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Canadian Sovereign Green Bonds – Catalyst for the Nation’s Sustainability Targets

  • The commitment of issue of sovereign Green Bonds by Canada in 2021 will come to fruition in the first half of 2022

  • Various developed countries such as Italy, Germany and developing countries such as Egypt and Chile have already issued Green Bonds

  • Canada has underdeveloped sectors such as clean transportation, water and wastewater management, and green buildings, which are the venues for the use of proceeds from Green Bonds

Canadian Sovereign Green Bonds – Catalyst for the Nation’s Sustainability Targets

Published: January 2022
Source: GlobalData

In the first half of 2022, Canada will be joining countries that have introduced "green bonds" to change the direction of private capital to climate change mitigation opportunities. The tranche of $5 billion is considerably large, and it forms only 2% of Canada's target of $286 billion for the year. Canada has been criticized for dealing in Keystone gas pipelines and oil sands in recent years. This green bond initiative can help the country highlight its activist approach to sustainability.

Green Bonds – Financial Instruments Focused on Sustainable Finance

The Climate Bonds Initiative states that "Green bonds were created to fund projects that have positive environmental and/or climate benefits. The majority of those who use the proceeds secured them to finance projects that create positive environmental impact." Back in 2008, World Bank issued the first green bond, and after almost a decade, Poland issued the first sovereign green bond in 2017.

International Capital Markets Association (ICMA) identified broad themes that form principal green investment sectors. These sectors are Renewable energy, Energy efficiency (including energy-efficient buildings), Sustainable waste management, Sustainable land use (including sustainable forestry and agriculture), Biodiversity conservation, Clean transportation, Sustainable water management (including clean and/or drinking water), and Climate change adaptation. According to the World Bank, Renewable Energy and Energy Efficiency are the sectors with the highest number of projects.        

Various countries have already adopted the green bond initiative. Among developed countries, Italy recently issued its first green bonds worth 8.5 billion Euros, and the UK issued its second green bond worth GBP6 billion, which reported 12 times oversubscription. Developing countries such as Chile joined the green bond movement in 2020 with a $7.6 billion issue, and Egypt became the first Arabian country to issue green bonds worth $750 million in 2020. Organization for Economic Co-operation and Development (OECD) also shows a considerable inflow in emerging market economies' sovereign green bonds market.

Canada's Untapped Green Sectors

In Canada, investments in green bond-related sectors have been relatively stagnant. Renewable Energy generation shows a gloomy picture in Canada. While in the neighboring US and Mexico, renewable energy generation grew 9% and 17%, respectively, Canada reported a growth of 3% in 2021. As per GlobalData estimates, renewable energy generation in Canada is expected to grow at 15% CAGR between 2021 and 2025. Upcoming wind power plants by Northland Power, Solar PV plant by Greengate Power Corporation & Copenhagen Infrastructure Partners, and large hydroelectric power plants by Hydro-Quebec and BC Hydro are likely to contribute considerably to this Canadian initiative.

Regarding Clean Transportation, Canada set a zero-emission target for all new passenger vehicles by 2035, as highlighted in COP26. To achieve this target, the sales of new ZEV have to grow at a CAGR of 26%. The provinces of British Colombia and Quebec have already brought in ZEV regulations, and other provinces are expected to follow suit.

According to the Canada Organic Trade Association, the country's organic food market reported annual growth of 8.7% between 2017 and 2020. However, less than 1% (~1.4 mil hectares) of the total available land is under organic management, implying the potential for Canadian farmers to grow more sustainably.

The market value of Water and Wastewater Management in Canada has been growing, whereas the Green Building Construction market has been dormant for the past few years. Private players such as the Royal Bank of Canada entered the green building sector through investments in REITs such as Morguard, KingSett Canadian, and Canada Infrastructure Bank, which are expected to invest $35 billion in water and wastewater management infrastructure.

Canadian local governments of Ottawa, Toronto, and Vancouver have already launched their green bonds and intend to use the proceeds in various green initiatives in their respective provinces. The expected launch of sovereign green bonds will facilitate increased investments to help achieve the Canadian sustainability targets.

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