Opportunities growing in green bonds

Demand for green bonds – which fund environmental projects — grew exponentially in 2014, but slowed slightly in the first quarter of 2015.

Delegates to the Responsible Investment Association’s annual conference in Banff, Alta. found that out Monday. Further, the Canadian green bond market remains immature, with just a handful of issuers.

Yet there’s “an opportunity for large amounts of capital to be funneled to climate-friendly and environmental and social solutions,” said Simon McMahon of Sustainalytics in a panel discussion.

The market has flourished since 2013, especially now that corporate banks are getting involved, he says. Green bonds, whose funds are earmarked specifically for environmental or social projects, started in 2008 when the Scandinavian bank SEB approached the World Bank.

Fast forward to today, and the World Bank just approved its 100^th green bond issue, raising $8.3 billion. “We have seen a huge increase over the last year,” says Andrea Dore of the World Bank.

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When to invest

Brian Minns of Addenda Capital, an institutional manager focused on environmental, social and governance (ESG) integration, says his company uses three key aspects when evaluating sustainable investments: promoting sustainable financial markets, ESG integration and stewardship, all of which can also be applied to green bonds.

“If we look at promoting sustainable financial markets, we see that as raising standards, raising the bar, making the market a better place for investors and making sure there is an efficient use of capital.”

Minns says when evaluating green bonds, Addenda first looks at eligibility. Then, he makes sure the issuers are providing enough information so he can evaluate the bond’s purpose. “These are multi-year investments, so we are looking for the issuer to come back and report on what the proceeds were used for. Increasingly, we are looking for some impact reporting as well. Finally, we would like to see independent assurance: a third party providing a second opinion that the funds were held separately and flowed through to the project.”

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Paul Belanger of RBC Capital Markets says after clients expressed interest, the bank watched the international green bond market develop first. Canada didn’t get on board until last year, he noted. “We’re at the early stage and people need to be educated.” Green bond issuance worldwide totalled $37 billion in 2014, and although Q1 2015 has been slower than anticipated, Belanger is optimistic last year’s numbers will at least be matched.

In Canada, Ontario was the first to issue a Canadian dollar green bond, followed by TD Bank, then an offering from a hospital in British Columbia. In total, Canada represents just 1% of the global market, Belanger noted. “We should be a little further ahead,” says Belanger. “I am confident in my discussion with potential issuers across Canada that we will see this market grow.”

Adds McMahon, “People are disappointed with the start to 2015 but are overall quite bullish.”

One major challenge for green bonds is getting them to the retail investor. “That’s something that needs to be addressed,” says Belanger. Minns adds, “There’s not enough product to sell to clients.”

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Doug Watt is an Ottawa-based writer and editor, covering the RIA conference in Banff