There is a budding market for green bonds, the new financing vehicle the Ontario government is depending on to raise money for transit, but investors are not going to cast aside returns for a feel-good factor.
That's one conclusion of a new report from the economics team at Toronto-Dominion Bank, which looked at the nascent market for bonds issued to finance "green" environmental projects.
Ontario's government said Wednesday that it would look to the new market to raise money for such initatives as transit expansion. TD chief economist Craig Alexander said that the green feature will be attractive to certain investors, but they will still demand first and foremost a competitive yield.
"At the end of the day what matters most is the rate of return," Mr. Alexander said. He said he doubted that borrowing with green bonds would be any cheaper for a government than by using regular government bonds.
Investors will look for the return first, the credit quality of the issuer second and thirdly will look at the environmental connection, he said. But the green aspect will make a difference, says TD. The report, entitled "Green Bonds: Victory Bonds for the Environment," asserts that there is "great scope" for the market to grow.
"I honestly do think that feature is going to be attractive to some investors," Mr. Alexander said.
Ontario has yet to give many details on how the bonds would be structured.
In general, Mr. Alexander said that to avoid suspicions of "greenwashing" there must be a clear link between the money raised by the bonds and the underlying environmntal project.
"The green dimension of the bond could be attractive to certain institutional investors," he said. "The thing about the bond is, it absolutely has to have some mechanism to ensure that the capital being raised is in fact going to the green initative."
The market is so new, it is not even clear how big it is. TD's report cites estimates that it is somewhere between $10-billion and $346-billion, depending on how you define a green bond.
A large offering from a province such as Ontario might be attractive to investors because they generally like big bond issues, which are easier to buy and sell than smaller niche offerings. Ontario could end up setting an example for other governments, kickstarting growth in the green bond market.
"The Ontario experience is going to be a very important test of the green bond market in Canada."