The issuance of green bonds by Canadian-based and supranational organizations has reached $9.6 billion this year, surpassing the $7.2 billion mark of 2018, according to data from Laurentian Bank Securities.
Economist Dominique Lapointe and analyst Andrès Quintana recently released an update on research and strategy for green bonds with a focus on Sustainable Development Goals (SDG)-linked and transition bonds. A green bond is used to fund projects that have positive environmental and climate benefits, the majority of which are asset-linked bonds that are earmarked for green projects but are backed by the issuer’s entire balance sheet.
The data indicates that while the governments of Ontario and Quebec were the single largest block of issuers in 2018, the financial sector, including financial institutions and pension funds, have taken the lead in 2019. Two deals raising a total of $1.4 billion were completed this year by Canadian banks (RBC and Scotiabank). This compares to a single $600 million deal in 2018 done by Manulife. In 2019, Canadian Pension Plan Investment Board (CPPIB) issued two green bonds: a euro medium term note ($1.5 billion) and a private placement ($665 million).
Interestingly, they point out, all green bonds issued by the financial sector in 2019 were denominated in foreign currency (euros and U.S. dollars). Combining banks and pension funds, the financial sector now forms the largest block of issuers in Canada ($8.3 billion outstanding in Canadian dollars equivalent). Domestically, provincial issuance rose from $2 billion in 2018 to $2.5 billion in 2019. There was no significant increase in municipal and agency green bonds.
The economists raise another interesting point. Companies looking into issuing green bonds have to meet certain criteria and they usually fall under specific categories that include aquatic biodiversity conservation, efficiency, pollution prevention and control, renewable and transportation. Oil and gas, mining and some transportation companies would usually not meet the criteria. This issue might lead to the following quandary: is the main goal of sustainable finance to attract capital for green projects or to maximize greenhouse gas emission reduction? If it is the latter, then the data suggests that oil and gas production is where maximum efficiency can be achieved. In 2017, 27 per cent of all carbon dioxide emissions in Canada came from oil and gas production. This was closely followed by the transportation industry, including motor vehicles, airplanes and ships, with 24 per cent of total emissions.
The global market has seen the advent of new thematic bonds related to companies wishing to transition from polluting sources of energy towards environmental-friendly operations. The report attributes the warm reception from investors to the fact that large emitters have significant potential to reduce carbon dioxide emissions with transition and SDG-linked funding strategies. They advise that developing a precise taxonomy seems to be the next step towards clearly identifying sustainable-transition deals.
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