Canada eyes early 2022 for issuing its first green bond

Canada plans to issue its debut "green" bond in the spring of 2022, a $5 billion tranche that will allow the North American nation to join the countries tapping private capital to tackle climate and clean technology solutions.

Green bonds, such as those Canada is planning to use to fund investments in climate and environmental initiatives, typically are issued to fund large-scale, capital-intensive, eligible green infrastructure projects such as energy efficiency, transit, or renewable power projects that result in positive environmental outcomes, including climate benefits.

"Sovereign bonds are generally very liquid, easy for investors to get in and out of," IHS Markit Executive Director Peter Gardett told Net-Zero Business Daily.

"That is appealing, perhaps especially so among dedicated green bond buyers, who are limited to a small segment still of the total bond market," said Gardett, who has been tracking a subset of green bond sales in 2021. He has been examining the use of bond proceeds, issuer language, and product-level alignment with climate risk reduction methodologies, including guidance provided by the International Capital Markets Association's (ICMA) Green Bond Principles.

Countries as well as companies are increasingly using or evaluating green bonds as viable financial instruments for raising capital for climate and clean tech solutions that align with their net-zero goals.

As of 21 December, the green bond total had nearly doubled since mid-September, reaching $443.4 billion. This total includes $43.1 billion in certified climate bonds, and $400.3 billion in debt the UK-based Climate Bond Initiative (CBI) said is aligned with its definition of green, The CBI has been tracking green bonds since the European Investment Bank issued the first one in 2007.

Taking "real action"

At the Leaders Summit on Climate in April, Prime Minister Justin Trudeau pledged to reduce Canada's emissions by 40% to 45% compared with 2005 levels by 2030, before reaching net zero in 2050.

On December 16, Trudeau sent customary year-end letters outlining his government's priorities to each member of his cabinet, including the newly appointed Minister of Environment and Climate Change Steven Guilbeault and Deputy Prime Minister Chrystia Freeland, in which he described climate change as an existential threat that requires "real action."

Trudeau particularly urged Freeland, who also serves as the country's Minister of Finance, to "ensure budgetary measures are consistent with the government's climate goals" and to launch an annual green bond program, starting with the initial $5 billion.

As of 21 December, IHS Markit's database shows about 16 countries or blocs issued a combined 16 sovereign green bonds in 2021. The data show the EU as the leading sovereign green bond issuer with about $58 billion in cumulative offerings, Germany ranks second with $53 billion, followed by UK in third place with $20.3 billion.

Canada is looking at the end of the first quarter of 2022 to release the framework underlying its $5 billion offering. The bond is set to be issued shortly thereafter.

Framework necessary for green bonds

The framework is essential because it clearly articulates the proposed uses of the bond's proceeds and whether they align with the Green Bond Principles, according to Sustainalytics, a Netherlands-based environment, social, and governance research and ratings analytics firm.

Essentially, the principles require a framework to clearly state how the government will select the projects it expects to back using the proceeds of the bond, the process for allocating those proceeds, managing those funds, and finally a commitment to reporting, Jonathan Laski, Sustainalytics corporate solutions director, told Net-Zero Business Daily 22 December.

According to the Canadian Ministry of Finance, Canada has engaged TD Securities and HSBC as advisers on structuring the bond, and appointed Sustainalytics to provide an independent, second-party opinion on its green bond framework.

Sustainalytics has provided second-party opinions for a number of governments, including Ireland and Turkey, as well as for companies that have issued green bonds. Laski said the company has provided services for around 35% of such transactions, citing Environmental Finance, an online news and analysis service reporting on sustainable investment and green finance.

Without going into specifics about its review of the Canadian bond framework, Laski said: "As with any issuance, we are retained by an issuer to provide an assessment of their framework."

So, when the bond issuer goes into the markets to secure investors, it can provide not just the framework, but also the independent opinion that lays out how the planned activities, investments, and expenditures are aligned with what the markets consider green, Laski added.

Trudeau, like his US counterpart President Joe Biden, has pledged to take a whole-of-government approach to tackling climate change.

Elsewhere in the Americas

Canada is not the first country in the Americas to issue sovereign green bonds.

Mexico in September 2020 issued an $890 million sovereign green bond linked to UN Sustainable Development Goals. Mexico followed up its debut in the sector less than year later with a $167 million green bond.

Colombia in late September issued a 10-year Colombian Peso 750 billion ($200 million) sovereign bond to fund environmental initiatives such as water management, cleaner transport solutions, biodiversity protection, and migration to non-conventional renewable power. It was the first green bond in the region issued in a local currency. Colombia issued another Colombian Peso 650 billion ($172 million) green bond on 27 October.

According to ICMA, Chile remains the green bond leader in Latin America, having issued $7.6 billion in the past three years.

According to IHS Markit's Gardett, sovereign green bonds are seen as attractive to investors, and are often oversubscribed, as was the case with Colombia.

"That appears to reflect a desire for green attributes over and above the ordinary elements of the bond, though some dispute this observation," he added.

Posted 22 December 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst