June 1, 2021

Guest post by Vasundhara Saravade & Olaf Weber


With the release of the 2021 federal budget in Canada, the spotlight is on implementing a green recovery plan for “building back better”. This reflects a global trend looking to leverage the pandemic’s economic impact as a way forward into a greener economic transition. A big trendsetter driving transitionary change both globally and in Canada is the green bond. Green bonds allow public and private issuers access to debt capital to finance their green transition, while providing investors with socially responsible financial returns. With the recent Canadian federal budget calling for the issuance of $5 billion in inaugural sovereign green bonds this year, there is a growing need to understand how market players – including policymakers, issuers and investors – can take advantage of present opportunities. To address the question of barriers within the current market and drivers that can help scale it up, our Smart Prosperity Institute-funded research surveyed and interviewed various green bond market participants and observers, based in Canada and abroad. Our research found that engagement within and for this market has never been more active and invigorating, and that green bonds are truly helping mainstream the concept of sustainable finance through their green labels.


Drivers of the Green Bond Market

Our research first looked at the factors driving the green bond market. We found that this market can help track the environmental impacts of an investment by institutionalizing its post-issuance reporting process among issuers and investors. The idea of non-financial reporting has only recently emerged with initiatives like the Taskforce for Climate-related Financial Disclosures and other global sustainability frameworks. However, the green bond market has in many ways been a pioneer in making environmental reporting norms a part of the financial investment process.

Another active driver in the green bond market is the increased need for educational awareness around climate risks and opportunities in the financial sector. This has pushed issuers, investors and even governments to rethink the fundamental concepts within finance and policy to include a sustainability or climate-related component to their decision-making.

Finally, one of the main drivers of the market has been its public spotlight on the issue of climate change and the reputational benefits that come with being a participant of the green bond market. With climate pledges and net-zero targets emerging around the world – not only from governments, but also from investors and issuers - the marketing potential of green bonds make them not only easier to invest in (with already built-in market infrastructure), but also more attractive to those previously uninterested.


Barriers for the Green Bond Market

A major risk to how the market develops in Canada and globally is how it addresses the question of greenwashing in a way that is not overly prescriptive or “one-size-fits-all” in nature. For instance, the tracking and measuring of a bond’s environmental impact can be onerous for smaller issuers that may not have the financial resources or staffing required. That said, the market cannot afford to appear negligent and allow greenwashing to be passed off under the green bond label. This indicates the need for some oversight on what is measured and tracked as being “green”, especially by governments and investors.

A big barrier faced by the green bond market is the debate around the question of a green bond’s additionality or impact, and how to establish meaningful disclosures of the investment over time. Some progress has been made by issuers having public commitments and realigning with climate targets, but the lack of scrutiny on how these commitments are upheld makes the challenge more complex in nature.

To tackle issues like additionality and greenwashing risks, the use of a standard taxonomy has been suggested. However, this comes with its own challenges due to countries being vastly different and therefore facing further barriers when trying to create a single nomenclature of green and transition oriented-sectors and industries.

Lastly, there is a market gap in understanding whether green bonds have the potential to finance innovative projects in climate adaptation or disaster mitigation areas. This gap is further amplified when it comes to the retail side of the market, where buy-in from the average individual investor is rising but the access to and understanding of the market is still missing.


Policy and Market Recommendations

Based on our research, we recommend that decision-makers (both those in the market and on the policy side) take steps to address the barriers identified in a manner that helps drive forward growth of the market, especially in the Canadian context. This is particularly important because green bonds are the most public face of sustainable finance and the market needs to use this to encourage more issuances and investment.

A good way to do this would be to issue more sovereign green bonds in Canada, which not only tackle liquidity problems in the market but also help explore more novel sectors like climate adaption or nature-based solutions. Complementary to sovereign bonds, even private sector issuers and investors can encourage green bond issuances in economically relevant yet transition-oriented sectors like water, agriculture or mining.

The measurement of additionality or impact can be achieved through setting trackable climate or environmental-benchmarks towards a low-carbon economy and using science-based tools or frameworks to measure progress. In order to do so, the role of a taxonomy will be important, and the creation of an appropriate one must be given due consideration and participation by the federal government.

Finally, improving access for individual investors and reducing greenwashing risks to the market is necessary if it is to go fully mainstream, which means at some point, market oversight will become necessary. In the meantime, Canadian decision-makers are encouraged to see the green bond market as a stepping-stone for tangible action towards greening the financial system. 


This project, titled Behavioural Finance and Green Bonds: Drivers and Barriers for Investors to Invest in the Green Bond Marketwas funded through Smart Prosperity Institute’s 2020 Call for Proposals. Further details of this and other funded projects are available here. To read the full study, see the newly published Smart Prosperity Institute Working Paper