Canada’s New Green Bond Will Help Mainstream Sustainable Finance

An important step in sustainable finance

The federal government is taking an important step toward mainstreaming sustainable practices in Canadian financial markets with the decision to issue its first-ever green bond in 2021-22. The brief announcement, as part of Finance Minister Chrystia Freeland’s Fall Economic Statement (FES) on November 30, demonstrates meaningful progress in sustainable finance.

The announcement signals to the financial sector that Canada is serious about an investment tool that will be a cornerstone of the country’s effort to speed up greenhouse gas reductions and achieve net-zero emissions by 2050.

How green bonds work

Green bonds can be used to raise money for specific projects or ongoing climate investment programs. But their value goes far beyond the initial dollars they attract.

• They can be incorporated in wider, more diversified green investment products allowing investors to invest directly in green projects.
• Allows the financial community as a whole to more easily raise money to push climate mitigation activities farther and faster.
• They can be used to price or hedge other green of sustainability bonds.
• They help to establish a green yield curve, enabling Canada to participate in a global green yield curve.
• They educate financial markets by giving investors regular, detailed updates on the green projects their money is supporting.

In all of those ways, green bonds help bring all forms of sustainable investment closer to day-to-day business practice.

Green bonds within the global context

Green bonds have come a long way since the World Bank issued the first one in November 2008 at the request of a group of Swedish pension funds. That early initiative became a blueprint for a debt instrument that allows investors to support climate mitigation or other environmental solutions without sacrificing financial returns.

Fast forward a dozen years, and green bonds have just finished their strongest third quarter ever, with nearly 200 entities from 39 countries raising $64.9B USD over the three months ending September 30. Global green bond activity since 2007 stands at $948B USD. Now, Canada’s federal government is stepping up as one of the first in the world to issue a green bond, pointing to the investment flows that will help build the country’s low-carbon economy.

Growing number of green bonds issuers

National governments generally account for a small proportion of the global green bond market, with the lion’s share of the activity coming from local governments, financial institutions, other corporations, and asset-backed securities (ABS).

But countries’ share is slowly increasing—from 10% in 2018, to 11% in 2019, to 14% in the first half of this year. As of July, 16 nations had issued green bonds worth more than $80B USD. Germany, Sweden, Mexico, and Egypt joined the club in September, with new offerings worth a total of $10.6B USD, and the United Kingdom announced its first green bond in November.

In Canada, the Province of Ontario was the first to issue a green bond in 2014, raising $3.05B CAD to fund transit and energy efficiency projects. In 2018, the Canada Pension Plan Investment Board (CPPIB) became the world’s first pension fund to enter the green bond market, with a placement worth $1.5B CAD. In 2019, green bond issuances across the country totaled about $7.0B US

Entering the mainstream

Canada’s decision to enter the green bond market is a significant nod to the future of sustainable finance.

As governments around the world adopt more ambitious greenhouse gas reduction plans ahead of next year’s United Nations climate change conference in Glasgow, investment will be one of the most important conditions for success. Green bonds will play an essential role, attracting capital to new projects and gradually mainstreaming the idea that every investment in the 21st century must be a sustainable investment.

Read the Institute for Sustainable Finance’s primer on green bonds and check out other resources at isfcanada.org.