Graphic by nik harron
Ontario made a small splash in the financial world at the end of October when Premier Kathleen Wynne and two top cabinet ministers announced the province was set to become the first Canadian jurisdiction to issue “green bonds,” a debt tool for governments to raise money solely to fund environmentally friendly initiatives.
"These bonds will help attract institutional investors, and they will be competitively priced based on what the market bears," said Finance Minister Charles Sousa at the announcement.
Craig Alexander, senior vice president and chief economist with TD Economics, realized the potential of green bonds as a way for government to raise funds for significant but often underfunded environmental initiatives. He also realized little was known about the next big thing in green investing. On November 1, 2013, Alexander issued a special report on green bonds that attempted to bridge the gap between their potential and what possible investors knew about them.
“Think of them as victory bonds for the environment. The scope of projects categorized as ‘green’ is determined by the issuer and can be broad,” he wrote. “At one end of the spectrum, the instrument could be tied to mitigating and adapting to the effects of climate change. Alternatively, the green bond could have a narrow focus and be tied to a specific environmental issue or technology, such as solar and wind energy projects, energy retrofits and transportation.”
As important a tool as they can be for governments and even private companies to raise capital for environmental initiatives, green bonds are not a panacea for solving the underfunding of green projects, Alexander notes. However, “the bonds provide a steady stream of capital over many years, allowing projects to be launched and kept afloat before they become profitable.”
Ontario is following the World Bank’s lead on the green bond file. The global financial institution began issuing green bonds in 2008 as an attempt to raise funds to help combat climate change and has, to date, issued more than US $4 billion worth of green bonds through 59 transactions in 17 global currencies. Some of those projects include reforestation programs, energy-efficient buildings, public transportation initiatives, greenhouse gas emission reductions and constructing renewable energy installations.
In October, Wynne and Sousa were joined by Toby Heaps, founder of Corporate Knights magazine and a booster of the green bond system, in announcing Ontario’s planned move.
"Long-term investors really want to invest in climate-friendly investments with a fixed income,” Heaps said at the launch. “These are the kinds of investors that if there were a green bond they'd be beating a path to the doorstep to buy them.”
Despite the first green bond being issued only six years ago, the market for them is substantial, tapping into US $95 trillion worth of demand. Investors in charge of large pools like pensions are increasingly looking at ways to invest in environmentally sustainable projects to be seen as green, making the appeal of green bonds even stronger. In touting the popularity of green bonds, both Heaps and Sousa referenced the state of Massachusetts, which in June this year received $130 million in green bond bids for only $100 million in bonds the government was issuing.
For those worried about the Ontario government taking on more debt of any kind as it attempts to pay down its $11 billion deficit by 2017-18, both Heaps and Sousa assured reporters this was not the case. Issuing a green bond doesn’t necessarily mean the government is assuming new debt, they argued, so much as they’re “replacing existing debt with more accountability."
To ensure the bonds are being spent to build what investors are investing in, the green bonds will be third-party certified. The province hopes to issue Canada’s first green bonds in 2014.
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