As social consciousness increasingly turns its attention toward looming environmental issues – including meaningful opportunities to curb and adapt to climate change – so, too, are investors. Few things highlight this trend more strongly than the rapidly-growing, and largely over-subscribed, green bond market.

In 2014 alone, $37B in “green” bonds were issued across the world, up from just $11B in 2013.¹ Canadian companies accounted for $1.3B of these bonds.² The Climate Bond Initiative, an international non-profit organization, doesn’t view this trend as short-lived. In fact, it anticipates global green bond issuance to triple again in 2015, and approach the $100B mark.³ By framing debt as “green”, companies have the opportunity to tap into an emerging “responsible investor” segment,improve their environmental reputation and diversify their investor base in the process. This should cause any companylooking for funding to take notice. 

Who’s going ‘green’?

Until about 2012, supra-nationals were the sole issuers of green bonds worldwide.⁴ In the past few years, however, the tides have turned – government and corporate issuance is growing.In 2014, there were 20 new green bond issuers⁵ – three of which were Canadian. TD Bank, Export Development Bank of Canada and the Province of Ontario all introduced green labeled bonds totaling $1.3B. There were also climate-themed bonds being issued across the country – bonds that were not yet marketed specifically as being ‘green’ – with the most prominent issuer being Hydro-Quebec.

The corporate sector is an area of potentially significant growth. While companies in the renewable energy segment may be particularly well-suited to these types of bonds, any company having projects or activities with green benefits may be eligible for funding. Unilever, for example, issued a green bond last year to finance projects related to waste, carbon and energy efficiency in their factories. So far, companies in the real estate, power generation and utility sectors are receiving the most investor attention, as well as transport, finance and agriculture/forestry. 

How are green bonds different?

Green bonds aren’t always remarkably different from other types of bonds; they’re often vanilla bonds with green features.But those features require some extra legwork.The proceeds from green bonds are supposed to go exclusively toward green activities and projects, such that setting ongoing processes in place to achieve this is essential. As is implementing transparent reporting practices to illustrate this is indeed being done. This includes clearly defining and outlining criteria to establish green project categories, developing and implementing controls over use and management of proceeds,and potentially hiring an independent third party to vet your green bond framework and initial compliance thereto. 

To further establish and maintain trust with investors, periodic reporting and assurance on the use of the proceeds is also important. Whether this is done on your website or through formal sustainability reports, the reporting should include disclosures on a number of essential features – particularly a description of the specific investments made with the proceeds and the environmental benefits being realized. Setting standards.

Since green bonds are a relatively new financing and investment vehicle, there is still some way to go in terms of establishing complete and consistent governing standards.That being said, there are important existing resources designed to offer guidance in the issuing of green bonds. A group of large financial investors, issuers and underwriters formed an alliance to develop the Green Bond Principles.These principles outline disclosure, management and reporting obligations related to green bonds. The Climate Bonds Initiative is developing standards that define what is considered as a ‘climate bond’ and criteria for certain types of climate-related projects, such as wind energy and low carbon buildings. 

Various third-party service providers, like KPMG, can assist in determining what constitutes a green bond, help establish appropriate frameworks, processes and controls, advise on initial and ongoing reporting requirements, provide audit and assurance services on these reports, and more broadly help your organization realize its environmental targets. 

It’s not easy being green – but is it worth it? While green bonds are in their infancy they show a lot of promise: they simultaneously respond to different needs from organizations, broader society and investors. First, organizations require financing of larger scale projects and, with little additional effort, give themselves the opportunity to improve credentials as responsible organization. Broader society seeks measures to mitigate and adapt to looming environmental issues, including climate change. And finally, the institutional investors are seeking stable returns while meeting their growing commitment to responsible investing – in Canada alone, assets under management by responsible investors doubled over the last years to over CDN$1 trillion⁶. So, if this type of bond is in line with your organizations’ goals, it could be worth an extra look. 

Footnotes:

1 RBC Capital Markets, February 20, 2015. “Green Bonds: A market coming into its own.”

2 Climate Bonds Initiative, 2014. “Canada Report: Bonds and Climate Change 2014.”

3 RBC Capital Markets, February 20, 2015. “Green Bonds: A market coming into its own.”

4 Ibid

5 Climate Bonds Initiative, 2014. “Canada Report: Bonds and Climate Change 2014.”

6 Responsible Investment Association, 2015. “2015 Canadian Responsible Investment Trends Report.”