In “The Next Green Bond Wave: Should Ottawa Step In?,” author Glen Hodgson explores Ottawa’s decision to issue green bonds, why the move is desirable and how to properly implement it.
International development banks have been present in the green bond space since they were first introduced in 2007 and have been joined by governments, state enterprises, business enterprises, and financial institutions as issuers. Green bonds are any type of bond where the proceeds will be exclusively applied to finance or re-finance new or existing green projects, and are a core element of a well-developed system of green finance which has been steadily expanding within the global financial system.
Green bond issues were surging prior to the pandemic, with US$257.7 billion issued globally in 2019 and C$9.25 billion in Canada. Hodgson notes Canada has seen the green bond market grow rapidly over the past five years, growing by 63 percent in 2019 alone. As the economy recovers from COVID-19, so should the popularity of green bonds.
Investors are increasingly looking for ways which demonstrate that negative externalities – like GHG emissions – are being addressed, explains Hodgson. The same might be said for issuers who want to show that they are focused on reducing GHG emissions through their activities. Because of this, both providers and users of investment capital have gravitated toward green bonds as a tool that can mobilize and allocate capital for environmental purposes.
The report supports Ottawa’s involvement in green bonds as it would allow the federal government to set standards and create a baseline price, creating an environment where green bonds at the private level are traded properly in a functioning market.
In addition, the 2019 Expert Panel on Sustainable Finance recommended that Canada develop transition-oriented fixed income taxonomies, ideally by adopting a common international standard. Well-defined transition financing, including transition bonds, is important for reducing GHG emissions in Canada’s oil and gas sectors and other emissions-intensive sectors, argues Hodgson, and the federal government could consider the role it might play in helping to develop the market for transition finance.
“Ultimately, the federal government should expect to engage all available economic and policy instruments if it is committed to reducing GHG emissions and reach net-zero emissions by 2050 within a well-performing economy,” concludes Hodgson.
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