A Reason for Optimism: Canada's Green Bonds Market in 2012

We’re going to hear a lot about climate change in the next few months. The International Panel on Climate Change, the UN-sanctioned body of climate scientists, is due to issue its fifth “Assessment Report” on the science of climate change this fall. The report, based on the scientific consensus the IPCC represents will show two things. First, that the human (“anthropogenic”) role in causing climate change is indisputable, and second, that the scale and imminence of climate impacts will be greater than has been expected up to now.

So we know we need to do something about climate change. But what? And how? On the “what” questions, there are two obvious candidates. First, after the floods of this summer in Calgary and Toronto, it is now obvious that we need to invest in our municipal infrastructure to prepare for more frequent extreme weather events. Second, we need to begin and accelerate the inevitable transition to a low-carbon energy system and invest in renewable energy.

In both the climate-resilient infrastructure and renewable energy spaces, financing represents a substantial ongoing challenge. Despite the pressing need and widespread economic and environmental benefits, governments are sometimes hard-pressed (especially in these tight fiscal times) to deliver the direct financial support required. That is why financial innovation – in the form of emerging vehicles like green bonds – hold such promise.

Climate solutions, with their long-term revenues streams and long-lived asset base, are well suited to debt finance like bonds. They deliver predictable returns in projects or investments that are typically low risk and benefiting from supportive policy environments. For investors, green bonds provide the additional benefit from helping to diversify a broad investment portfolio, particularly in helping hedge against the climate risk of which investors are growing increasingly aware.

Sustainable Prosperity, in collaboration with the Climate Bonds Initiative and HSBC, has tracked developments in Canada’s green bond “universe” and is now releasing its 2013 report. Our report shows that there has been considerable growth in green bond issuances in Canada, mostly on the back of renewable project finance. We expect that overall growth to continue in 2013-14, particularly around climate-resilient infrastructure. Governments can and should do more, both in creating supportive policies for private investment in green bonds (through differentiated tax treatment, etc.) and in issuing their own green bonds to pay for much needed transit or municipal infrastructure.

As investors and market makers get educated about climate risk and the investment advantages of green bonds, the market will grow and the investment will flow. Amid the grim climate news, that is a ray of sunshine.