Canada to issue first green bonds this week

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Canada will issue its first green bonds this week, a move that will give the federal government a new tool to finance its low-carbon transition plans and help establish a benchmark for other sustainability-linked financial assets.

The Department of Finance said Monday that it intends to sell $5-billion worth of green bonds to investors this week, “subject to market conditions.” The deal is expected to be priced on Tuesday.

The proceeds will be earmarked for environmentally focused projects. That could range from spending on infrastructure, such as electric-vehicle charging stations and public transit, to spending on pollution reduction and forest preservation.

The global market for green bonds has grown rapidly in recent years, as investors have begun demanding assets that align with environmental, social and governance (ESG) goals, and governments have looked for ways to fund renewable energy and emissions-reducing infrastructure projects at a lower cost.

As of mid-2021, 19 countries had issued green bonds, according to OECD data. Meanwhile, companies and governments at all levels issued around US$470-billion worth of sustainable bonds in 2021, according to Refinitiv data. That is up from US$245-billion in 2020.

While Canada has lagged its peers in terms of federal government green bond issuance, the broader market for sustainable debt has expanded quickly in the country. There was US$14-billion worth of green bond sales in Canada in 2021, up from US$8-billion in 2020, according to Refinitiv.

On the public side, Ontario is leading the way – with $10.75-billion worth of green bonds issued since 2014 – along with municipalities such as Toronto and Ottawa, and pension plans including the Canada Pension Plan. Companies ranging from Royal Bank of Canada to Alimentation Couche-Tard Inc. have also issued bonds linked to sustainable initiatives.

Sara Alvarado, executive director of the Institute for Sustainable Finance at Queen’s University, said the new federal government bonds should provide an important benchmark for other green assets.

“If you’re a corporate issuer, you need something to compare to in terms of being able to price, and pricing is very key for the market to function effectively,” Ms. Alvarado said. “Creating that benchmark opens up the gates for any issuer in Canada to come in.”

The federal government’s inaugural issuance of green bonds comes ahead of its 2030 emissions-reduction plan, which will outline how it intends to reduce greenhouse gas emissions by 40 per cent to 45 per cent below 2005 levels by 2030. Environment Minister Steven Guilbeault said earlier this month that the plan would be released in the coming weeks.

“The timing of the two goes hand in hand,” Ms. Alvarado said. “You have the plan, but you also need the money to execute.”

Notably, the proceeds from the green bond sales cannot be spent on nuclear energy projects or initiatives to lower oil and gas company emissions. The government said these exclusions were done in light of “exclusionary criteria embedded in major green bond indices” and “market expectations.”

TD Securities and HSBC advised the government on the structure of the bonds and are helping with the sale. The bonds will mature in December, 2029.

Investment bankers and researchers will be watching the pricing of the deal closely to see what kind of premium investors are willing to pay. The hope is that high demand for sustainability-focused assets will allow the government to sell the bonds at a premium compared with traditional bonds, lowering the amount of interest the government pays and reducing the cost of servicing the debt.

Raphael Duguay, an assistant professor at the Yale School of Management who studies green bonds, said that premiums have tended to be small on green bonds: typically less than five basis points (a basis point is one one-hundredth of a per cent) for issuers in Europe and close to zero for issuers in the United States.

“If we get evidence that the market is willing to pay a premium, that [the government] can borrow cheaper with those green bonds, then I would think that many corporations would follow suit, but also provincial governments in Canada and municipal governments,” he said.