Green bonds – which raise money for projects that help mitigate climate change – have grown from a niche market to a substantial portion of the fixed income market, a new report says. And Canada is emerging as a significant player in that market, thanks to three large green bond issues in 2014.
The report, to be released Monday by Ottawa green-energy think tank Sustainable Prosperity, shows that Canada's universe of labelled green bonds – those that are explicitly marketed with a "green" designation – went from zero to $1.2-billion (U.S.) over the course of 2014. That rise was thanks to three large issues, a $500-million (Canadian) green bond issue from the Ontario government (to be used to fund light rail transit), another of the same size from Toronto-Dominion Bank and a $300-million (U.S.) issue from Export Development Canada.
Globally, there are now more than $51-billion (U.S.) in green bonds outstanding, according to numbers compiled by the British-based Climate Bonds Initiative.
"This is a breakout year for these bonds," said Alex Wood, senior director of policy and markets at Sustainable Prosperity. He noted that many of the bond offerings were substantially oversubscribed, indicating that the issuers could have raised even more money if they had wanted to.
With the market so new, it is hard to define what exactly is a green bond. While some new issues are explicitly described that way, many other bonds that are used for environmentally friendly projects are not included in the "labelled" category. If unlabelled climate bonds are included, the global total is much larger – more than $500-billion.
In Canada, this broader market for unlabelled climate bonds is roughly $26-billion, Sustainable Prosperity says, and that includes almost $16-billion of bonds from Hydro Québec which were used to finance its hydro-electric power projects.
As the green bond market continues to grow, it is increasingly important to set standards and provide some oversight, Mr. Wood said. "With the scaling up of the market, there is increased scrutiny and increased questions being asked about the transparency of the claims being made," he said. It will be necessary to track investment to make sure that green bonds are funding the promised activities, he added.
To make this happen, some large issuers, investors and underwriters have got together to create a set of green bond principles that will ensure there is transparency in the green bond market.
However green bonds are defined, it is clear that investors are increasingly keen to put their money in environmentally friendly projects, Mr. Wood said. Many large family foundations, for example, now invest with a "deliberate green focus," he said. Other large institutional investors – such as pension funds, banks and money managers – also see green bonds as a way to hedge environmental risks in their portfolios.
So far, very few green bonds have been geared to individual investors, but this will likely change in the coming years. The Ontario government has already said it will consider a retail green bond issue that will be similar to traditional savings bonds.
Eventually, said Paul Belanger, managing director of debt capital markets at RBC Capital Markets, there will be enough Canadian-dollar denominated green bond issues in Canada that a mutual fund firm will be able to put together a green-bond fixed income fund that will appeal to individual investors. It is clear there is an appetite for these products, among both institutions and individuals, he said. "The demand is there."
Mr. Belanger said the Ontario government green bonds, which his firm helped to sell, had orders for four times the amount of the issue, a sign of the desirability of bonds with high ratings. Eighty different buyers snapped up the bonds, and 17 per cent of them were purchased by investing groups outside of Canada.