TORONTO Canada could grow into a thriving market for climate friendly "green bonds" if the federal government meets a campaign pledge to turn to this type of financing.
Proceeds of green bonds are designated for projects that benefit the environment such as clean transportation and renewable energy.
Canada is preparing to spend more than $180 billion over 12 years to support infrastructure, including green infrastructure.
Green bond issuance by the government could kick-start deals from the private sector and boost liquidity in the green bond market. This might reduce the cost of borrowing for environmental projects, given growing demand from socially responsible investors.
Currently, "even if you want to buy, you can't. There are not too many new issues and the issues that come, they are small in size,” said Hosen Marjaee, senior managing director, Canadian fixed income at Manulife Asset Management. According to the Manulife website, it has $135 billion assets under management in fixed income.
Last year, Canadian dollar issuance accounted for less than $1 billion of the fast-growing global green bond market which totaled $82 billion, a report by RBC Capital Markets showed.
"If the government of Canada issued green bonds, that would support the market. It may bring in other provinces or corporations to issue as well," Marjaee said.
The Canadian government's "aggressive green agenda," which includes introduction of carbon pricing in 2018, sets the stage for Canada to become the third sovereign issuer of green bonds, after Poland and France, RBC said.
A spokeswoman for the Canadian finance ministry said the government was monitoring developments in the green bond market.
"Conventional bond markets continue to offer our government the most cost-effective manner to support these commitments," said ministry spokeswoman Annie Donolo.
Still, Canadian government and private sector issuers have the potential to issue at least C$56.3 billion ($42.3 billion) in green bonds in the fiscal year ending March 2018, if all eligible climate friendly projects were financed by green bonds rather than traditional bonds, a report released last week by Corporate Knights, a Canadian quarterly magazine, said.
In addition to issuing bonds, the government could release guidelines to spur private-sector involvement, Corporate Knights CEO Toby Heaps said.
Chinese green bond issuers have come to dominate the global market after the country's regulatory authorities released guidelines. Improved liquidity may add a so-called "greenium" to any Canadian bonds, lowering the cost of borrowing below that of conventional bonds.
Canada has federal and provincial governments with "big green ambitions" and many interested investors, said Sean Kidney, chief executive of the investor-focused Climate Bonds Initiative. That's "a pretty good recipe" for a robust market.
(Reporting by Fergal Smith; Editing by Denny Thomas and David Gregorio)