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  Mid-November 2020 FOCUS ON PRODUCTS INVESTMENT EXECUTIVE | 13 Rise of the robo-advisors
Canada ranks eighth in the world for issuance of the products
Green bond issuances are reaching new highs in
2020 — but there’s plenty of room to grow in both the retail and institutional spaces.
Demand from institutional investors thus far has been greater than market supply, says Radi Annab, vice-president of credit ratings, infrastructure, power and utilities, Canada, with Toronto-based DBRS Morningstar Inc.
In October, Canadian Imperial Bank of Commerce (CIBC) issued its first five-year green bond with an offering of US$500 million. The proceeds will be used to finance environmental projects and businesses that mitigate the effects of climate change by focusing on sectors such as renewable energy and clean transportation.
CIBC became the latest major bank to issue a green bond. The asset class reached a record issuance level of US$76.5 billion worldwide in the third quarter of 2020, according to New York–based Refinitv.
Canada ranks eighth in the world in issuance of green bonds as of Sept. 30, says Annab. These issuances, however, remain largely in the domain of institutional investors.
Sucheta Rajagopal, investment advisor and portfolio manager with Toronto-based Mackie Research Capital Corp., says this is largely due to the expense of creating such products.
“If you look at what’s involved in launching a retail product, you’re going to
see that costs will eat up a lot of the small amount of interest you’re going to be getting, which is a problem for fixed income in general,” she says.
Issuers are increasingly following the ICMA’s Green Bond Principles
  Green bond funds are
available to retail investors
in Canada. Options
include the iA Clarington Inhance Bond SRI fund, the NBI Sustainable Canadian Bond ETF and the iShares Global Green Bond ETF.
When investing in green bonds at the retail and institutional levels, the key is to know the criteria for how projects are selected for financing. In the case of a retail ETF, for example, its underlying index probably encompasses the entire green bond universe, says Rajagopal, which could include fossil fuel–focused companies. That may bother some clients.
To avoid such problems, Rajagopal uses funds managed by portfolio managers who are doing their due diligence. She also makes sure clients understand that while some funds may not be perfect, the instruments still work to help the environment.
“I think we compromise in many other areas of our life, and sometimes [we] have to compromise a bit too, in terms of [an investment] portfolio,” Rajagopal says.
Diligence is also due at the institutional level, as
there is no global standard for green bonds. That, Annab warns, can lead to “greenwashing” — the practice of using unsubstantiated or misleading claims to market something as being environmentally friendly.
Issuers around the world are increasingly following the Green Bond Principles established by the International Capital Market Association (ICMA) in 2014. The principles, which are updated periodically, are voluntary guidelines that focus on four components: the use of the bond’s proceeds, the process for project evaluation and selection, how the proceeds are managed, and reporting.
“There’s a lot of transparency,” says Annab, who adds that a third party usually verifies whether a green bond adheres to the principles.
The CIBC bond follows the ICMA Green Bond Principles of 2018 and has been reviewed by Netherlands-based rating firm Sustainalytics.
Assets held by Canadian retail investors in ETFs listed on a Canadian or foreign stock exchange, by distribution channel
      2.0% 5.6%
$122.2 bil.
3.6% 4.9%
$138.2 bil.
AS OF MAR. 31, 2019
4.8% 4.8%
$153.5 bil.
       100% 80% 60% 40% 20%
AS OF MAR. 31, 2018
AS OF DEC. 31, 2019
n ETF assets held through other channels
n ETF assets held through n ETF assets held through discount/ n ETF assets held through full-service brokerages online brokerages robo-advisors
  96.6% In the robo-advisor channel, ETF assets held by Canadian retail investors grew at a compound annual rate of 96.6% between Dec. 31, 2017, and Dec. 31, 2019,
according to the Canadian ETF Association. During the same period, the growth rate was 10.5% for full-service brokerages, and 14.1% for discount and online brokerages combined.
Figures may not add up to 100% due to rounding. Sources: Canadian ETF Association; Investor Economics Inc.
Institutional market share growing
Assets held by Canadian investors in ETFs listed domestically or on a foreign exchange by type of investor
    100% 80% 60% 40% 20%
$178.9 bil.
AS OF DEC. 31, 2017
$188.8 bil.
AS OF DEC. 31, 2018
n Institutional investors n Retail investors
$243.7 bil.
AS OF DEC. 31, 2019
  21.7% ETF assets held by Canadian institutional investors grew at a compound annual rate of
21.7% between Jun. 30, 2017, and Dec. 31, 2019, according to the Canadian ETF Association. During the same period, retail ETF assets grew at a rate of 17.9%.
Sources: Canadian ETF Association; Investor Economics Inc.
 Non-traditional categories have their price
Average asset-weighted management expense ratio (MER) for Canadian and U.S. ETFs by category as of May 31, 2020
 Fixed income Equities Commodities Multi-asset Leveraged/inverse
0.17% 0.18%
0.31% 0.31%
n Weighted MER (Canada) n Weighted MER (U.S.)
n N/A
   0.50% 0.43%
          0.45% The asset-weighted average management
expense ratio for Canadian ETFs launched in the three years prior to May 31, 2020, was 0.45%, according to data from National Bank Financial Inc.
Source: National Bank Financial Inc., as analyzed by Finance et Investissement
2.66% As of May 31, 2020, the Horizons Seasonal Rotation ETF had a management expense
ratio of 2.66% — the highest of any ETF listed on a Canadian exchange, according to National Bank Financial Inc.

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