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You're listening to the OMFIF podcast, the show that explores the latest insights and discussions on Global Finance, Economics and Policy. For people who love staying informed about the rapidly evolving landscape of the financial world. Join us as we break down complex topics, interview key thought leaders and provide essential insights to keep you informed about the evolving world of finance. Hello and welcome to the OMFIF podcast.
My name is Taylor Pearce, and I work as lead economist of OMFIFs Economic and Monetary Policy Institute. Here with me today are Alex coridia, Head of Public Sector markets at RBC, and Heather Taylor, partner of climate change and sustainability at EY. This conversation is a part of OMFIFest workstream on the future of public money project. One of the major structural factors impacting government financing is the massive scale of public money that will be needed to ensure the transition to a carbon neutral economy. For this podcast, we'll be discussing trends in government debt issuance and in particular, how that relates to sustainability. Welcome Alex and Heather. It's a pleasure to have you. Thank you. It's a pleasure to be here.
Great to be here. Great. Alex. I'll start with you. Can you begin by discussing any recent trends or strategies that governments are employing to manage their debt through capital markets? And if you could elaborate in terms of products and instruments, what trends are you witnessing there in government bond markets? Yeah, sure. I mean, I think in terms of trends around debt issuance, really, despite a lot of public discussion around the level of debts in any of these economies, we really haven't seen issuance and debt levels come off from recent highs during the pandemic. If anything, they've moved.
They've moved the other way. What we have seen, though, is in the high interest rate environment, we've seen, certainly on the sovereign side, some of the sovereigns reduced term so, you know, the Treasury, for example, has been focusing more on Bill issuance in Canada, we've seen, we've seen the same, there has been a reduction of weighted average maturities. And you know, we've seen similar from some of the other sovereigns. And I think that sets itself apart from some of the semi government issues, you know, Canada, Australia and some other development economies, where they sort of the one level below the state or provincial level, has they have actually been not only borrowing more, but also increasing their term despite, you know, higher interest rates.
I think in terms of product, it's fairly similar to what we've been seeing for some time now. We've been seeing fixed rate bonds, with some of the sovereign obviously issuing inflation linked bonds, and more and more sovereigns issuing also in ESG format. And that's a trend we've obviously been witnessing for quite some time. I'd say that speaking about Canada, which is obviously where our focus has been, Canadian government issued their first green bond issue some years ago.
They followed that up with a second transaction, and I think that's going to be a programmatic issuance going forward. And we've also seen many of the other g7 countries issue in ESG format. Notably, we haven't seen the US issue yet, but that's certainly a product away from the and fixed rate bond issues. We've seen government be active, and then also at other levels of government, be that, at the sort of state or provincial level, at the municipal level, or indeed, you know, they sort of state guaranteed or SSA market, they've all been focusing on green bonds and perhaps reducing term a little bit in the case of sovereigns. Great thanks. And it sounds like the so there's been an expansion in the issuance of green bonds, and bonds sort of aimed at sustainability objectives. Would you say that governments are spending the funds raised on capital markets effectively? Or, how are they, how are they allocating the funds that they're raising here?
Alex, maybe you first, and then, Heather, I'll come to you Sure. I mean, I'm not going to talk to how effectively they're spending the funds. And I think that obviously, you know, differs from government to government, and depending on their objective, and also depending on who's who's making that judgment. But I think obviously one of the features of a green bond is that, you know, there is a framework that framework lays out very clearly what what funds are supposed to be spent on. It also lays out what types of projects are eligible, and it's obviously segregates those funds from, you know, from their standard issuance. So, you know, from that perspective, it's obviously a an effective tool to ensure that funds flow into the right kind of projects. Now, obviously there's, you know, a lot of debate about what is the right kind of product. What is more green or less green?
And there's different opinions on that, but certainly just from a instrument perspective, that's a good instrument to use to make sure the funds are actually going to where they should be going. Thanks. And Heather, did you have a view here? How are you monitoring the spending, or how is the spending of earmarked funds being raised with the issuance of greener labeled bonds. How does it differ across markets? Yeah, I want to build on what Alex just said, because to the point that he mentioned the framework, I think it's really key that it's understood that there's a rigorous process that goes into one, first and foremost, creating the finance.
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Housing framework that permits the labeled bond, but a third party does validate the intent, the intended use of the proceeds, even prior to the deal being completed. So there is a rigorous process upfront, but where there's really huge opportunity for enhancement in this area is the tracking of the data once the funds have flowed. There's a tongue twister for you. There is an opportunity to actually track the metrics around how to demonstrate that the intended outcomes are being delivered. And I really do, and Alex and I have had this conversation multiple times around.
You know, the evolution of green instruments in the marketplace? You know, if you think about when they first came out, it was just a matter of, do they align with green outcomes? Yes, there they were labeled green. But we know now, with the sophistication of the investors, as well as the integrity and the credibility that's needed to maintain labeled bonds, or the demand for labeled bonds. You know, it's a natural evolution to go into enhanced reporting around the outcomes or during the term of the bond that the outcomes are being achieved. And would you say that reporting standards assist with this transparency, or what are some of the challenges there that persist? So maybe I can jump in first, Alex, if that's okay. So I absolutely think standards will help.
I think when we consider data, we want to make sure that the data is is in formats that's well understood by the markets, that is consistent, it's comparable, and without standards to guide how that data should be aggregated, you're going to have inconsistencies naturally. And so I do think standards will help in overall transparency, but when it's specific to labeled bonds, I think you're going to have to go to more granular detail than what standards are going to identify for financial reporting purposes, let's say in financial statements or annual reports.
So I do think that it helps with standardizing the information, but I still come back to more granular information is going to be needed to track the outcomes and the metrics on a labeled bond, and just to follow up before I come to you, Alex, what do you think it would take to get that granular level of data?
Heather, so, so Alex might cringe when I say this, but truthfully, I think it comes down to what are the terms and conditions that are attached to an instrument, and I think that investors are going to be in a position to demand more granularity. So if we have consistency on how we interpret information, then I think they will be in a position to ask for more specific information attached to the instrument that they're getting involved in. But that is obviously going to create a responsibility and onus and responsibility on the issuer side to ensure that they are aggregating that they're tracking, and they're reporting on that information in a way that complies with the terms and conditions that are in the instrument. Thanks. No. I
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mean, sorry, just to jump in. I'm not, I'm not cringing at all. I agree with with Heather 100% and that's something we've seen more of over the years, as investors have become more familiar and sophisticated in that space. They've been asking for more granularity around reporting. They've been asking for more information. And I think important to note that goes not just at the instrument level, but it also goes for the overall issue level. So we've, you know, we've seen investors focus obviously, and when it comes to green bonds on the instrument, and you know, some of those bonds fall into certain portfolios. Investment mandates that you know are require investors to buy those type of instruments. But more and more investors are also focusing on the issue and demanding a lot more granular information around how does this issue fall into, you know, categories that we want to be investing in?
Yeah, can you elaborate a little bit on that, Alex, in terms of what you mean by the instrument versus sort of the entity that might be issuing instrument, and how any kind of trends you're seeing there?
Yeah, I guess, you know, labeled bond markets has grown significantly, as we talked about. I think it's grown in the green bond space, or environmental focused bond issuance. But also, you know, we've seen more social bonds, more themed bond around gender and other themes, and often those will fall into sort of very specific buckets that investors are looking to invest in. You know, be that, as I say, around the environment, or certain, certain social themes or whatever. But more and more investors are now looking at.
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That you know, does this issue meet the criteria that and we would like, are they at the investor level, at the issuer level? Are they an entity that lined up to the UN pris, for example? Are they an issue that ports on specific themes?
Do they fall into a category of issue that we want to be investing in? Some of the investors are exclusionary in around their approach and say, you know the issue is involved in XYZ, then you know we're not going to be investing in them even, even if they issue a labeled bond. So we're seeing, I guess, some focus from investors on on the overall issue, rather than just the labeled bond. Thanks for that. I guess Heather, unless you had a comment to that point, I would like to ask, looking forward, how do you expect bond issuance to evolve, and what role do you expect that issuance to play in the broader strategy for promoting sustainability?
Well, I mean, I can jump in and maybe pass over to Heather, but I think, you know, in terms of issuance, how to expect issuance to evolve? I don't see issuance level going down, both for sort of, you know, labor conditions and I guess, overall issuance at the public sector level. I think if anything, we've seen sort of deficits increasing. I don't think there's particularly as the world has been going through, or is in the process of going through quite a number of elections, you know, and governments tend to borrow more in election year, so I don't see any reduction in deficits and much, much talk about it at this point, though, I'd say, if I look at this sort of overall picture in terms of the issues and regions that you know, we cover at RBC, I wouldn't expect issuance to reduce dramatically from here over the next year or two. In terms of what role do I think ESG and green bond plays.
I think, I think it'll play an increasingly important role. Having said that, I do think it's worth highlighting that it's tends to be quite a small percentage of overall issuance for for governments, you know, it differs obviously from, you know, issue to issue and region to region, but generally it's a really small part of their funding program, and probably one which gets an outsized attention, both from the issues and from the investors, just given obviously the importance of ESG and the how topical it is. So I think in terms of ESG, it'll probably flatline relative to the size of the overall programs, but I do think issuance volumes overall are probably going up from here. Thanks. Alex Heather, same question for you.
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So I might be a bit more bullish. I agree with Alex. I don't think it's going to go down, but I think as the public sector, as governments now start, you know, as the clock is ticking towards 2050, and there is more transition requirement needed. I think the demand for financing, or the opportunity to actually specifically go out for labeled financing, is going to increase, and because of that, as Alex mentioned earlier, that there are buckets of very specific investors that are looking for homes for their funding, for very specific outcomes.
And so I think it's an opportunity to actually target intended investors and increase that investment pool. And so I think if issuers are looking and kind of connecting the dots, they're going to see that there's an ability to match their need for increased financing to investor demands in very specific and targeted areas. Now, to what we've just talked talked about, if the market evolves so that better terms and conditions will be offered, if the reporting and the outcomes are delivered, then that additional administrative requirement will be worth the effort.
So I'll be a bit more bullish and think that the demand will go up, but it's only if the issuers connect the dots and see that their need for financing is going to go up. We all know that, and if they can actually match their programs against very specific investor needs, I think there's going to be a win win on both sides.
Great. Thanks, Heather. I don't know if either of you have any final remarks. Otherwise, I would just wrap up by saying, think you put it pretty succinctly, governments are being expected to do more with less, essentially, and we touched on some important points to make sure that capital is being allocated as effectively and transparently as possible. To have the highest impact, we need the correct frameworks and practices in place. So thank you both for joining us today.
Thank you as well to our listeners. If you're interested in further reading on this topic, be sure to check out OMFIF and Ey future of public money report, which will bereleased in October. Thank you for joining us for this edition of the OMFIF podcast. If you found today's conversation engaging, make sure to stay tuned for additional thought provokingdiscussions on worldwide finance, economics and.
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