Canadian market for 'climate-themed' bonds grows to $28B

Canada’s market for climate-themed bonds totalled $28 billion in 2014, a substantial increase that reflects growing interest in green bonds, according to a report issued Monday.

Climate-themed bonds are bonds used to finance or re-finance projects that address climate change, including wind and solar plants, hydro and low-carbon transport including transit and rail.

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Of the $28 billion in total bonds, about $1.3 billion were actively labelled as “green bonds,” according to Sustainable Prosperity, a research group based at the University of Ottawa which looked at the Canadian market for the U.K.’s Climate Bonds Initiative.

Alex Wood, senior director of policy and markets at Sustainable Prosperity says he believes green bonds are now mainstream investments.

From a base of nearly nothing in Canada in 2012, the green bond market began to emerge in 2013 and grew 78 per cent in 2014, Wood said.

“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 Corp.,” Wood said.

“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.”

Three big investors moved the market forward in 2014:

• TD Bank issued $452 million in three-year green bonds dedicated to funding a range of initiatives.
• Export Development Bank issued $335 million in bonds for loans to “preserve, protect or remediate air, water or soil of help mitigate climate change."
• Ontario issued a $500-million four-year green bond in September.

In addition, a big bond issue ($15.7 billion) by Hydro Quebec was counted as a climate-themed bond, along with issues by CN Rail, Cascades Inc. and Société des Transports de Montréal.

Many large hydro companies were not included in previous reports due to concerns over assets in tropical areas, but Hydro Quebec has no such assets.

Green bonds over-subscribed

The three large green bond issues were over-subscribed, indicating a pent-up demand for climate-theme investments, Wood says.

In an interview with CBC's The Exchange with Amanda Lang, Wood, said the market for green bonds is broader than so-called "ethical investing" with both investors with an interest in green energy and institutional investors entering the market.

"With the bond-type vehicle new investors are coming into it who have not traditionally held that type of investment and want to hedge other investments," Wood said.

About 90 per cent of the Canadian issues were investment grade.

Internationally, Sustainable Prosperity estimates the green bond market at $51 billion US and the “climate-themed” bond market at $506 billion US. Wood expects the market to expand exponentially again in 2015.

The global market is beginning to issue standards in an effort to build confidence in the green bonds market.

Some of the largest green bond issuers, investors, and underwriters came together this past year to create the Green Bond Principles which demand that issuers make full disclosure of how bonds will be used and what process is used to evaluate projects.