26 July 2023, Toronto
The importance of environmental, social and governance (ESG) factors for investors in Canadian provincial and municipal bonds is highlighted in a new report published today by the Principles for Responsible Investment (PRI).
Canada’s provinces and municipalities are on the frontline of many sustainability challenges, including extreme weather events, the transition to a low-carbon economy and demographic change.
The new PRI report, ESG considerations in Canadian provincial and municipal bonds, explores the relevance of ESG factors for risk-adjusted returns, as well as how investors can use this market to work towards positive sustainability outcomes.
PRI’s Jasper Cox, Guidance Analyst, Fixed Income, says: “Environmental and social themes are very tangible in the Canadian provincial and municipal bond market, for example with many provinces hosting substantial fossil fuel, agriculture, or mining industries. There are many opportunities for responsible investors to drive progress, too. This report aims to help bondholders start to incorporate ESG considerations in their investment processes for this market.”
The paper was written before Canada’s recent devastating wildfires, but these latest events further demonstrate the environmental risks that the country faces and may prompt provincial and municipal bondholders to go further in considering climate change in their investments.
Bond investors provide an important source of funding for Canada’s sub-sovereign entities, and they are often international, with more than CAN$230bn of foreign investment in provincial and municipal bonds and provincial money market instruments.
Provinces and municipalities fund public services and infrastructure with clear environmental and social benefits. In addition, provinces have substantial power to shape policies in their jurisdictions. This makes the market a potentially useful tool for investors pursuing a thematic ESG approach.
Some borrowers have started issuing green and other labelled bonds, which can help bondholders signal participation in projects that are environmentally or socially positive. However, investors always need to conduct appropriate due diligence on the bond and the issuer before buying.
This new report follows a webinar the PRI held last year, Tackling ESG factors in Canada’s provincial and municipal bonds. It also complements previous PRI work on sub-sovereign debt, including two reports on the US municipal bond market: ESG integration in sub-sovereign debt: the US municipal bond market and The thematic ESG approach in US municipal bonds.
ENDS
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