OMERS' CFO and CSO on Their First Sustainable Bond Offering

Last week, OMERS announced it successfully completed its first sustainable bond offering:

Earlier this week, OMERS Finance Trust (OFT) announced that it has successfully closed its first offering under a recently established Sustainable Bond Framework.Opens new window The inaugural dual tranche sustainable bond offering comprised USD 600 million of 10-year notes and USD 500 million of 30-year notes, securing strong international investor interest and a two times oversubscription.

“The establishment of the Framework and issuance of our first sustainable bonds is another example of our commitment to sustainable investing and demonstrates conviction in our ability to profitably deploy capital into assets with strong green and social attributes,” said OMERS Chief Financial and Strategy Officer Jonathan Simmons. “The appeal of sustainable bonds to the investment community enabled us to tap into global capital markets at attractive rates to enhance returns for our members.”

This is the first time that OFT has issued a sustainable bond. The bonds were rated AAA by Fitch, AAA by DBRS, AA+ by S&P, and Aa1 by Moody’s. For further details on the first notes offered under the program, please see the OFT website.

“We are proud to support the evolution of sustainable finance in Canada through the offering of these instruments,” said Michael Kelly, OMERS Chief Corporate Affairs and Legal Officer. “The proceeds from our sustainable bonds will be used to finance investments in areas including renewable energy, green buildings, and access to affordable basic infrastructure, such as broadband internet. We believe well-run organizations with sound ESG practices will perform better, and be well-positioned to create value and opportunity, particularly over the longer term.”

OFT obtained an independent opinion on the Sustainable Bond Framework from Sustainalytics that confirms, “the OMERS Sustainable Bond Framework is credible and impactful and aligns with the International Capital Market Association’s Sustainability Bond Guidelines 2021, Green Bond Principles 2021, and Social Bond Principles 2021.”

For additional information on OMERS sustainable investing activities, including business-specific advances, please see our website and 2021 Annual Report.

Sustainalytics

Sustainalytics, a Morningstar company and a globally-recognized provider of ESG research, ratings and data, evaluated OMERS Finance Trust’s Framework and the alignment thereof with relevant market standards and provided views on the robustness and credibility of the Framework which views are intended to inform investors in general, and not for a specific investor.

OMERS Finance Trust

OFT is an independent entity that issues debt unconditionally and irrevocably guaranteed by OMERS Administration Corporation (AC). OFT extends loans to support certain OMERS investments.

OMERS

Founded in 1962, OMERS is one of Canada’s largest defined benefit pension plans, with $121 billion in net assets as at December 31, 2021. OMERS is a jointly-sponsored pension plan, with 1,000 participating employers ranging from large cities to local agencies, and over half a million active, deferred, and retired members. OMERS members include union and non-union employees of municipalities, school boards, local boards, transit systems, electrical utilities, emergency services and children’s aid societies across Ontario. Contributions to the Plan are funded equally by members and employers. OMERS teams work in Toronto, London, New York, Amsterdam, Luxembourg, Singapore, Sydney and other major cities across North America and Europe – serving members and employers and originating and managing a diversified portfolio of high-quality investments in public markets, private equity, infrastructure, and real estate.

As stated above, details on the first notes offered under the program are available on the OMERS Finance Trust (OFT) website:

 

I also highly recommend you download OMERS' Sustainable Bond Framework here as well as OMERS Sustainable Bond Framework Second-Party Opinion (from Sustainalytics) here.  

Both these documents contain important details on this first offering and are also available at the bottom of the page here:

Let me also publicly commend Brandon Weening, Senior Vice President, Corporate Finance at OMERS Finance Trust, and his team for putting this first sustainable bond offering together and making it a big success.

Alright, earlier today, I had a discussion with Jonathan Simmons, OMERS' CFO and Chief Strategy Officer, and Courtney Burke, Vice President, Corporate Finance, who worked directly on this offering.

I want to thank Jonathan and Courtney for taking some time to talk to me and also thank Ann DeRabbie, Vice President Corporate Communications, for setting up this call and Neil Hrab for alerting me about the offering last week.

I began by asking Jonathan to give an overview and explain why OMERS and other pensions are issuing green bonds:

"Great, let me start off by stating our bond is more than just a green bond, it's a sustainability bond so we decided to combine not just a green bond framework but a social bond framework into one. Hence, we went with the sustainability format as our first non conventional bond issue. So, why are we doing this non conventional bond issue? Well, first of all, let's deal with the bond aspect first. We believe it's an important piece of leverage to try an enhance investment returns over the long-term time horizons that we have. Having leverage in our structure has been something we've had for many years. This is the ninth medium or long-term bond offering we've issued. So that is good investment sense (use of moderate leverage to enhance returns over the long run). The other thing which you know is that for many years we've believed in incorporating deep analysis of ESG factors in our investment process is actually critical to the management of risk in our long term assets."

He added:

"Those are two things that have existed for many years at OMERS. What is actually happening now is these are converging so the opportunity set to invest in green and social projects in a way that earns good investment returns for our members is now emerging. And whether that's the transition to the low carbon economy which has made investing in green energy now commercially viable for us as an investor or whether that means investing in basic infrastructure on the social side, those things are now ripe for investing and that means that able to combine both the debt objectives with our investment objectives in a way that makes sense. And when you layer on the fact that there is real demand out there in potential buyers of investment product like this -- which means we were 2 times subscribed to the rate we were able to raise funds by which we find attractive --  that means there's a market out there for this kind of product. So, these concepts are not brand new but it has taken time for markets to mature and we are really excited to be able to do this. I think we are the first Canadian pension to issue a sustainable bond incorporating green and social aspects and I think there will be more to come."

I told Jonathan incorporating green and social aspects in a sustainable bond issue is unique as far as I can tell, and I agree with him, there will be more to come as other pensions follow OMERS in doing so.

I also told him that these bonds are rated by independent third parties (credit agencies) which gives independent credibility to the issues. 

Moreover, they got a second opinion from Sustainalytics, a Morningstar company and a globally-recognized provider of ESG research, ratings and data, to evaluate OMERS Finance Trust’s Framework and provide views on the robustness and credibility of the Framework which views are intended to inform investors in general, and not for a specific investor.

 

That just adds another layer of credibility to the issuance which is probably why it was 2x subscribed, on top of having great underlying assets that appeal to investors.

Jonathan replied:

"That's right. There's now a dual process with these bonds. There's the conventional rating by firms like Fitch, DBRS, S&P, etc. and our conventional credit ratings are very strong. But alongside of that, we retained a firm called Sustainalytics to validate the framework for the sustainability bond. And so not only do we have the conventional credit ratings, we also have the second-party validation of our framework from Sustainalytics which just adds to the credibility of this and gives global investors the confidence to buy our paper. We had 62 global investors participate in our offering from foreign-wide (North America and Europe), across a range of types of investors (official institutions, insurance companies, asset managers), and it was really pleasing to see the level of interest we had."

I noted that this is not only combines dual objectives, it also allows OMERS to properly manage its total portfolio in a way that takes advantage of the entire capital structure including debt in an efficient manner. 

Next, I asked Courtney Burke, Vice President, Corporate Finance, to discuss her role in this offering and to provide more details on how it was structured. She replied:

"My role was twofold. First, working with the organization to develop a sustainable bond framework. That was a process that took six months which we started last summer. Second, being the point person on the actual bond issuance, partnering with our dealers at the banks, coordinating all the market efforts (meeting with credit agencies) and then just execution."

Courtney then went into more detail on building the bond framework and their approach:

"We gathered insights from our sustainable investing team (led by Michael Kelly, OMERS Chief Corporate Affairs and Legal Officer), we partnered with our investment teams, global tax and legal and various people in finance to develop a framework that really fits within our investment strategy. It is a future-proof framework so we are able to issue debt which is aligned with our framework but we also made sure we developed a framework which incorporates things our investment teams are thinking about the future. This is the process we undertook in partnership with our structuring business partner, HSBC, which helped us make sure our framework is aligned with all the appropriate ICMAs (International Capital Markets Association guidelines for green and social bonds) and they helped us through the Sustainalytics process as well. So, it was a very large project that spilled across the organization and it's a great outcome."

Again, take the time to download OMERS' Sustainable Bond Framework here to get all the details

I then pressed Jonathan to explain how this sustainable bond framework covers the social aspects.

"Our bond framework is a social and green bond framework. Issuers can now choose to issue conventionally, or they can choose to create a green bond framework, or they can choose to create a social bond framework or you can combine both social and green into the sustainability framework and that is the choice we made. Why did we make that choice? We wanted to create optionality in how we use the proceeds. But also we saw the opportunity set to invest across the pension. On the green side, the transition to the low carbon economy and the demand for renewable power is one example of something which is clearly very evident. On the social side, the infrastructure deficit which exists in society is very clear. So, if social bond aspects include things like investments in basic infrastructure and other social projects where there's a need, we can address this deficit in developed countries. We felt having a broad opportunity set for us to deploy proceeds was helpful and that's why we selected the sustainability bond framework rather than just limiting ourselves to a social or green bond framework."

Here, I mentioned to Jonathan about the infrastructure deficit in developed countries that I read yesterday a post Mike Renchcheck, CEO of Bruce Power, a holding of OMERS, made on Linked in on how successful their green bond issuance was:

I am glad Bruce Power was able to issue a $500 million Green Bond (private issuance) with over 60 investors with requests 6x that amount, but as I read in the Toronto Star recently, Ottawa’s ‘Green Bond’ program excludes nuclear, one of the cleanest of all energy sources.

And that's a cause for concern. 

Actually, let me be blunt, it's totally insane not to include nuclear energy in any Green Bond Framework because if we don't increase this important source of clean energy, there's no way the world will get to net zero by 2050. Period.

You can talk to me all you want about solar, wind, hydrogen, clean grids but without nuclear energy, we aren't going to get very far in lowering our greenhouse gas emissions to achieve net zero by 2050.

In fact, on Monday I discussed Senator Clément Gignac's conundrum, the lackluster capital investment in Canada and what our large pensions can do about it, and stated the focus shouldn't be on buying more Canadian equities, it should be on creating the winning conditions to allow our large pensions to invest more in large infrastructure projects domestically like toll roads, airports, ports and nuclear power plants.

Nuclear power plants? You bet, I can't think of a better investment to match pensions' long-dated liabilities but no pension would ever take on construction risk of a nuclear power plant, you need the federal government to step in to effectively derisk these projects.

[Note: At least initially, I foresee a time when our large pensions will be able to take on construction risk of nuclear power plants, just like CDPQ's REM project, but we are not there yet, far from it.]

Once derisked, pensions can invest for the lifespan of the nuclear reactor (100+ years) and collect great cash flows above bond yields over a very long duration (find me a 100+ year bond offering stable and relatively high yields, it doesn't exist).

The problem in Canada is our policymakers are not thinking long term because if they were, nuclear energy would be a huge part of the net zero equation and our large pensions would be able to invest billions in these assets. 

I consider OMERS to be very lucky to own Bruce Power, the nuclear power company that powers Ontario, it's one of their best long-term assets and I think it will continue to perform well over the long run. 

Jonathan added his insights here:

"Well, remember, companies define what their green bond framework is (which is how Bruce Power issued this $500M Green Bond). Certainly we feel nuclear energy plays a critical role in the global transition to net zero. It is a very important component of the energy mix here in the province of Ontario. We think of having optionality to include nuclear as an eligible product is very important."

I couldn't agree more and I'm glad Bruce Power was able to successfully issue its own $500 million Green Bond despite Ottawa reluctance to include nuclear in its Green Bond Framework. 

Let me wrap it up there and once again thank Jonathan and Courtney for a great discussion covering OMERS' first and highly successful sustainable bond offering.

Also, make sure you read my recent comment going over OMERS 2022 Virtual Annual Meeting.

Before I forget, Jonathan is taking part in this year's MS Walk in Toronto to raise funds for MS research:. He posted this on Linkedin earlier this week:

 

As you can see from my reply, MS is a disease I and many other Canadians know all too well.

On his pledge site, Jonathan writes:

"I hope you and your family are doing well and enjoying the spring weather.
 
For 22 years I’ve been walking and fund raising for Multiple Sclerosis. This year, I am excited to participate in the walk along with many others on Sunday, May 29, 2022.
 
Last year, your generous donations in support of my Walk for Multiple Sclerosis helped me raise over $34,000 for the MS Society of Canada. This year I hope to raise $40,000.

Over the past 22 years, I have raised over $398,000 for the MS Society. Please continue to support my efforts for this deserving cause."

Thank you for your support.

Thank you for helping to end MS!

Wow! I read this late this afternoon and was totally blown away!

So, please help a worthy cause and donate to Jonathan Simmons' 2022 MS Walk by clicking here and help him reach his goal of $40,000.

My best advice for anyone suffering from MS is don't needlessly stress out, as time goes by, you'll get really good at listening to your body but pay attention to all symptoms, including the hidden symptoms which are often more of a pain than overt ones (be honest with your doctor about all your symptoms including your mood and psychological state of mind).

Also, with time, your disease will plateau so you will not suffer from it as much as in early years, you will get used to living with MS, and focus on your abilities, not your disabilities.

What else? Proper diet (including moderate intakes of vitamin D), moderate exercise (as much as you can do) are important but in my opinion, nothing is more important than good quality sleep. Sleep apnea is very common in people with MS so if you're feeling tired all the time, it could be an MS symptom but take the time to visit a good sleep doctor at an established clinic to see if anything else is going on and address it (CPAP machines are life changers for many people, 25% of the population suffers from sleep apnea and doesn't even know it). 

And it's not just MS, earlier this week Good Morning America reported on how new research reveals how a sleep disorder may be linked to Parkinson's, so take it from me, whether or not you have MS, Parkinson's or any other underlying condition, good quality sleep is essential for your overall health.

What else? If you are working and have MS, it's not easy opening up to people because you risk getting the wrong reaction, so proceed cautiously and trust only a few at your workplace (only if you need to disclose it). The advent of hybrid work should in theory make things easier for people with MS and other chronic conditions but you can't control people's reactions and some people just don't react well (if you don't need to disclose it, my best advice is not to but sometimes you'll find the right support from good people, so judge for yourself). 

Alright, that is all from me on MS, just remember, life will throw you a bunch of curveballs, some are harder to swallow than others, but try to stay positive no matter how hard it gets and surround yourself with people who really care about your well-being.

Below, watch a brief introduction on Sustainalytics' next generation ESG research and ratings, the ESG Risk Rating. Dr. Hendrik Garz, Executive Director, ESG Ratings Products & Thematic Research shares insights from their white paper on the ESG Risk Ratings (2018).