 09.03.2016. For illustrative purposes only.

For now they trade in line with other debt issued

Green bonds – Transaction costs

15

Source: HSBC Fixed Income Research September 2016

Transaction costs tend to be higher for smaller bonds – potential explanation

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

Section III

Green Bonds and engagement

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Engagement example – Supranationals

17

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

Disclaimer

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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.

Contact us

© 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.

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• Total focus on clients

• Comprehensive range of products

and solutions

• Defined expertise – including a suite of

specialist investment boutiques

BMO Global Asset Management (EMEA) – Head OfficeExchange House

Primrose Street

London EC2A 2NY

Tel: +44 (0) 20 7628 8000

bmogam.com

03.2017 UK NL CM12478