What the action beneath the veneer of the S&P 500 highs is telling investors.
TORONTO • Canadian firms issued a record amount of green bonds in the second quarter, and bankers expect the debt instrument will become more popular because issuers are able to charge a premium that environmentally-friendly investors are willing to pay.
With corporations and financial institutions facing growing pressure from investors to embrace more environmentally-sustainable practices, green bonds are seen by some as one way to work toward the transition to a clean energy future.
One of the reasons they are catching on in the fixed-income world is the debt tends to be sold at a premium, consistently eking out one to six basis points over the price of a non-green bond, which lowers the cost of raising money for the issuer.
Green bond issuance in Canada rose to $4.9 billion in the second quarter, its best showing so far and up from $2.6 billion in the first quarter, Refinitiv data showed. Global green bond issuance, however, slowed to US$126 billion in the second quarter, from US$130.8 billion in the first three months of the year.
RBC Capital Markets, TD Securities and CIBC World Markets were the top book runners for Canadian green bonds.
“The climate agenda has accelerated globally and being at the forefront of the agenda are corporations, investors and governments,” said Valerie Lemieux, head of public sector Canada for HSBC Bank Canada.
Green bonds are fixed-income securities that generate capital for projects that offer environmental benefits, including low-carbon transport or renewable energy.
Richard Sibthorpe, head of global debt capital markets at BMO Capital Markets, said while investor demand for green bonds continues to outpace supply, the constraint isn’t a lack of eligible projects.
What reduces supply is the time it takes to ensure sustainability frameworks are developed appropriately and align with objectives and the many environment, social and governance (ESG) financing options open to issuers, he said.
Several firms, including Alimentation Couche-tard and Brookfield Finance, as well as the Canada Pension Plan Investment Board, have launched green bonds this year.
“All else being equal, we are seeing green bonds outperform non-green bonds in terms of being oversubscribed and in terms of pricing,” said Amy West, managing director and global head of sustainable finance and corporate transitions at TD Securities.
For many investors, including banks, asset managers and pension managers, green bonds fulfil a need as they face continued pressure to incorporate ESG practices into their investment decisions.
Trevor Bateman, head of credit research, portfolio management and research at CIBC Asset Management, said while the returns of green bonds versus regular bonds closely match, the premium means investors sacrifice a “small amount” of return compared to investing in a non-green bond.
The growing popularity of green bonds also tells a wider story about the more general rise in economic activity as countries recover from the coronavirus pandemic.
The value of Canadian mergers and acquisitions (M&A), initial public offerings (IPOS) and equity offerings also rose to a record high in the first half of 2021, according to Refinitiv data.
More than US$104 billion worth of M&A deals were announced in the second quarter of this year, up from US$90.7 billion in the prior quarter. IPOS edged up to $3.08 billion in the Apriljune period, from $3.02 billion in the first quarter.
Equity offerings fell to US$12.7 billion in the second quarter, from US$20.8 billion in the first three months of the year, but accumulated issues for the first half of the year hit an all-time high.