NORTH AMERICA State Of The Market - Climatebonds

3. Policy review: The USA and CanadaThe USA and Canada have recently introducedeconomy-wide emission reduction targets at thehighest levels of government, as well as publiclyreaffirming their commitment to work togetherto achieve said goals.1 However, both countrieslag many of their DM counterparts in the speed,scale, and breadth of their climate action. Thisis not least due to a continued reliance on fossilfuels to power much of their economies; thelegacy of heavyweight lobbying power from oiland gas companies and industry associations isclear in the scale of subsidies that both countriescontinue to pay.The lack of binding climate-related reportingrequirements is another hindrance to actionin both the real economy as well as in finance.Moreover, political pressure especially in theUS has previously given rise to efforts aimed atcomplicating sustainable asset allocation despitesubstantial demand growth, as evidencedin the recent surge of inflows into ESG andsustainable funds.2 For example, the Trumpadministration Department of Labor introduceda rule to block private pension fund managersfrom allocating investments on the basis of ESGconcerns, including climate change, a movethat was criticised by some asset managers as“interfere[nce] with funds integrating investmentstrategies consistent with beneficiaries’ values.”3A turning political tideThe urgency and magnitude of financial risk thatclimate change poses to the North Americaneconomies together with the need to bothmitigate as well as adapt to that risk, is beginningto sink in: for example, a 2020 report from theUS Commodity Futures Trading Commission(CFTC) cited estimates that between USD1tnand USD4tn of global wealth tied to fossil fuelassets could ultimately be lost, much of which iseither physically in North America or owned byinvestors in the region.4Since his inauguration, President Bidenhas exercised executive power to establish a“whole of government approach” to assessingand integrating climate risk considerationsto decision-making in the various branchesof government.In November of last year, the Canadiangovernment introduced a landmarklegislative proposal, the Net-Zero EmissionsAccountability Act, which would solidify theimplementation of the country’s existing net-zeroby 2050 target by introducing interim emissionreduction checkpoints at five-year intervals.5Canada is also pioneering its own taxonomy forinvestments that would facilitate the country’slow-carbon transition.The United StatesExecutive action andglobal cooperationUS federal governmentclimate leadership willcatalyse action across theeconomic system. The BidenHarris presidential ticket was built on a strongclimate platform with action being taken to furtherits climate agenda. Highlights include: Bringing the USA back in to the ParisAgreement fulfilled in February 2021.6 Tackling the Climate Crisis at Home andAbroad7 (executive order) established aNational Climate Task Force of representativesfrom across the government. It was responsiblefor drafting the USA’s Nationally DeterminedContribution (NDC), on the back of which itwill develop the national climate strategy laterthis year.8 The NDC stipulates a halving ofemissions by 2030 and complements a targetfor a zero-carbon electricity sector by 2035 anda net-zero economy by 2050.9 The US International Climate Finance Planincluding pledges to double climate mitigationand adaptation financing in developingcountries, as well as to prioritise supportfor blended finance mechanisms and endinternational fossil fuel funding.10 The US joined a G7 new “30x30” initiative,which seeks to protect 30% of the Earth’s landand sea area by 2030. Nature-based solutions,including the restoration of carbon sinks in soiland the oceans, are a critical tool in achievingdecarbonisation goals and protecting againstthe physical impacts of climate change.11 The Executive Order on ClimateRelated Financial Risk signed in May 2021directed the National Climate Advisor and theDirector of the National Economic Councilto develop a government-wide strategy toidentify and report on climate-relatedfinancial risk to government programmes,assets, and liabilities.12TreasuryThe increased international cooperation extendsalso to the US Treasury Department.The Treasury joined the global Coalition ofFinance Ministers for Climate Action in April.The Treasury’s priorities include the co-chairingof the G20 Sustainable Finance Working Group(SFWG).13 The SFWG will build on existinginternational approaches to sustainabilitydisclosures and coordinate approaches toidentifying sustainable and climate-alignedinvestments, including taxonomies.North American State of the Market 2020 Climate Bonds InitiativeA new Treasury Climate Hub will coordinateclimate-relevant activities including key levers inthe Treasury toolbox such as the directing of publicinvestment and enacting of fiscal policy measures.14The “American Jobs Plan” unveiled in Marchaddresses both mitigation as well as adaptation andresilience across key sectors in the economy. Its goalscover electricity, water, waste, rail transportation,electric vehicles and energy efficient and affordablehousing. If passed, the USD2.7tn plan would bethe most comprehensive public infrastructureinvestment programme since the 1960s.In tandem, a “Made in America Tax Plan” includesrolling back and ultimately eliminating fossil fuelsubsidies, as well as re-introducing paymentsfrom polluters to ensure culpable industriesparticipate in covering the cost of environmentalremediation. See more on page 25.The FedThe Fed recently became a member of theNetwork for Greening the Financial System(NGFS), joining 80 of its peers to share informationon integrating climate change risk managementpractices into regulation and activities.Furthermore, the Fed established Supervisionand Financial Stability Climate Committees toanalyse climate risks in the US financial system,and the readiness of supervised financialinstitutions in the country to respond to them.15The SECThe Securities and Exchange Commission (SEC)has created a solid foundation for climate-relatedaction across its functions in the first half of 2021.This includes:A Task Force focused on identifying ESGrelated misconduct, announced in March.The Division of Examinations stated that climaterelated risks have been elevated to top priority.16Climate disclosure public consultation while SEC Guidelines for Climate Disclosurehave been in place since 2010, these have beenfound largely ineffective among US publiclylisted firms.17 To address criticisms and meetthe soaring demand for information on climatechange, a three-month public consultationbegan March 2021.The PRI and others have recommended that theSEC also focuses on disclosure of individual debtsecurities. The COVID-19 pandemic saw recordlevels of bond issuance supported by low interestrates and quantitative easing programmes. Mostcorporate debt sold during the crisis was exemptfrom detailed disclosure normally required by Rule144A.18 The SEC could use the Rule 144A to directissuers to report on ESG-related issues that matchthose required of companies going forward.4

Other work onclimate disclosuresRegulators including the SEC could draw on thework of the Partnership for Carbon AccountingFinancials (PCAF) to calculate financedemissions in investment portfolios.19 PCAFhas the support of large US financial institutions,such as Bank of America, Citibank, and MorganStanley. Some banks have set a net-zero financedemissions target in their own operations. Thiscould harmonise calculation approaches andaccelerate the uptake of this reporting.The proposed Climate Risk Disclosure Act of2021 would require public companies to reporton climate-related risks. It is intended to addtransparency and empower investors to assessthese risks, driving the low-carbon transition.A letter of support for the bill has been signedby 82 organisations in response to polling thatindicated clear demand for added transparencyfrom Wall Street regarding climate change risks.20Sub-national climate action,disclosures, and guidanceState-level progress varies: Half of the 50 states (including District ofColumbia) have economy-wide emissionreduction targets in place. Approximately half of the 100 largestAmerican cities also have targets in place.21, 22 3,800 states, cities, businesses,universities, faith-based, and other nonfederal organisations have made climatecommitments which, together, could deliver 25% reduction in emissions by 2030compared to 2005.23 State-level action on climate continuedover the past five years despite the federaladministration rolling back climate andenvironmental policy, a further testament tothe power of sub-national climate action. California introduced a new ClimateCorporate Accountability Act in February2021. If it passes, it will require largecorporations doing business in the state toreport on Scope 1 – 3 GHG emissions from2024, and to set and disclose a science-basedemissions reduction target beginning in 2025.24 California’s green bond market has beensupported by the state’s own Green BondDevelopment Committee since 2019.25 New York’s Department of FinancialServices (DFS) published Proposed Guidancein March 2021 detailing how climate-relatedfinancial risks are to be managed by stateinsurers.26 The move was the first of its kind atthe state level and could nudge similar actionsfrom other financial regulators. DFS is also partof the NGFS.CanadaCanada’s ambition to becomeone of the greenest countriesin the world is inscribedin a Federal SustainableDevelopment Strategy. Partof the Federal SustainableDevelopment Act, the strategy is comprised of 13goals - the first of which is centered on effectiveclimate action. However, Canada’s actual netzero 2050 target has been criticised for not beinglegislated and otherwise lacking detail.27 Since theend of 2020, Prime Minister Justin Trudeau hasannounced several measures to strengthen it.Canada’s strengthened climate plan:“A Healthy Environment and a HealthyEconomy” was announced in December 2020.28The new plan commits an initial CAD15bn(USD12.4bn) of investment to foster a cleaneconomy and create jobs, with specificexamples including a CAD3bn (USD2.5bn) NetZero Accelerator Fund to help large emissionintensive companies reduce their emissions.The government plans to launch the Net-ZeroChallenge in 2021, a voluntary initiative toencourage large industrial emitters to developand implement net-zero transition plans.The Canadian Net-Zero EmissionsAccountability Act was proposed in November2020. It is intended to formalise Canada’starget to achieve net-zero emissions by 2050by establishing a series of interim emissionsreduction targets at five-year milestones. Tosupport the implementation of the Act, theNet-Zero Advisory Body was launched as anindependent expert group that will advise thegovernment on decarbonisation pathways.29Canada has enhanced its NDC to a 40-45%reduction from 2005 levels by 2030, addingfurther rigour to the decarbonization journey withthis interim target.In May 2021, Canada launched the SustainableFinance Action Council, with the stated objectiveto bring together public and private sector financialexpertise to support the growth of a strong, wellfunctioning, sustainable finance market. Participantswill include representation from Canadian banks,insurance companies and pension funds. A publicsector coordinating group will play an observerrole in council meetings and advising the chair.30Other key memberships and forums include: Membership of the G7 30x30 initiative. Membership of the Net-Zero Producers Forum,a platform for oil and gas–producing countries todiscuss how the sector can implement the ParisAgreement and net-zero by 2050. It will be todevelop pragmatic net-zero emission strategies,such as advancing the circular carbon economyapproach as well as the development anddeployment of clean-energy and carbon captureand storage technologies.31,32 Other membersinclude Norway, Qatar, Saudi Arabia (about40% of the world’s oil and gas production).33Canada’s Transition TaxonomyCanada kick-started a process to work on aTransition Taxonomy in 2019.34 The processis being led by the CSA Group, and forms partof creating a full National Standard of Canadafor Transition Finance.The process is currently on hold as an initialversion of the Taxonomy failed to secure amajority vote from the Technical Committeeworking on it. Some of the performancethresholds for activities in the initial prioritysectors, energy (oil and gas), utilities, andforestry, and their sub-sectors are still beingrevised. An additional four sectors (agriculture,materials, mineral mining, and transportation)are expected to be included later in the process.A multi-faceted transition challengeBeyond the obvious technical challenge ofsetting appropriate thresholds, the elephantin the room is the difficulty of swiftly movingaway from the continued oil and gas reliance,particularly pertinent for the province ofAlberta. This, however, is key to the successfuldelivery of a net-zero economy, and the risksof not doing so are immense.North American State of the Market 2020 Climate Bonds InitiativeThe Transition Taxonomy will presumablyinclude thresholds for continued but moreefficient operations of the oil and gas sector,indicating that these sectors are not expectedto be phased out in the short term. If donewell, it could provide a clear, ambitious, andParis-Aligned pathway for an industry that isvital for transition.However, there are valid concerns that thetaxonomy may not be ambitious enough.The Canadian Banking Association (CBA)maintains that any disclosure standard “mustconsider the importance of oil, gas and otherresource-heavy industries to the Canadianeconomy.”35 Prioritising the economicimportance of a sector as a starting point is atodds with the science-based approach takenin the EU and elsewhere.Further, if Canada fails to get it right, itcould put it in direct conflict with the othertaxonomy developments around the world(and therefore global harmonisation).5

4. Market analysis: USAOverviewThe USA is the largest country source of GSSbonds with USD275.9bn issued to date, andUSD234bn outstanding at the end of Q1 2021.Nevertheless, GSS debt comprises just 0.6% ofthe USD46tn American bond market, so thereremains great opportunity for expansion.36The US GSS market remains largely characterisedby numerous small deals from Fannie Mae,and munis which are mostly bought bydomestic retail or individual investors. Tomobilise institutional money, and dedicatedmandates which could help to drive policychange and shift capital at scale, the marketneeds more benchmark deals from the full rangeof economic sectors.Green The USA is the largest sourceof green debt globally,in both number of bonds,and volume. At the end of Q1 2021the Climate Bonds Green Bond Databaseincluded USD241.4bn/USD234bn amountissued/outstanding in green bonds and loansoriginating from the USA37. The market hasseveral unique features, including the largevolume of green agency MBS from Fannie Maewhich accounts for 39% of all issuance, withoutwhich the US would fall behind China andFrance in the league table. Green US municipal(muni) bonds issued by local governments andgovernment-backed entities make up 23% oftotal volume. Other than agency MBS, the USgreen securitisation market includes a variety ofother collateral types with auto ABS and PACEABS being the most popular. Since inception in 2011, the market hasexperienced steady growth except for 2018and 2020.Global ranking endof Q1 2021 1Number of deals4944Global ranking endof Q1 2021 4thNumber of deals744Contribution to USGSS bond market87%Average sizeUSD48mContribution to USGSS bond market81%Average sizeUSD198mCumulative amountissued USD241.4bnNumber of entities349Repeat issuers 120Biggest issuer/amount issuedFannie Mae/USD94bnCumulative amountissued USD147.5bnNumber of entities348Contribution to theUS debt market0.5%Repeat issuers 119Biggest issuer/amount issuedNew York MTA/USD11bnContribution to theUS debt marketN/A**US market data is taken from BIS which does not publish thenumbers ex-Fannie Mae, hence this data point is N/A. The US green bond market counts 349 issuerswith only 120 (34%) of them having issued atleast two deals. The remaining 229 entities(66%) have only issued one deal. Repeatissuance allows investors to use economiesof scale as they carry out initial due diligencewhen investing in an entity for the first time. Issuance dipped for all categories of bonds inthe first half of 2020 as the COVID-19 pandemichad a major impact on confidence. US greenvolumes dropped to USD838m in April, but theFederal Reserve (Fed) intervened swiftly andUSD6bn of green bonds were recorded for May.In H2 2020 issuance rebounded to a monthlyaverage of USD5.6bn reaching peak monthlyissuance in November with USD7.8bn. Despiteoverall volume translating into an annualdecrease of 2% compared to 2019, the Bidenadministration policy is expected to be broadlysupportive of green bond markets thus weexpect the market to grow steadily. March 2021saw record monthly issuance with USD8.4bn.At the end of Q1 2021, US issuance for the yearhad already reached 34% of the 2020 volume.ABS is the main issuer typeThe US green bond market is dominated by agencyMBS (falling under the ABS issuer type), and USmunis (falling under either local government orgovernment-backed entities issuer types). AgencyMBS are mainly issued by Fannie Mae with theproceeds for financing green mortgage loans.US market dominated by ABS50403020USD BillionsThe green theme is by far the most developed,with 87.5% (USD241.4bn) of US GSS debt labelledgreen at the end of Q1 2021. The first greenbond was issued in the US in 2011, when YubaCommunity College District issued a USD15mnote to finance solar PV. The largest US greenissuer, Fannie Mae, entered the market in 2012,and has consistently brought new deals eversince reaching 4200 in number/USD94bn at theend of Q1 2021. The social and sustainabilitythemes represent smaller but growing portionsof the market. The first US sustainability bondwas issued by Starbucks in 2016 and the themenow contributes 7.5% to the GSS market, whilethe social theme was first tested by New YorkHousing Finance Authority in 2018 and is now 5%of the market.USA Green ScorecardExcluding Fannie MaeUSA Green ScorecardIncluding Fannie nDevelopment BankNon-Financial CorporateGovernment-Backed EntityABSLocal GovernmentFinancial CorporateNorth American State of the Market 2020 Climate Bonds InitiativeSource: Climate Bonds Initiative6

Development bank issuance is less commonin the USA, California Infrastructure andEconomic Development Bank, Ibank, MississippiDevelopment Bank, OPIC and United StatesInternational Development Finance Corp raiseda cumulative total of USD2.2bn. Developmentbanks and green loans each contributes 1% oftotal issuance volume.Most US green bonds are USDUSD accounts for almost 95% of total US greenbond issuance. Six issuers (Apple, Citigroup,Digital Realty Trust, Equinix, Prologis, andSouthern Power) have printed EUR deals, whichtogether comprise 5%. AES Corporation priced251000Deals Up to 100m100-500m deals500m-1bn deals1bn or more deals2080015600104005200002014Up to 100m20152016100-500m2017500m-1bna single BRL (USD210m) deal in 2019, andPrologis issued two JPY denominated bonds(combined USD172m) in 2020. The lack ofcurrency diversification points to a mature andwell-developed domestic bond market. Most ofthe US green bond market comprises agencyMBS, and US munis which are largely bought bydomestic investors.Small deal size dominates dueto market structureMost of the volume comes from agency ABS andUS munis and these instruments are usually ofsmaller size. It is therefore unsurprising that in2017, 2018 and 2019 which were the strongestyears for agency ABS, the highest volume andlargest number of deals fell into the smallestbucket of Up to 100m. 2020, a weaker year foragency MBS but the strongest recorded year forfinancial corporates, deal sizes were distributedmore evenly. Yet the number of deals was stillmuch higher for the smallest size range with 659,60 and 21 respectively for each bucket. Dealsover USD1bn are rare peaking in 2020 with seveninstruments raising USD9.1bn in total.Benchmark deals are picking upTo the end of Q1 2021, there had been 83benchmark sized ( / USD500m) US greenNorth American State of the Market 2020 Climate Bonds Initiative201820191bn 2020Number of issuersIssuance from financial and non-financialcorporates has steadily increased since Bank ofAmerica entered the market with a USD500mgreen bond in 2013. The only blip was 2017 whenannual issuance reached USD3.1bn. The yearlyrecord for financial and non-financial corporateswas achieved in 2020, with USD19.3bn. 17%of the annual issuance originated from nonfinancial corporates and 20% came fromfinancial corporates. Financial corporates playa crucial role in the sustainable debt market asthey facilitate lending to entities without directaccess to capital markets. By enabling them toborrow money from banks or other lenders tofinance or refinance green assets, the reach ofthe labelled space can be amplified. Citigroupranks third among the financial corporates witha total volume of USD2.8bn issued to finance abroad range of eligible projects. Second is Bankof America with a total of USD4.4bn financingRenewable Energy projects and Low-carbonBuildings. The top issuer in the Americanfinancial corporate space is Digital Realty Trust –a Real Estate Investment Trust – with USD5.4bnissued to date. The top three non-financialcorporates are all energy/utility companies withXcel Energy, MidAmerican Energy and SouthernPower Company issuing a total amount ofUSD4.3bn, USD3.9bn and USD3.5bn respectively,financing Renewable Energy projectsincluding power generation facilities as well asinfrastructure. AES Corporation ranked first in2020 amongst the non-financial corporates witha total of USD1.8bn financing wind power plants.Small instruments prevailUSD BillionsUS muni bonds are primarily issued by localgovernments or government-backed entities(the former makes up the majority with 76%of all US muni issuance) and finance publicproje

European Union (27 states)* USD689bn 398 195 1635 USD421m Yes, Green, Sustainability and Social** TCFD recommended. Sustainable Finance Disclosure Regulation - investment managers must disclose how ESG is incorporated into decision-making Central Bank of Hungary has risk-weighting benefits. 20% of eligible green securities for its QE programme.