Addressing climate change requires strategic thinking, public- and private-sector coordination and global cooperation. As part of the global strategy to reduce greenhouse gas (GHG) emissions, Canada, along with most countries, adopted the 2015 Paris Agreement and has committed to reducing its GHG emissions through policy (e.g., carbon tax), regulatory measures and support for clean technologies and innovation. As policies and attitudes toward climate change shift, many mainstream investors are seeing the potential economic opportunities of a clean or low-GHG economy.
Canada is still a small player in the global green bond market, but its role as an issuer is growing steadily. Investors with specific ESG mandates find Canadian green bonds attractive, and there remains significant opportunity for further issuance, especially
from the private sector. DBRS expects that as global climate change initiatives strengthen, and the push toward environmental sustainability increases, the Canadian green bond market will continue to thrive.
The green bond market is still relatively young, having launched in 2007 with issuance
from the European Investment Bank and the World Bank. Since then, the bonds have
become increasingly popular, with a record global issuance of $183.2 billion in 2018
(including the newer financing product — green loans — totalling $6.6 billion) and
$37.9 billion already in 2019 (including $0.2 billion in green loans) as of March 19, 2019.
Though the market was initially dominated by supranational development banks, the
class of green bond issuers has expanded significantly since 2007.
Broadening base of issuers
International development banks remain among the world’s largest green bond issuers,
but strong institutional investor demand has allowed for a broadening base of issuers
to enter the market, including private- and public-sector institutions as well as issuers
from emerging markets. Exhibit 1 illustrates the green bond market share by issuer type over the past decade. DBRS notes the increase in asset-backed securities, corporate and financial issuance over time compared with a marked decrease in supranational and project finance issuance.
As the global attitude toward climate change shifts, DBRS expects green bonds to continue growing in popularity as mainstream investors look for environmentally friendly investment opportunities.
Green grows in Canada
Although the Canadian green bond market has grown markedly over the past three years,
there is still a fair amount of growth potential. Canada’s green bonds are attractive to
international and domestic investors because they often trade at a premium to standard
bonds on the secondary market as a result of their scarcity (higher demand than supply)
and generally shorter terms to maturity as well as the involvement of dealer syndicates.
Canadian issuance is currently led by the public sector, particularly Ontario and Québec,
along with a growing number of municipalities. Public-sector issuance is expected to
continue in line with Canada’s commitment to the Paris Agreement and other global
climate change mitigation plans. Ontario recently indicated it plans to sell more green
bonds in 2019, as a flat yield curve provides the province with an advantage to issue
more 30-year debt, given the decline in yields for the longer tenor.4 Moreover, for highly
motivated investors seeking green investments, the United States’ withdrawal from the Paris Agreement may make Canada’s green bond offering an attractive alternative.
There is also room for growth from the corporate sector in Canada, which has yet to
make as significant an impact on the green bond market as it has elsewhere. DBRS
expects that this will change as the green bond market matures and as more corporations
seek green-project funding from investors committed to environmental sustainability.
This is especially apparent in the number of large financial institutions such as RBC, the
Toronto-Dominion Bank (rated AA with a Positive trend by DBRS) and Sun Life Financial
Inc. (rated “A” with a Stable trend by DBRS), which have each recently developed verified
sustainability frameworks for green bond issuance that align with or address the ICMA’s
Green Bond Principles (GBP). The principles provide a measure of transparency around the issuers in terms of how their green bond criteria are defined and give comfort to investors who are assured that their investments and any proceeds thereof are not being greenwashed.
Read the rest of the DBRS report "Green with Envy: Canada’s Green Bond Market Is Growing into a Global Player" here
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