Lonely green bond market

Party of one.

That’s the state of affairs among government issuers of green bonds, with Ontario being the only member of the club.

The province recently closed its third such issue: an $800-million offering that came with a six- year term and a 1.95- per- cent coupon. Previously it had raised $500 million in October, 2014, and $ 750 million in February, 2016.

In fact the latest bond offering is a reopening of the green bond issued last February.

The proceeds from the recent deal will be used to fund 12 projects, all of which have been identified. Half the projects, which are slotted to receive most of what was raised, are in the area of clean transportation. The rest of the projects are in the area of energy efficiency and conservation.

All three transactions were done under the province’s global documentation program.

In essence that program allows marketing of the issue — and hopefully sales — into foreign markets. The financing, originally slated to be a minimum of $500 million, was priced after a process known as overnight marketing. The bonds will be listed on the Luxembourg Stock Exchange.

But despite that global capability, more than 90 per cent of the demand came from North American investors. Asset managers ( 41 per cent), banks (28 per cent) and insurance companies and pension funds ( 25 per cent) were the largest buyers. More than 50 investors participated.

Some market participants had expected the federal government would have entered the fray given some wording that was included in the 2016 budget.

Ottawa said that “green bonds are a way to finance projects that support important environmental objectives. They are also a way for investors to know that their money will be used in an environmentally sound manner.”

In the budget, reference was made to two green bond issues by Export Development Canada. EDC raised US$ 300 million in January, 2014, ( at 0.75 per cent for three years) and a further US$300 million in December, 2015 (at 1.25 per cent for three years.) “EDC is committed to becoming a regular issuer in the green bond market,” noted the budget.

In its two financings, EDC raised capital and used the proceeds to “support eligible transactions” in certain identified areas.

Others had expected that British Columbia would follow Ontario’s lead.

But so far there’s been no action. “It’s hard to say, who, if any, will follow suit,” noted one government underwriter.

So why aren’t there more Canadian government green bonds issuers, given that Canada has signed the Paris Accord at the 2015 UN Climate Conference, and given that Ottawa recently imposed a federal carbon tax?

One reason is that it takes time, given the approvals required, for an issuer to do it right. And it takes even longer to get it really right. For instance, Ontario’s green bond program was developed in consultation with the Centre for International Climate and Environmental Research Oslo (or Cicero) — a lengthy process requiring lots of documentation.

That third-party accreditation occurs after an Ontario government advisory panel considers whether fully approved projects are green — or not.

EDC also obtained a socalled second opinion. Details of that second opinion — provided by Cicero — are on EDC’s website.