Green Bonds

What are green bonds?

To answer this, let’s first define bonds. A bond is a financial debt instrument used to borrow money or raise funds. Investors purchase bonds from firms, sovereign governments, or municipalities and receive periodic interest payments and the repayment of their initial investment (called the principal) at a future date. Bond terms, conditions and agreements outline the timeframe and frequency over which the borrower will repay the investor including interest payments. Bonds are typically issued to raise funds for ongoing firm investments and/or for specific projects, such as a bridge or a new factory.

Green bonds are a type of bond designed to raise funds to invest in environmental or climate change mitigation projects. Green bond issuers commit to provide investors with detailed on-going information on the projects and infrastructure supported with the green bond proceeds. In November 2008, the World Bank issued its first green bond in response to a request from a group of Swedish pension funds seeking to invest in projects that address climate change. Labelled the world’s first green bond, it became a blueprint for today’s green bond market, providing options for investors to support climate solutions with their investments without sacrificing financial returns.

What are the criteria for green bonds?

• Use of proceeds: Proceeds are exclusively used for legally documented green projects.
• Project evaluation and selection process: The issuer should clearly communicate the environmental objectives and the process used to determine that the project fits within eligible green project categories.
• Management of proceeds: The net proceeds of the green bond should be credited to an account for tracking and verification.
• Reporting: The issuer must follow mandatory reporting on the use of the proceeds to ensure the integrity of the market.

Why are green bonds important?

Climate change has drastic impacts on our physical world and our financial systems. It requires countries to transition toward smart, low-carbon economies over the next two decades or risk being left behind. This rapid transition required to address climate change means a significant involvement of the financial markets in funding climate-friendly and clean projects. Green bonds are also a barometer for the impacts of climate change on the financial system. The development of vibrant green bond markets allows countries and organizations to mobilize traditional debt investments into projects that can have positive and environmentally friendly impacts for society. Green bonds also give investors an opportunity to meet their Environmental, Social and Governance (ESG) objectives by creating low-carbon investments.

What are the guidelines?

To avoid the practice of using unsubstantiated or misleading claims to market a company or a product as environmentally friendly, the International Capital Market Association (ICMA) consolidated the Green Bond Principles (GBP) in 2014. Regularly updated, the principles are voluntary and act as guidelines for labelling a bond as “green.” They serve as a starting point for issuers and investors in promoting and ensuring the integrity of the green bond label. The guidelines recommend transparency and disclosure of the use of the proceeds of the bonds so that investors can evaluate the environmental impact of their green bond investments.

Who are the issuers?

Any agency that can issue a bond can also issue a green bond. This includes governments, corporations, financial institutions, and recently, even individuals approved through the World Bank. Any institution fulfilling the credit requirements is eligible to issue a green bond. Today, issuers from more than 50 countries have issued green bonds. The Climate Bond Initiative (CBI) estimated issuance volumes of green, social and sustainability (GSS) debt of nearly half a trillion ($496.1-billion US) during the first half of 2021, representing 59 percent growth from 2020, with green bond issuance doubling relative to H1 2020 to $227-billion US.¹ CBI further estimated cumulative GSS issuance of $2.1-trillion US by the end of the first half of 2021, including cumulative green debt issuance of $1.3-trillion US. CBI forecast green bond issuance to hit $450-billion US during 2021, and that $1-trillion US in annual green bond issuance was within reach by 2023.

It is notable from the CBI report that Social and Sustainability (S&S) bonds comprised 47 per cent of total GSS issuance during the first half of 2021 (at $233.3-billion US), bringing total S&S issuance since 2006 to $867-billion US, with issuance up 18 per cent versus the first half of 2020. The Sustainability-Linked bonds market segment of S&S bonds in particular, rose exponentially, with issuance in H1 2021 amounting to $32.9-billion US (6 per cent of the total). This contrasts with none being issued during H1 2020.

What's happening in Canada?

The first Canadian green bond was issued in 2014 by the Province of Ontario to fund transit and energy efficiency projects. Ontario is currently the largest Canadian issuer with 10 green issues totalling $10.75-billion Cdn., of which $10.25-billion is currently outstanding.² Another major issuer is the Canada Pension Plan Investment Board (CPPIB), the world’s first pension fund to issue a green bond totalling $1.5-billion in 2018. In 2019, CPPIB issued its first euro-denominated green bond. The proceeds were to be used to invest in renewable energy, water and wastewater management projects as well as certified green real estate.

More recently, within Budget 2021, it was announced that the federal government will publish a green bond framework in the coming months in advance of the inaugural sovereign green bond, with an issuance target of $5-billion.³ This represents an important signal to the financial sector. Read more about Canada’s first-ever green bond.

The value of federal government green bonds goes beyond the uses of the funding received since they can:

• be used to price or hedge other green or sustainability bonds;
• help establish a green yield curve, enabling Canada to participate in a global green yield curve; and,
• educate financial markets by giving investors regular, detailed updates on the green projects their money is supporting.

Canada’s green bond market is relatively small compared to the market in the United States, Germany, France and China. However, like global issues, Canadian issues continue to increase steadily in size and frequency. During 2020, Canadian green bond issuance exceeded $8.5-billion US, up from $7.0-billion in 2019, $5.5-billion in 2018, and just $537-million in 2016. As of Q1 2021, Canada had issued a cumulative total of $35-billion US of GSS debt, placing the country 11th globally, with green bonds and loans originating in Canada comprising $30-billion US of the total.⁴

• ¹ Source: Climate Bonds Initiative, “Sustainable Debt Market: Summary H1 2021,” September 2021.
• ²Source: Ontario Financing Authority.
• ³Source: Borden Ladner Gervais LLP, "BLG".
• ⁴Source: "North America: State of the Market 2021", Climate Bonds Initiative, 2021.