November 26, 2019

Guest Post by Vasundhara Saravade, University of Waterloo


Green Bonds: A Catalyzing Climate Finance Tool

With climate change already impacting existing infrastructure, there is a need to upgrade or build climate resilient cities. This creates huge socio-economic challenges for a “safe and just” transition. Current public balance sheets are already stretched and unable to support the massive scale of such a transition. For the private sector, challenges lie in trying to continue to do business-as-usual in a world with a changing and increasingly unpredictable climate. This is where the green bond market delivers – it allows public and private issuers access to debt capital to finance a just, clean transition, and provides investors with socially responsible financial returns. 

So far, the green bond market has seen exponential growth in issuances across all continents, surpassing $200 billion in the second quarter of 2019.  A key factor in sustaining future growth comes from the opportunities presented by emerging markets in Asia. The reasons for this are twofold. First, countries such as India and China are driven by their economic needs and social priorities to support a massive populace. Second, the high level of environmental degradation that accompanies economic growth in developing countries calls for greater green investment. 


Lessons from Emerging Green Bond Markets

Against this backdrop, my research looked into the drivers of growth in the green bond markets of Asia’s two biggest emerging economies – India and China. The research examined the role of public institutions, like financial market regulators, in supporting the green bond market. The results suggest that institutional lessons can be adapted by regulators in countries like Canada, which are looking to jump start their own green bond markets.  

The first important finding was that with growth in the global green bond market and the international nature of finance, there is now the need for a regulatory presence to dispel fears of greenwashing for investors, and establish a market framework. Doing so also allows bond issuers to understand what “green” means in the context of national priorities, especially in view of climate change. 

Second, a regulatory presence and its impact on the market will vary by country and will be influenced by existing high priority social actors, namely those who hold a high degree of legitimacy, financial power and span various institutional settings. For example, in China, the institutional legitimacy of the market is driven by high priority regulators like the central bank, whereas in India, it is driven by investors and through advocacy efforts by the private sector.

Lastly, it is increasingly necessary to measure the institutional influence of these social actors on the market, as their impact creates a pathway for countries to get them on board with the low-carbon transition. The repercussions of leaving behind important social actors in a societal level change (the lack of a ‘just transition’) is one we see with a rise in populist governments

Therefore, the involvement of important public institutions like central banks, other regulators and governments, can be instrumental in fostering the necessary conditions for sustainable finance to become mainstream. Countries that delay in creating a realistic, yet ambitious transition strategy will be left behind in the low-carbon sustainable world. This is why it becomes imperative to consider what works in the Canadian context and how it can be used to incentivize the private sector to transition to low-carbon practices over time. By measuring institutional impact in the market, it makes it possible for regulators to create a robust framework and long-term strategy for various sectors and industries to transition to a green economy. Doing so will also allow investors to examine the risks and opportunities that climate change is going to bring to the economy in the next few years.


Growth of a Socially Responsible Canadian Regulator?

So far, Canada has not created any formal regulation in the green bond market. However, there is a need to establish a robust framework on how Canada will transition to a green economy and create the pathway for issuers to raise green capital. Given Canada’s enormous resource wealth and an economy that currently relies on it, it becomes even more urgent to consider the risks that various climate scenarios will have on Canadian financial assets as well as opportunities for growing the economy responsibly. 

Accomplishing these urgent goals is going to prove difficult if the Canadian financial sector is unable to support the entrepreneurial nature of green and clean-technology innovation. It is time for Canadian regulators and public institutions to act by backing the green bond market and creating incentives for it to grow, and perhaps taking more of a fiduciary role in how all Canadians experience a safe and just transition to a low-carbon world


To learn more about green bonds, check out Smart Prosperity Institute’s past work on Green Bonds in Canada.


Vasundhara is a PhD student in Sustainability Management, currently supervised by Olaf Weber, School for Environment, Enterprise and Development (SEED), Faculty of the Environment, at the University of Waterloo. Vasundhara presented their research, “An Institutional Analysis of the Green Bond Markets in India and China”, at the International Sustainability Transitions Conference, Carleton University 2019. Her trip was funded by the Smart Prosperity Institute’s Graduate Student Travel Awards.