Investors embraced Canadian climate-themed bonds in a big way in 2014, pushing the total holdings of Canadian issuers to US$26-billion in funds that are aimed primarily at projects to combat climate change and mitigate its impact, according to Sustainable Prosperity’s Canadian companion to the third annual Bonds and Climate Change report prepared by the UK-based Climate Bonds Initiative.
What the SP/Climate Bonds report has found is that there was – within the broader universe of “climate-themed” bonds - a significant increase in Canadian-issued investments labelled specifically as “green bonds”. Canadian-issued “green bonds” grew from zero in mid-2013 to US$1.2-billion by October 2014 thanks to three issuers: TD Bank, Export Development Canada and the Province of Ontario. The global market for “green bonds” is over US$51bn outstanding according to the latest Bonds and Climate Change report.
Climate-themed bonds are used to finance or re-finance projects that address climate. They range from wind farms and solar and hydropower plants, to rail transport and building sea walls in cities threatened by rising sea levels. Only a small portion of these bonds have actually been labelled as green or climate bonds by their issuers.
The total investment in Canadian-issued climate-themed bonds in 2014 was recorded at US$26-billion, an increase of 78 per cent over 2013 due in part to the inclusion of $15.7-billion in unlabelled bonds issued by Hydro-Quebec. Many large hydro companies were not included in previous reports due to concerns over assets in tropical areas. Hydro Quebec, which has no tropical hydro assets, is now included. The global total of climate-themed bonds grew by 45 per cent in 2014 to $502.6-billion.
In addition to the growing scale and frequency of green bond issuances, the market is experiencing the steady development of market infrastructure and standards. Some of the largest green bond issuers, investors, and underwriters came together this past year to create the Green Bond Principles, with a view to building the transparency of and confidence in the green bonds market.
Alex Wood, Senior Director of Policy and Markets at Sustainable Prosperity says the explosive growth of green bonds over the past 18 months, particularly in Canada, shows that they are now mainstream investments.
“Three years ago, bonds labelled as ‘green’ or ‘climate’ were a niche market pioneered by a handful of multilateral development banks such as the World Bank and International Finance Corporation,” says Wood. “This has now changed with the issuance of bonds labelled as ‘green’ or ‘climate’ growing rapidly in the past year in Canada and worldwide, and the work that has gone into standardizing practices in the green bonds market by private sector investors.
“We are seeing a whole new class of institutional and private investors coming into this space. Many are investors who understand the bond market, but have never considered green bonds until now, while others are traditional green investors who have never before considered bonds.”
Wood adds that all three “green bond” issues in Canada in 2014 were over-subscribed, which indicates a pent-up demand for this type of investment. A big part of the attraction is the high quality of the Canadian issues, with 92 per cent rated as investment grade.
“The result is the creation of large pools of capital to fund green infrastructure projects that help the environment and the economy,” he says.
Wood expects another bond issue from the province of Ontario, which has said it foresees at least $1billion a year in future issuances. Other provinces and municipalities could follow suit with climate-themed bonds of their own.
The success of the TD Bank and EDC issuances may spur other Canadian financial institutions to issue green labelled bonds as well, he adds. There are also opportunities for small scale green investments such as community bonds to finance local green infrastructure projects.
“In the year ahead there will be significant developments in Canada and the rest of the world,” says Wood. “The challenge will be to ensure that all market operators work to demonstrate that the market is truly shifting capital to climate solutions rather than facilitating green wash. The Climate Bonds Initiative and Sustainable Prosperity will continue to work together to grow the scale of the market and the capital available to sustainable economic development in a way that is both rapid and credible.”
About Sustainable Prosperity:
Made up of business, environment, policy and academic leaders Sustainable Prosperity is a national green economy think tank/do tank. We harness leading-edge thinking to advance innovation in policy and markets in the pursuit of a greener, more competitive Canadian economy. At the same time, we actively help broker real-world solutions by bringing public and private sector decision-makers to the table with expert researchers to both design and apply innovative policies and programs.
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