Canada's green bond market edges towards maturity, says Ottawa think tank

Canada’s green bonds market made a significant breakthrough in 2012 thanks to three renewable energy project bonds valued at a total of $855 million, according to a new report.

The Bonds and Climate Change report prepared by the London-based Climate Bonds Initiative assessed the state of the global green bonds market. Sustainable Prosperity, a national research and policy network at the University of Ottawa and focused on market-based approaches to build a greener economy, provided context and analysis for the report’s Canada supplement.

Alex Wood, Senior Director of Policy and Markets at Sustainable Prosperity says the issuance of the three BBB-rated investment grade project bonds in Canada indicates a new level of maturity in the market.

“Up to now, the U.S. has been the major player in the project bond space, so these three issuances represent what could be the start of an important new direction for green bonds in Canada,” says Wood.

The three issuances were: 
• Brookfield Renewable Energy Partners’ $440 million offering for its Comber Wind farm in Essex County, Ontario. 
• Enerfin Energy Company of Canada’s $243 million senior secured construction and term loan facility for its L'Érable Wind Farm project in Québec. 
• First Solar Energy’s $172 million bond for its solar photovoltaic project in St. Clair, Ontario.

The three were the major contributors to a total of $1.2 billion of green bonds issued in Canada last year, which brought the total universe of green bonds by Canadian issuers to $5.7 billion compared to a total global universe of $346 billion.

Wood says green bonds are broadly defined as fixed-income securities that raise capital for a project with specific environmental benefits. Most green bonds issued to date have been climate bonds, where the proceeds go to climate mitigation or adaptation efforts.

“Debt capital markets represent a key pool of assets that must be tapped in order to finance the transition to a low-carbon, resource-efficient and climate resilient economy,” he adds. “Institutional investors are a natural market for higher rated green bonds, given their growing concern for managing the risks associated with long-term issues such as climate change and their existing heavy investment in low-risk bonds.”

Sean Kidney, CEO of the Climate Bonds Initiative, points out that 83% of the Canadian bond universe is investment grade, which mirrors the global universe where 89% of bonds are considered to be so.

“Demand is strongest in the A and above investment grade, reflecting the requirements of the types of investors that are members of the USD21 trillion of institutional investors aligned with the new Global Investor Coalition on Climate Change.”

He adds, “While we are hoping for further renewal issuance, we think the next areas of growth in Canada will be hydro and government related issuers, where there are a lot of existing opportunities to create investment grade green bonds”.

Wood says while there is already a sizeable global market for green bonds – US$74 billion issued last year – it is dwarfed by the mainstream bond market.

“The biggest immediate issues for the expansion of a green bond market are issuance scale, liquidity and monitoring. A larger number of bigger green bond issuances are needed, especially for renewable energy and other corporate green bonds. A liquid green bond market requires at least US$200 – US$300 billion, made up of bonds rated BBB or higher,” he says.

A major driver of interest in the Canadian green bonds sector over the next 12 months, adds Wood, will be the country’s “infrastructure gap” and particularly climate-resilient infrastructure in the wake of the severe flooding in Calgary and Toronto this summer.

Climate Bonds Initiative co-founder and CEO Sean Kidney will deliver a speech to The Economic Club of Canada on September 24, where he will explore benefits and options for green bond issuance in Canada in the next year and will consider the hurdles faced by the climate bond market and its future potential.

About Sustainable Prosperity 
Made up of business, environment, policy and academic leaders Sustainable Prosperity is a national green economy think tank/do tank. We harness leading-edge thinking to advance innovation in policy and markets, in the pursuit of a greener, more competitive Canadian economy. At the same time, we actively help broker real-world solutions by bringing public and private sector decision-makers to the table with expert researchers to both design and apply innovative policies and programs.