The global market green bonds is on track to grow this year, and the Canadian market is poised to follow this overall trend in the years ahead, suggests a new report from the Investment Industry Association of Canada (IIAC).
Green bonds were created in 2007 to fund projects that have positive environmental and/or climate benefit.
The report, Opportunities in the Canadian Green Bond Market v2.0, finds that in the first half of 2018 global green bond issuance was up by about 4% US$74.5-billion to compared with the same period in 2017; full-year issuance is expected to exceed US$200 billion, up from US$156.9 billion in 2017.
As the global market grows, the variety of issuers that are launching green bond issues is continuing to expand, with issuance by government entities, corporations and financial institutions growing rapidly, “in response to strong institutional investor demand,” the report states.
So far, investment in renewable energy projects takes up the largest share of green bond funds , this is seen expanding to a wider range of initiatives, including waste, land use, and adaptation investments.
“Ultimately the issuance of green bonds will depend on local market conditions, including borrowing rates, market liquidity, investor appetite, regulatory factors and the priority placed on socially responsible investing,” states the repot.
Canada is “in the mix” in terms of green bond issuance, according to the report, although the market remains notably smaller than the leading issuers — the United States, China and France. Looking ahead, the Canadian market is set to follow the global growth trend, the paper adds.
“The Canadian green bond market is poised to grow in tandem with the global market as the world moves to reduce carbon emissions,” the paper states. “Canadian debt capital markets will embrace the green market sector as the increase in socially and environmentally related projects are funded by mainstream investors committed to sustainable projects.”
Some of the early Canadian issues were placed in international markets, but domestic demand has been growing, the report notes, particularly as Canadian institutional investors have increasingly adopted responsible investing guidelines in recent years. “As the Canadian green bond market matures, more investors are likely to participate in this market which will also support market liquidity for established names in the marketplace,” the report states.
Canada’s green bonds often trade at a premium in the secondary markets, the report adds, “likely due to the scarce nature of Canadian green bonds.” Additionally, investor demand in the secondary markets has growth potential thanks to the involvement of dealer syndicates in Canadian offerings, according to the report, which provides “a backstop of liquidity for investors gives comfort to investors.”
To date, Canada’s green bond supply has largely come from the public sector. “Various provincial governments have taken important steps to recognize the importance of climate change issues by implementing carbon taxes, cap and trade and other initiatives,” states the report. “Ontario continues to be a leader and has shown a strong commitment to green bond issuance. Quebec will likely issue and add to green bond supply.”