National Post (National Edition)
Canada slow to embrace green bond market
When they’re offered, investors crawl over each other to buy them. But if Canadian issuers don’t see the opportunity in offering green bonds and don’t get creative, the market will not develop to the extent possible.
That’s the gist of a recent report by the Investment Industry Association of Canada. The report by IIAC managing director Todd Evans cries out for a more developed domestic green bond market, in large part because it would provide an alternative financing structure for infrastructure projects.
“Green bond financings issued by public and/or private entities have the potential to reduce financing costs given receptive strong demand (either) driving or encouraging environmentally supportive projects,” wrote Evans, adding green bonds earn that label because of the use of proceeds.
The list of Canadian green bond issuers is small: one federal agency, Export Development Canada; two provinces, Ontario and Quebec; and one city, Ottawa. The City of Toronto is planning one.
Among corporates, TD Bank last year completed a US$1-billion three-year offering, while on Monday Manulife said it raised $600 million of 10-year, non-call five-year 3.317 per cent green bond.
Participation by other corporates could change “given the positive investor reception towards mandates and competitive pricing of green bonds,” said Evans.
One entity, CoPower, has carved a niche among retail investors, who purchase the private placements under the offering memorandum exemption. It will launch its third such issue this month.
Trish Nixon, CoPower’s managing director and head of capital, said the green bonds are backed by portfolios of loans to distributed clean energy projects, including roof-top solar, geothermal heating and cooling projects, as well as energy-efficiency retrofits in buildings. “These smaller projects are under-served by traditional infrastructure investors, but offer compelling return opportunities, alongside significant carbon reductions.”
Among investors, Bruce West, chief financial officer at The Co-operators Group, said his organization invests in green bonds as part of “our commitment to invest 10 per cent of our $9.4 billion in investments that measurably address the world’s most pressing environmental and social challenges.”
“We’re not only doing what’s right, we’re doing what makes sound financial sense for the organization,” given such investments generate “longer-term investment returns consistently performing above benchmarks,” West added.
Why so few Canadian green bond issuers? One explanation is that it takes effort to set up such a program. For instance, a thirdparty report is required to certify the capital raised will be used for green projects. As well, the rules require the proceeds not be mixed with the issuer’s other cash balances. Those “costs” can then be assessed against the benefits of attracting a new group of investors, of, at times, issuing at a lower coupon, and of building the market.
Ian Russell, IIAC’s chief executive, said the market “needs a boost. There is lots of potential (because they) provide another option.”
Certainly issuing green has been embraced by willing buyers elsewhere. In 2017, for instance, more than US$155 billion of green was raised by about 240 entities from 37 countries. (In 2016, US$87.2 billion of such bonds were issued; double the level of 2015.)
Of the 240 green issuers in 2017, almost 150 were first-time borrowers. Issuers from three countries, China, France and the U.S. accounted for more than half the total.
And size doesn’t appear to be a problem: Fannie Mae, through its green MBS program, raised a total of US$24.9 billion; France raised US$10.7 billion with US$7.6 billion coming on its debut offering. Three borrowers — China Development Bank, the European Investment Bank, and the New York MTA — raised more than US$4 billion.
Lithuania recently joined the ranks of sovereign issuers with a 20-million-euro (US$24-million) raise. Poland, Belgium, Fiji and Nigeria have previously issued such bonds.