By Jonny Wakefield
December 18, 2014
The fixed income market got a whole lot greener in 2014, according to a new report from an Ottawa-based think tank.
Three Canadian projects helped transform green bonds—debt securities issued specifically for climate-friendly projects—from niche market to potentially game-changing financial instrument this year, according to a reportreleased by market research firm Sustainable Prosperity.
Bonds are essentially an I.O.U. issued by a debtor to a creditor. The issuer is obliged to pay back the bond's principal amount, usually with interest, depending on the terms of the bond.
The Canadian market for "climate-themed" bonds exploded in 2014—from zero dollars in mid-2013 to nearly $1.2 billion U.S. by October of this year.
Major green bondsissuedby TD Bank, the Ontario provincial government and Export Development Canada drove that explosion.
The $500 million bond issue from the Ontario government will go to fund a light rail project, while other bonds have funded everything from wind farms to tide retention walls in cities threatened by sea level rise, the report states.
Worldwide, banks and governments now owe around $51-billion U.S. on green bonds.
That number grows if you include environmentally-friendly issuances that are not specifically labeled as green bonds, according to the report.
So far, the Canadian experience shows that green bonds are not speculative. According to Sustainable Prosperity, 92 per cent of green bonds issued in Canada were "investment grade"—as opposed to poorly-rated junk bonds.
In a release, Alex Wood, Senior Director of Policy at Sustainable Prosperity, noted that classifying bonds as "green" has become a powerful marketing tool.
"The challenge will be to ensure that all market operators work to demonstrate that the market is truly shifting capital to climate solutions rather than facilitating green wash," he said.
The worldwide growth in green bonds has some experts speculating on the reciprocal effect the bonds could have on fossil fuel divestment movements.
Some believe a strong market for green bonds could ease concerns about the potential impacts of climate regulations on capital markets.