Green bond market is expected to reach $100-billion in sales in 2015.Maciej Korzekwa/Getty Images/iStockphoto
Investors who want to add environmentally friendly investments to their portfolio without embracing a lot of risk don't have much choice. Most renewable energy stocks have taken wild swings in the past few years.
What about green bonds? These fixed-term investments are designed to create steady, if unspectacular, returns by lending money to sustainable energy or infrastructure projects.
According to Climate Bonds Initiative, a British-based research group, the green bond market is exploding. In 2014 alone, more than $35-billion (U.S.) worth of bonds specifically designated as "green" were sold, the CBI said, up from $11-billion in 2013. The 2015 estimate is $100-billion.
In Canada, there have been a handful of large green bond issues, including $300-million raised by Export Development Canada, $500-million (Canadian) worth from Toronto-Dominion Bank and another $500-million from the Ontario government.
But all these were snapped up by big institutions – such as pension funds – who wanted green bonds for their portfolios. A very small proportion trades in secondary markets, where individual investors may buy them.
A spokeswoman for finance minister Charles Sousa said the Ontario government may create a "retail-oriented" green bond in the future "once the domestic market for green bonds has had time to develop and the retail issue can be undertaken in a cost-effective manner." This would look much like a traditional government-issued savings bond.
One of the very few products that is geared to individuals is the bond sold by Toronto solar co-op SolarShare. It has raised $5-million worth in the past three years from about 700 individuals, who bought a stake in a portfolio of rooftop and small ground-mount solar projects. The co-op members get a guaranteed 5-per-cent annual return on their bonds, which can't be cashed out for five years.
There have also been a handful of other offerings aimed at individuals, but they are tiny and more closely resemble crowdsourcing than a bond. Toronto's ZooShare Biogas Co-operative (which generates power from animal manure) has raised money through community bonds, and Green Timiskaming, a solar co-op in northern Ontario, now sells bonds to finance its projects.
Most green bonds require large minimum order sizes, said Toronto-Dominion Bank chief economist Craig Alexander. And until the green bond universe is much larger, there will likely be few issues available to individuals, he added.
Paul Belanger, managing director of debt capital markets at RBC Capital Markets, said there would have to be a lot more green bonds issued in Canada before someone could create a retail-oriented mutual fund that holds a variety of instruments. "It would be pretty much impossible to put together a diversified Canadian-dollar green bond fund [right now], but hopefully as the market matures, it will be easier for retail investors to participate," he said.
One problem is that there are no standards for the creation of a green bond, and not even a concrete definition. Some bonds are explicitly described and marketed as green bonds, while others – even if the proceeds are used in environmentally friendly projects – are considered "unlabelled."
Bill Gilliland, a corporate lawyer at Dentons Canada, said it may be prohibitively expensive to establish a certification process to pronounce on each green bond issue to make sure it meets specific standards. He said transparency is a more effective tool – making sure that issuers are up-front about what the proceeds of a bond will be used for.
Many Canadians are already participating indirectly in the market if their pension funds are buying green bonds for their portfolios, Mr. Gilliland said. He expects many more corporate issuers to jump into the fray.
Until the retail green bond market matures, there are alternatives for individual investors looking for both security and yield, said Tom Konrad, editor of the AltEnergyStocks.com website. He noted that some Canadian-based green energy utilities such as Brookfield Renewable Energy Partners LP and Boralex Inc. pay significant dividends, but are also less volatile than many other renewable energy stocks because they have fixed long-term contracts to deliver power.