Introducing green bonds

Canadian investors have been buying bonds for decades. First, it was Victory Bonds to finance the war effort, then Canada Savings Bonds (CSB) to encourage savings and support government cash flow. Now, there’s a new bond on the horizon: Green bonds; and, the target this time is climate change.

The premise behind green bonds is simple: Investors buy privately managed, government-guaranteed bonds with modest returns and the money is invested in large-scale renewable energy projects that reduce carbon emissions.

“We need to do something to accelerate the deployment of renewable energy production, and we need to engage the Canadian public in what is essentially a nation-building project,” says Tom Rand, project manager of GreenBonds.ca and director of the private equity fund, VCi Green Funds. “It’s about a positive vision, stimulating the economy and realizing Canada’s potential as a renewable energy superpower.”

A popular idea

The idea for green bonds isn’t brand new. Most recently, the World Bank launched its first green bond last November, raising approximately $350 million (US) to fund climate change-related projects.

Even though the technicalities of a Canadian bond issue still need to be worked out, according to a recent poll by Nanos Research, the demand is out there: 82 percent of Canadians support the idea of green bonds and 62 percent say they’d purchase a green bond with an interest rate similar to that of a CSB.

Canadians want to do more for the environment than change a light bulb, says Rand.

Good for green energy producers

Green bonds are an effective way to give energy developers access to low-cost debt.

“A lot of the renewable energy sectors have the feature of high upfront capital costs but low operating costs,” says Andrew Heintzman, president and CEO of Toronto-based Investeco Capital (Note: Green Living and Investeco are owned by the same parent company, but independently operated.) For example, it takes large amounts of money to finance the installation of a geothermal system, but a lot less money to run it.

What’s more, banks are often nervous about making loans to companies interested in using green technologies (such as biogas) over a conventional power generator (such as coal) so they charge higher interest rates. The credit crunch has confounded this problem, making access to money even harder.

“What’s holding back growth [in the renewable energy sector] is basically just a financing challenge,” says Heintzman.

The cost of capital to energy producers is extremely important because it dictates the price of energy produced, explains Rand. The lower the borrowing cost, the lower the price of the energy produced. “In providing low-cost debt to renewable energy producers, we make renewable energies more competitive with their fossil fuel counterpoints,” he says.

Good for investors

In the face of market volatility and worries about a worldwide recession, green bonds would represent a safe and secure investment for Canadians. And though the returns would be relatively modest, they'd come with the bonus of helping the development of Canada’s green economy.

With green bonds, says Heinztman, as long as the projects are technologically sound and commercially viable,  “You’ve got a relatively well-established cash stream and return – I think that’s the basis of reasonable investment product.”

As for when green bonds will be publicly available – who knows? The federal Conservatives aren’t interested in the idea, but both the Liberal and New Democratic parties see the promise of green bonds. GreenBond.ca's Rand is shopping around the idea with the provinces, and Ontario’s Energy and Infrastructure minister, George Smitherman, is considering it, he says.

Combating climate change

The global reality is, we need to reduce greenhouse gas (GHG) emissions and maintain economic prosperity over the long-term—and green bonds may help do just that.

“If we make a green investment, we can not only stimulate the economy but put it back on a course that will lead to lower GHG emissions faster,” says Mike Kennedy, senior resource economist at The Pembina Institute. “That’s why this is a good moment to pull out the stops… and get good projects on the ground.”

Still, even Rand admits that green bonds are just part of the climate change solution.

Experts agree that the most effective way to reduce GHG emissions is through economic policy and by making it expensive to pollute, using initiatives such as carbon taxes or cap and trade systems. Until then, “Green bonds are a temporary measure designed to accelerate the transition into that environment,” he says.