Épisode 11 : Le financement vert en Chine

TRANSCRIPT:

Deborah Lehr: China is moving so quickly on this, and because they have a system that can dictate this from the top down as opposed to building consensus or it having to come from the private as it may in other countries or in the United States, we run the risk of China setting the standards for defining what is green. There is discussion going on over how to develop a common taxonomy, but I think the Chinese may be just one step ahead.

Michael Torrance: Welcome to "Sustainability Leaders." I'm Michael Torrance, Chief Sustainability Officer with BMO Financial Group. On this show, we will talk with leading sustainability practitioners from the corporate, investor, academic and NGO communities to explore how this rapidly evolving field of sustainability is impacting global investment, business practices and our world.

Disclaimer: The views expressed here are those of the participants and not those of Bank of Montreal, its affiliates or subsidiaries.

Michael Torrance: China has experienced enormous growth and development in the last 25 years, creating challenges in how to reconcile their development with environmental sustainability. In recent years, China's priorities have shifted to increasingly focus on environmental protection and sustainability. Initiatives such as growth of carbon markets, green bond markets and creation of green taxonomies have been key to China's environmental strategy and are driving innovation in that space, both in China and globally. My first guest is Deborah Lehr. She's vice chairman and executive director of the Paulson Institute. Deborah advises Hank Paulson, Chairman of Paulson Institute, on US-China relations and manages the institute's Green Finance Center. Deborah is a former trade official with the US government, having acted as lead negotiator for China's ascension to the WTO. She advised Hank Paulson when he was the CEO and chairman of Goldman Sachs and helped then-treasury secretary Paulson to create and launch the US-China strategic-economic dialogue. In addition to that, she served as senior advisor to the chairman and CEO of Merrill Lynch and was the Senior Managing Director at the New York Stock Exchange. She also runs the consultancy Basilinna, which focuses on China and the Middle East. My first for Deborah was whether she could provide us with some insights on what environmental sustainability means in the Chinese context.

Deborah Lehr: President Xi has made protection of the environment one of his top-three priorities for his second term, and he's done so for several different reasons. One, given China's runaway economic growth of the last 15 to 20 years, there was a focus on job creation, economic opportunity, but many instances, it was at the expense of the environment, and they've now realized that there's a huge environmental challenge that they have to deal with in terms of providing clean air, clean water and soil that is not polluted. It's not only an economic issue that they have to face now, but it's also a political issue. Many of the protests, in fact the overwhelming majority of protests that take place in China are because of environmental issues, and so President Xi recognized that this was an issue that he had to address for the wellbeing of the people, but also looking at the economy going forward that this is something that they needed to do as an economic imperative. There's a lot of economic opportunity that is coming out of what they're doing. It's creating whole new markets for them in terms of environmental goods and services, but it's also created a platform for President Xi as the head of the world's largest emitter of carbon to really take on a global platform, or, at least, this is what he's trying to do with his position on the environment.

Michael Torrance: And I understand that there's an estimated $1 trillion needed to meet those environmental goals and that the government is only intending to cover about 15 percent of that. What approaches are being taken to attract private capital to promote these green initiatives in China?

Deborah Lehr: You're exactly right on those statistics. The People's Bank has estimated that to implement their very ambitious agenda and cleaning up the environment, they need about $1 trillion a year for the foreseeable future, and it can't all be government money, so they've had to resort to very innovative ways to try and attract private capital to cover the cost of this environmental cleanup and the opportunities ahead. They have a very broad-ranging plan that they've looked at. I think it was 3 years ago they launched green bonds for the first time, and already, they're competitive with the United States as the world's largest issuer of green bonds and may actually be the largest in 2019. They have also started very aggressive programs for environmental lending with the banks through their policy banks and providing preferential loan pricing for anything that qualifies as an environmental company. They're trying to develop definitions for green, and while that sounds like a very basic issue, it actually is a very important one because we need standard definitions if investors are going to be confident in the kind of investments that they're making, but even in China, this remains a challenge. Even if it can be dictated from the top, they still need to agree on these certain definitions, and they're not implemented consistently across the board. When it comes to green bonds, for example, the Chinese have just announced that clean coal will actually not be included as a green investment. That seems very logical. A coal plant shouldn't be considered green, but when they came out with the recent catalog for investments in the environmental area, they actually did include coal as a green investment because their argument is about 60 percent of their energy still comes from coal, so how could they leave it out?

Michael Torrance: China now has one of the largest, if not the largest, carbon trading exchange in the world. How did that come about, and what will be the impact of that globally?

Deborah Lehr: A few years ago, China launched seven pilot projects for testing carbon trading, which were very successful. They were done a regional level and then announced that their goal was to unite these essentially into one national carbon market. The market was launched a year ago in November, last November, and just because it's China and the sheer size, even though it was launched, only one industry covering a little less than 2,000 companies in the power sector, it automatically was the world's largest carbon market. It has not yet begun trading. It has a lot of infrastructure-related issues that need to be addressed. There's no regulatory structure yet. They don't even have a cash market developed. They're experimenting with how to develop a futures market for carbon, but they have very aggressive plans for moving forward. Their hope is to cover the top seven most polluting industries over time on this exchange. One of the reasons that it only started with one industry is because they've had a very difficult time trying to collect the required data necessary to build confidence in trading in these different sectors, and so they're experimenting now with the power sector where it's been a little more transparent in collecting that kind of information, but looking ahead in terms of what China wants to do is, they want to begin to export this model, and they recognize that trading is going to be somewhat thin initially on their own exchange, but if they can work with other countries along the Belt and Road and help Southeast Asia, help the Middle East and Africa and developing their own carbon markets, they can allow those markets and those companies then to start trading on the Chinese exchange, so that creates more opportunity for investment on the Chinese exchange, but it also ensures that Chinese standards dominate the carbon market in those other sectors. That's good in one sense of you can create more innovative financing models because there will be consistency, but it's challenging for other countries, say the Europeans or the United States or in Scandinavia, others who are developing their own markets to ... How do you create these links then, for trading into a system that's dominated by Chinese standards?

Michael Torrance: You've mentioned the Belt and Road Initiative. Can you describe what that is and how environmental sustainability fits into it?

Deborah Lehr: President Xi announced that this would be his signature foreign policy initiative, and it now covers about three-quarters of the world's population, and I believe about 170 countries. It's a very ambitious program for infrastructure development, and China has really taken the lead in doing infrastructure financing. It's estimated they're about $1 trillion in need along the Belt and Road for infrastructure development, and China through the Asia Infrastructure Bank and other entities are doing a lot of that lending. It's an area where the United States doesn't really compete. We don't do infrastructure financing. So through this platform, Xi Jinping has announced that he wants to make it green. The Chinese have taken some steps to do this. They launched, and the Paulson Institute was actually a part of this along with the city of London and some others, voluntary lending principles for financial institutions who would be lending to development and infrastructure building along the Belt and Road, but we're still a long way from getting a consensus agreement about what green development is going to look like. There was a study put out by the United Nations just a few months ago that estimates this will be the largest infrastructure build in history, and the majority of the planning for it in initial development is going to take place over the next, say, 5 to 10 years. If that infrastructure development is not done in a way that is energy-efficient and green, we are going to be stuck with that infrastructure development for probably the next 50 years. Why this is so important? As they've done estimates on what build could look like, they believe that its carbon would accountability be larger than the carbon that exists in China today. So if we don't get this right, we are going to be stuck with a high-carbon development going forward, and it doesn't matter what any of the other countries do individually or as a region, whatever steps the United States takes to reduce carbon, whatever steps India or the EU take, if that Belt and Road initiative isn't done in a low-carbon way, all the rest of the actions will be for naught, so it's really important that China and the countries who are participating are held to a high standard in this development.

Michael Torrance: In our first episode of the Sustainability Leaders podcast, we took a deep dive into the green bond market with BMO's own Dan Krieter. Today we'll hear back from Dan to follow up on his views of China's role in the global green bond space. Issuances of green bonds in China are in excess of $31 billion and represent about 18 percent of all global green-bond issuances. I asked Deborah, "What is driving that scale, and how fast is that market growing?"

Deborah Lehr: Green-bond market is growing very rapidly, but it still accounts for less than 2 percent of the overall bond issuances internationally, so there's really a long way to grow. What's been very encouraging in the development of the market is we're starting to see how the infrastructure is coming along to support that, and I mean the rating agencies are now developing green indices to judge bonds. It's creating some kind of common understanding of what green is when lending, particularly in certain countries. We're encouraged that the Chinese have taken out coal as one of the areas that they would be lending with green bonds, and for China, they're using it as a way to help the municipalities to raise money so that ... Often, they have unfunded mandates, and it's been very difficult for them, even though the mayors have been told that they have to green development, they haven't been able to find the financing for it, and often infrastructure development that is energy-efficient is, in the short-term, more expensive. They can get the cost savings over the long-term, but the up-front financing for it can be more expensive than just a regulate building, and it's up to those municipalities often to find that kind of financing, so the green bonds have really been very important in helping to finance this green development in China.

Michael Torrance: What about environmental, social and governance, or ESG, considerations in investment decision making on the equity side? Have you seen growth in that approach to investing in China?

Deborah Lehr: We have see growth in that, but it's still pretty small. I think in China, there's a long way to go. It's a testing ground, and in China, as I said, Xi Jinping has announced a very ambitious agenda on green finance. They continue to issue regulations that promote this kind of activity, but we haven't seen some of the financing vehicles created yet to cover the cost of this kind of financing. So I would say we've seen a lot of on the policy agenda for green finance but not as much in the financial infrastructure.

Michael Torrance: And what role does the social side of sustainability play in this, like human rights? A lot of companies that do business in China have extensive programs around managing sustainability in those supply chains. Is that issue taking hold in a part of it, or is the focus largely on the green aspects of sustainability?

Deborah Lehr: One of the really important roles that foreign firms have played in China is bringing a lot of their own standards to play in China, and I would point to Walmart and Apple as two real leaders in this. Already, Apple has announced that they are relying on renewable energy to cover the energy requirements of their plants and their shops, and now they're moving to require that all their suppliers do the same. They're also looking at green packaging in their supply chain. Walmart has been following a very similar path and not only for themselves but providing capacity building for other companies who want to do the same. So I think as a catalyst, the foreign firms, particularly some of the American firms have played a very important role in that in China. With the state on enterprises, we have seen that the Chinese government has required them to start to take steps, but they've been very slow to move. Part of it is that the economy has slowed down. Some of them are making choices between putting the up-front costs behind, transforming themselves into a green company versus continuing to do business as normal as their revenues are shrinking, so that's been very difficult in this last year, and we're starting to see some concerns about, has there been some slippage in the dedication to moving forward on an environmentally sound path as the economy slows? I would say that the other aspect of this that has been driving a lot of change is the political imperative that I mentioned earlier, with a lot of the protests coming from the fact that the Chinese people are very concerned about the air that they breathe and the food that they eat that's been grown in polluted soil that that has put a lot of pressure on the Chinese government to try and make sure that they've improved. We've seen a lot of improvement actually, and talking I was in Beijing not so long ago and listening to a number of people talking about how much better the air quality is now and how encouraged they are that they're starting to see progress on that, but the air quality is only one small aspect. The biggest challenge is clean water and clean soil. The air quality obviously was the most visible, but these other issues are very difficult to address, but looking at it from a private-sector angle, it provides great business opportunities as the Chinese have started to encourage the opening of the environmental goods-and-services market in China. Goldman Sachs did a study and estimated that it could be a $1 trillion opportunity for the private sector, and so we think that for American companies in this space, they should be looking at China as an opportunity to bring their environmental goods and services into play.

Michael Torrance: So just as a final thought, what trends do you see as being most important for global investors and businesses to be aware of when it comes to sustainability in China?

Deborah Lehr: I think one of the key issues to watch is this definition of green, and if they can come up with one that is internationally acceptable as well as creating the final instruments necessary then to be investing in some of these sectors, it presents huge opportunities. Just in the private equity space alone, when we started the US-China Green Fund, it was the first major green fund to be established in China. It was about 2 years ago. Now there are 500 private equity funds focused on green, so the growth is huge. The key is just, as an investor, making sure that you do your homework.

Michael Torrance: Thank you very much to Deborah Lehr for her expert insights on the intersection between China's economic development and environmental policies. Next, we'll hear from Dan Krieter. Dan is a director in BMO's Fixed Income Strategy Group. He has a special interest and focus on sustainable fixed income investments and leads the group's research in the green-bond space. I wanted to follow up with Dan after our last conversation in Episode 1 and to get some of his insights on green bonds and the green bond taxonomy in China and beyond. Hi, Dan, and welcome back to the podcast.

Dan Krieter: Thanks for having me. Good to talk to you.

Michael Torrance: Dan, we heard from Deborah Lehr of the Paulson Institute about sustainable finance developments in China, and over the last number of years, it seems that China has really become a fairly formidable player in the green-bond space, although they have their own unique approach to it. What's your sense of the impact that China has had on the green-bond market globally?

Dan Krieter: Well, from a high level, I'd say that it's had a mixed impact, but first, I'll start with the positives like China at one time in 2017 was the largest green bond issuer in the world, in terms of jurisdiction of green bonds. They have a huge domestic need. Some of the pollution factors in China have been highlighted over the past few years, so both from a financial as well as domestic environmental standpoint, China has a lot to gain by being at the forefront of the green-bond market, and I think they recognize that, which is part of the reason why they were the first country in the world to institute an official green-bond taxonomy and have made many firsts, actually, in terms of the green bond market that we'll talk about more during this interview, but at the same time, there are a few downsides to China's presence in the green-bond market that makes it sort of stand apart from the rest of the world. For one thing, its taxonomy, as we said, was the first in the world, but it's not very closely aligned with the rest of the world. Kind of the most talked about example of this is China's inclusion of clean coal technology as an approved use of proceeds for a green bond in China. Other international standards do not include coal. They feel that it doesn't properly drive money towards more sustainable or environmentally beneficial projects in the long run. We should be looking to get off of coal, not use green bond proceeds to invest in maybe slightly better-for-the-environment coal projects. In addition, you have some slight differences in terms of disclosure, expectations and requirements between China and the international community. More and more, international borrowers are moving towards disclosing not only the types of projects that green bond proceeds go to support as well as their use of proceeds of things like that, which China has all of, but also disclosing quantitative data for, what type of environmental benefit are these projects actually delivering? That's not a requirement in China. Although it's encouraged, it's not a requirement, and many green-bond disclosures don't have that, and then some more nitty-gritty stuff like disclosure of how unallocated resources from green bond proceeds are invested and things of that nature. There's just a bit of a divergence between China's standards and the rest of the world, and then finally, and this is more high-level as well, there is some concern over just the stringency or even accuracy of some of the green-bond reports that come out of China, just given China is somewhat notorious in financial markets for not always having the most reliable information coming from official sources, and that has to be a concern as well, so there are some concerns but at the same time a lot of reasons for enthusiasm given China's engagement of the green-bond market and the precedent it's set really for some of the rest of the countries in the world. Some steps being taken by Western countries now were taken by China in 2015. So a lot of reasons for hope and enthusiasm, but also some concerns that results in sort of a mixed impact of China on the green-bond market, I would say.

Michael Torrance: Do you see the role of China in the green-bond market changing in the coming years, particularly in light of the dynamics that are changing in terms of China's role in international trade?

Dan Krieter: To be honest, I don't see much of a direct impact of the trade war on the green-bond market. I think those are really sort of two independent factors that China is dealing with, and I don't see a big transmission from one to the other. In terms of how China's role in the green bond market could change in the coming years, I think that they're going to continue to grow the green bond market domestically and get more and more new borrowers online, but I think the way that China can truly grow the market and grow its presence in the international green-bond market is to more closely align their standards with the international community. I touched on this in the last question, but just to put some numbers on it, the Climate Bonds Initiative, who works very closely with China in the development of China's green bond market, estimated that in 2017, 38 percent of Chinese green-bond issuance failed to meet international standards. In 2018, that figure fell to 26 percent, so we are seeing movement in the right direction, but even still, a full quarter of Chinese green-bond issuance does not meet international standards, so I think more close alignment between China and the rest of the world is the most important thing for the growth and international recognition of China's green-bond market, and there are steps being made in that direction. In March, Reuters had a report out that China was considering a new set of guidelines or a new taxonomy for the domestic market that removed clean coal technology from the list of approved green-bond use of proceeds. Now we haven't seen that yet. The Reuters report mentioned that it could come as early as the end of the month, and that was 4 months ago, but if that thought process is out there, hopefully, it will come at some point in the future, and we can see China sort of join the rest of the world instead of the international green bond market growing and China's green-bond market growing but just sort of independent from each other.

Michael Torrance: And you've mentioned this already, the green taxonomy that China developed. What influence do you think that taxonomy has had or will have on other taxonomies being developed, recently, the work done in Europe and Canada and elsewhere?

Dan Krieter: I think China's taxonomy and some of its other initiatives it's put forth has a very important impact on what's being developed in the Western countries. I mean, like we said, China put this in years ago, and they've really set the precedent for a few different things. They had the first taxonomy. They were the first to license and vet external assurance providers and verifiers of green-bond framework, so from a format perspective, I think China's taxonomy, it can be very useful for other countries putting together a taxonomy. Sort of a ... China's green bond, they call it their endorsed catalog of green-bond proceeds. It looks very similar to proposals we've gotten for Europe's EU taxonomy on green bonds that shows an explicit list of what activities should be considered sustainable or green, and then moving forward into some of the regulation, China's regulation of green-bond assurance providers, China's disclosure requirements, they've really set a strong precedent for how a framework should be constructed. The drawback to it is, I think some of the things included in that format. Some of the stringency of China's green-bond taxonomy not up to par with the rest of the world, so I think some of the things actually included in the taxonomy and other regulatory initiatives will not serve as much of a precedent, but in terms of format and structure, I think it's an extremely beneficial precedent for the rest of the world.

Michael Torrance: Last time you were on the podcast, Dan, we talked about the EU's action plan for sustainable finance and the forthcoming, at that time, technical reports, which have since been released, including one on the green taxonomy and on other topics, like benchmarking. What is your take on the green taxonomy report in particular and the impact that that taxonomy could have on the green-bond market?

Dan Krieter: Well, first impression of the taxonomy report was that it was truly incredible. The amount of detail and depth they've gone into, not just from the green bond market as whole, but each specific activity that they analyzed and described as contributing meaningfully to climate change mitigation or adaption, they've gone into an incredible amount of detail. Over 400 pages to talk about, what threshold should be considered sustainable? What activities should be considered sustainable? It's a truly incredible document and one that I think will, either in the short-term or long-term, set a new market standard that eventually all other standards will conform to. There has yet to be a taxonomy or anything like a taxonomy that goes to the level of depth and detail that EU taxonomy report does. So long-term, I think that it represents a true watershed moment for sustainable finance, both in terms of attracting more investors into the space, increasing awareness of it and actually maybe moving the needle in terms of helping the world avoid the 2 degrees raise in temperature that is the goal of the Paris Climate Accord, but short-term, the EU taxonomy I think could have a bit of a detrimental impact on green-bond supply, and to demonstrate why, there was a report out of Cicero. Cicero is the largest green bond auditor, or assurance provider, in the market today and the most well-known. They did a study on the green frameworks that they have audited, which again, more than any other auditor in the world, and they estimated that two-thirds out of the green bond frameworks that they've audited would not comply with the EU taxonomy as it's currently defined, so it's sort of the downside to how much detail the EU went into here is that issuers might not be ready yet to comply with the stringent requirements of the EU taxonomy, but now that it's out there, we think investors will quickly adjust their expectations for issuers to match or closely match what's included in the EU taxonomy. We would expect at least some hesitance on the part of some borrowers to issue a green bond that cannot yet demonstrate it fully complies with EU's taxonomy, and it's going to take a sufficient amount of time and effort to get existing green bond frameworks in compliance with what the EU has proposed, and we think that that work will be undertaken. It's probably being worked on right now, but it's going to take some time, and in that meantime, we could see issuance fall a little bit here in the second half of the year and potentially into the first half of 2020.

Michael Torrance: And now that technical document was a proposal as I understand it. What are the next steps in terms of the EU actually effectuating these recommendations?

Dan Krieter: It was a proposal, and the next step is for the taxonomy to be approved by the European Parliament. Now that could take some time. We just got a new European Parliament in place that might have some other issues to deal with, the least of which being Brexit, which could be another big thing that the European Parliament will have to tackle in the fall months, but the next step is for the European Parliament to approve it. I would not expect that happen in 2019 because, like we said, new parliament has other things to deal with, and there has been at least some pushback on the taxonomy and certain technical aspects of the taxonomy from some European countries, so this is not likely going to be approved until 2020 at the earliest, but there is sufficient momentum in the European markets to think that this will eventually get pushed across. It's ironing out a few details, ironing out how exactly the taxonomy is going to be used and how quickly it will be used in the European financial system.

Michael Torrance: Is your sense, though, that even before it becomes law, it will still have an effect on market activities?

Dan Krieter: That is precisely my thought. I think the thought is that this will eventually become law, and so we have to start adjusting out expectations for green bond issuance to these standards set forth now, whether or not it's law yet.

Michael Torrance: And in your view would that apply European issuances, or could it apply more globally?

Dan Krieter: I would think it could apply more globally. I mean, certainly to European borrowers but the Europe market already accounts for half of green-bond supply. The one country it likely doesn't apply to is China, and if China is 10 or 15 percent of market issuance, that probably has no impact on Chinese green-bond issuance, but outside of China, Europe is the leader. They issue the most, and the rest of the world sort of looks to Europe, so if you have a company from the US or from Canada or from Australia that's looking to issue, and they see, even though they're not in Europe, this is the future of the green-bond market. Now it might have slightly less impact on some of those countries we discussed, but I still think it has at least some impact and Europe certainly a much larger one.

Michael Torrance: Pivoting to Canada, the Expert Panel on Sustainable Finance in Canada released its recommendations of June of 2019. In your view, what were the most interesting recommendations that came out of that report?

Dan Krieter: Well, the Canadian report was very interesting, and by far the most interesting things I saw on the report was the proposal for tax-related incentives to either issue or invest in a green bond proposed by the Canadian Expert Group. China has proposed something similar in the past, offering tax incentives to issuers for issuing green bonds, but Canada is the first country I've yet seen outside of China to propose such powerful proposals, and this is the type of thing that could really result in an explosion of green-bond supply, and not just that, the type of thing that can actually answer the additionality question that is currently a tough one to answer for green bond market participants. I'll take a step back and just ... in case anyone is unfamiliar with what I mean by the term additionality. There's a concern out there that green bonds now go to finance projects that would've been undertaken anyways, it's just an issuer looks at its list of assets or projects and decides, oh, look, these would qualify for a green bond, so let's issue a green bond. There's not yet a financial incentive for a company to say, "Well, we're going to save money if we issue a green bond, and we can take those savings and then invest in maybe a lower return project, but the lower return project, but the lower return is offset by our cost savings." So the argument is, it's hard to prove at this point that green bonds are actually causing new investment into new projects that would be considered sustainable. But with the right amount of tax incentives, either at the issuer or the investor level, companies would actually then save money by issuing green bonds, which then incentivizes them to find projects that would be considered eligible for green-bond proceeds, and it actually drives new investment dollars to the sustainable market, so these types of tax incentives are extremely powerful, for both the green bond market and for the world's chances of avoiding the more dire effects of climate change, and Canada was the first country to propose them. Now proposal is a long way from actual implementation. We'll see if the Canadian government actually pursues this as a possibility, but if it does, I think it sends an extremely strong signal to the market, one that other countries are likely to replicate and could be perhaps one of the most important developments in the green-bond market so far, so I'll be closely monitoring any implementation of those proposals made in Canada's Expert Finance Panel Group.

Michael Torrance: Very interesting. Another recommendation that has spawned some activity is around the creation of a made-in-Canada taxonomy, which is sort of responding to or coinciding with the European taxonomy and is intended, I think, to be focused on Canada's natural resource sector and the greening of those industries within Canada and identifying how that activity can be consistent with global green taxonomies. What was your take on that recommendation and how it interplays with what we've already talked about, with the EU taxonomy, Chinese taxonomy and other types of similar activities?

Dan Krieter: Yeah, it's very interesting because Canada is in a bit of a unique spot with implementing a growing plan on sustainability. China's economy, or at least parts of China's economy, are very resource-centric, and China is an exporter of oil, and oil makes up a large part of GDP in certain provinces in Canada, so reconciling fossil fuel production alongside trying to build out a sustainable financial system is a bit delicate, so in terms of building a taxonomy, Canada maybe here is recognizing that there's going to be some more unique challenges for the Canada, given its natural resources. So at first blush, you think, "Well, what's the point of a Canadian taxonomy if Europe has already gone to such lengths and has already created a taxonomy that seems like it could be applicable for use around the world? Maybe Canada should just use that." But there is some unique circumstances, given Canada's resource-rich economy, and so there might have to be some deviations between a Canadian green-bond taxonomy or sustainable taxonomy and that of Europe's. From a global perspective, that risks coming off the way China's taxonomy did a little bit, right? China has clean coal in their taxonomy, and it's somewhat viewed skeptically around the world. I don't know if Canada is going to do anything like that. We'd have to see a lot more detail on what a Canadian taxonomy would look like, but anything that would set Canadian taxonomy apart from Europe would likely be driven there, and then the question becomes, well, would Canadian green bonds be viewed as, quote, unquote, green as other countries? And again, who knows if this would actually come to pass, but I think handling that delicacy is likely the motivation here, instead of just simply implementing what Europe has already put together, so we'd have to see details on how a Canadian taxonomy would work and the types of eligible projects and things of that nature to ensure that Canadian green bonds were on the same stringency level as what's being put forth in Europe.

Michael Torrance: There's been talk about creating a new category of sustainable bond, of the transition bond, which, in my understanding, would be to take industries or activities within industries that might not normally meet requirements of a green taxonomy, but if they have a significant positive impact in reducing emissions, greening of industries that wouldn't traditionally be viewed as falling within a green bond taxonomy, that that activity could be included for a purposes of a so-called transition bond. What's your take on this idea of transition bond, where it's going to go and how the market is reacting to it?

Dan Krieter: Yeah, you're definitely right on that, Michael, and transition is becoming a more discussed topic, I think, on the green bond market, just on the recognition that we're not going to be able to suddenly switch over to 100 percent renewable forms of energy. Just focusing on the energy sector here, it's not going to happen, but that doesn't mean that we shouldn't be making our best efforts to. It shouldn't be, "Well, there's no way we can develop 100 percent solar grid right now, so why even bother trying? We'll just keep going with coal." And transition is one of the things that was highlighted in the EU taxonomy. For example, they put out thresholds of an activity that should be considered sustainable, so I'll use the example that we used in our most recent publication, which is on geothermal energy production. They looked at best practices from around the world and looked at how much greenhouse gases should be emitted by a geothermal energy production project, and over time, the acceptable amount of greenhouse gases falls, but right now, the threshold is set higher than maybe European authorities would ultimately like it to see it settle in at, but in recognition of the transition that we need to encourage, it's set a bit higher, and then it steps down until it reaches zero by 2050, and the goal there is to let transition-type projects be considered sustainable in the short-term with the long-term goal of reaching zero carbon emission, so that's one methodology of doing it. Another one, what you talked about, Michael, straight-up transition bonds, and you mentioned the greenification of some other sectors, so let's use clean coal here because clean coal is a good example. Yes, is there more environmentally beneficial ways to burn coal? Yeah, there are better ways to do it, but should we be encouraging new coal-burning plants? The most sustainable people would probably say no, so a transition bond that would, say, go to finance a new coal-fired plant just with cleaner technology might not be the right message we want to send. Instead, I think the way that Europe has done it by allowing a higher threshold of greenhouse gas emission that then steps down over time, hopefully alongside improving technology, might be the way to go. I don't think transition bonds ... Ultimately, who are they for? Traditional bond-market buyers who don't have any sustainable metrics aren't going to be interested in transitional bonds, and then I'd argue that sustainable investors likely wouldn't have a high degree of interest in transition bonds either, so the idea of a labeled transition bond I struggle to get on board with. I think that the plan that Europe implemented where thresholds just step down over time in recognition of this transition need might be the more appropriate way to go.

Michael Torrance: Last we spoke, Dan, you told us about what you were foreseeing as headwinds facing the green-bond market in 2019, and in your most recent green-bond reports, you've stuck by that forecast overall for the course of the year, but you've noted that the market actually was off to a pretty hot start for the first half of 2019. Can you give us an update on what you've been seeing in the market and where you think things will go for the rest of 2019?

Dan Krieter: Yeah, absolutely, and as you said, I stuck by my initial forecast, but the rationale behind sticking behind that forecast has changed. Originally, when I put up that forecast, I was concerned that the market was at a bit of an inflection point where sustainable investments and green bonds in particular might struggle to cross over from the niche category of the financial markets into the more mainstream and that you could see these periods where growth is a big slower. That has not been the case at all. The reason I'm holding to that estimate now is because of that potentially negative impact on supply coming from the EU taxonomy release that could see issue and slow in the second half, but so far this year, issuance has been extremely high, growing at 66 percent over 2018 levels, extremely impressive, and I think it's safe to say at this point that that struggle to transition from niche to mainstream was incorrect. We're continuing to see more assets flood into sustainable investment vehicles, and I think the story of 2019 has really been more governments engaging the market, and that's true at the sovereign level but even more importantly at the subsovereign level. The government agency or supranational community SSA issuance has increased significantly in 2019, and that hasn't been driven by supranationals. The supers invented the market, essentially, and have been issuing for years, so that means the additional supply is coming from government agencies and government subsovereigns. You're seeing more government agencies issuing the market, more than we've ever seen, a lot of new market entrance this year, and that's a way for a government to say, "We want to be involved in the green-bond market. We're not sure we want to issue a sovereign yet, or maybe where are not ready to issue a sovereign green bond yet, but our agency certainly can." So it's an indication of more government involvement, which, ultimately at the end of the day, I think government involvement is going to be the key to the green bond market reaching its potential. If sovereigns don't engage the market, green bonds will likely ... They're not going to go away, ever, but they would be likely to remain more of a niche-type product, but if governments get involved, as they have, France is already the second largest issuer, and we started to see more Asian countries, non-China Asian countries with sovereign issuance, South Korea issued their first green bond this year and more agency issuance. It's moving that direction, so I really think that the most important storyline this year has been the degree that governments  have issued, and it should continue to move in that direction. Even if we're going to get a bit of a speed bump here over the second half of the year with the EU taxonomy, I think things are aligning now to really see the market in the years ahead, just maybe not the months ahead.

Michael Torrance: Thanks to Dan, as always, for speaking with us. Make sure you go back and listen to episode one of "Sustainability Leaders" to learn even more about green bonds and Dan's views of the market. We'll be watching to see what develops from China's environmental initiatives and the EU's action plan on sustainable finance. Thanks again to both of your gusts for their inputs today. Thanks for listening to "Sustainability Leaders." This podcast is presented by BMO Financial Group. To access all the resources we discussed in today's episode and to see our other podcasts, visit us at bmo.com/sustainabilityleaders. You can listen and subscribe free to our show on Apple Podcasts or your favorite podcast provider, and we'll greatly appreciate a rating and review any feedback that you might have. Our show and resources are produced with support from BMO's marketing team and Puddle Creative. Until next time, I'm Michael Torrance. Have a great week.

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