Green bonds are becoming more prevalent in the bond markets. What are they and how do they differ from traditional bonds? Interview with AlphaFixe Capital, co-portfolio manager of the FÉRIQUE Global Sustainable Development Bond Fund.
What are green, social or sustainable bonds, and how do they differ from traditional bonds in terms of their economic and environmental impact?
Impact bonds (also referred to as green, social or sustainable) are bonds whose proceeds are used to finance projects with a positive environmental and/or social impact. Sustainable bonds allow the issuer to finance environmental and social projects. Moreover, the issuers of such bonds must produce an annual report on the use of the funds and the environmental and/or social benefits of the projects financed. As with regular bonds, holders of impact bonds assume the credit risk of the issuer and not that of the underlying projects.
Can you provide a concrete example of a Quebec project financed by green, social or sustainable bonds?
The Province of Quebec issues green bonds to finance public transit projects in the Greater Montreal Area. The new Azur Metro cars and the Réseau express métropolitain (REM) are fine examples of such investments. The environmental impact of these projects comes from the number of additional cars that would be on the road if commuters had no access to these modes of public transit. Such initiatives not only avoid greenhouse gas (GHG) emissions but also make travelling around the city more pleasant and efficient.
What role do you see these bonds playing in Canada in the coming years?
In recent years, we’ve seen ever-larger numbers of issuers come to market with inaugural impact bond issuances. Such issuers tend to return to the market year after year, contributing to the growth of the amounts outstanding. With the increasing need for energy, coupled with ambitious GHG reduction targets, we can only be optimistic about the longer-term outlook for the green bond market. Moreover, because the energy transition will have to be orchestrated in an environment of increasing social inequality, the opportunities for all levels of government to issue social bonds only reinforce our thesis that this segment of the market will keep growing.
What are the advantages of including these bonds in a portfolio along with traditional bonds?
All other things being equal, for a given issuer, impact bonds have the same characteristics as regular bonds in terms of risk and return. Managers can construct diversified portfolios and actively manage them against a benchmark, just as they do with a regular fixed-income mandate. But these bonds can be used to finance projects with a positive environmental and/or social impact. Thus, investors can enhance the impact of their investments by contributing to causes aligned with their values.
About AlphaFixe Capital
AlphaFixe Capital is a Quebec-based investment management firm specializing in fixed income. Its investment philosophy, inspired in part by the aftermath of the 2008 financial crisis, is based on a rigorous risk management process. At AlphaFixe, integration of environmental, social and governance (ESG) factors into investment decision making dates back to the firm’s inception and is an integral part of its mission and values. AlphaFixe became a signatory to the United Nations Principles for Responsible Investment in 2009, undertaking to respect its six principles.
About the FÉRIQUE Global Sustainable Development Bond Fund
The Fund was established in 2021 to provide income and, to a lesser extent, long-term capital appreciation. It invests, directly or indirectly (such as through investments in ETFs or other mutual funds), in a globally diversified portfolio composed mainly of fixed-income securities issued by governments and corporations to finance projects and businesses aligned with the principles of sustainability. The Fund’s responsible investment approach contributes to sustainable development. AlphaFixe Capital co-manages the Fund along with BMO Global Asset Management.
