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Canada's green bond opportunity

Legal and financial professionals need to come together in search of market-friendly mandatory disclosure requirements for ethical bonds.

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The development of green bonds in the global debt market is a sign of our time. The climate crisis is becoming increasingly urgent, and political, corporate, and world leaders are committed to sustainable and climate-friendly living. Canadian commercial and political leadership is no exception. Just earlier this month, Prime Minister Justin Trudeau delivered a compelling national statement at the COP26 that advocated for "increased global ambition and action" toward a sustainable future. He paired this statement with the verity that Canada is primed to use and expand its existing $100 billion (CAD) invested to date toward expertise and labour for innovative developments.

Few junctures in history hold as much promise of opportunity for Canadian innovative developments as the one our global green bond market does. The need for environmentally sound and sustainable living is urgent, the drive and funding for green innovations are plentiful, and Canada's scientific knowledge and innovative technology sectors are rapidly expanding. Canadian currently ranks 11th in cumulative global issuance of green bonds, but it is the 10th largest country. Our infrastructure and talent pool for sustainable developments suggest that, as a nation, we are well poised for more innovations that may seek financing through the debt market.

What's more, the global green bond market is on an astounding trajectory. Last December, it reached $1 trillion (USD) in cumulative issuance since inception. A hefty chunk of this came from 2020 alone, in which a record-breaking $269.5 billion (USD) in green bonds were issued. In July this year, Moody's Investor Service raised its forecast for global issuance of green bonds in 2021 to $450 billion (USD); merely months later in October, it updated this forecast to exceed $1 trillion (USD) in 2021.

"Green" or "ethical" bonds are relatively recent theme-centred bonds, which purport to finance specific green projects or initiatives. Some are certified by agencies such as the Climate Bonds Initiative and some are not. As such, they are still very much the "wild west" for analysts, financial advisors, and regulators. It is increasingly difficult to discern just how "green" a green bond is these days. Analysts and advisors struggle to determine the true impact of their investments based on traditional data, and the financial industry has started to tie interest rates to performance. Regulators recognize the industry's predicament, and they are reacting.

Earlier this year, Ontario's Capital Markets Modernization Taskforce recommended mandatory ESG disclosure for all Ontario non-investment fund bond issuers. The task force stipulates these mandatory disclosures will need to satisfy the recommendations of the Financial Stability Board's Task Force on Climate Change-Related Financial Disclosure. The Ontario task force recommends a transition period (dependent on an issuer's market capitalization) of up to five years, and suggests "a comply or explain" approach. Their recommendations also called for all Canadian securities regulators to construct and implement uniform standards across their respective provinces.

If Canadian securities regulators are to follow these recommendations, the clock is ticking for some good old-fashioned solution building. These solutions will need to be informed by the practical realities of disclosure requirements so as not to produce a chilling effect on Canada's potential in the green bond market. This is an exciting opportunity for legal and financial professionals to come together. If you're like me, you might also see this as necessary. The extent to which the green bond market is a viable vehicle for financing Canadian issuers of all sizes will depend on whether securities regulators can achieve a market-friendly and practical balance of disclosure requirements to facilitate this end.

The Financial Stability Board's Task Force on Climate Change-Related Financial Disclosure is an international task force comprised of 31 members from five continents, over half of which are "experts from the Financial Sector." These experts can inform Canadian regulators on the international market implications from lending, underwriting, asset management, and investing perspectives.

Canadian bonds do not attract as much international investment compared to their global contemporaries, but Canada is primed for a stronger presence on the world stage. As Canadian climate-aligned issuers can now refinance their maturing liabilities via the "certified" green bond market and take advantage of increased visibility and other benefits offered by such instruments, international input is all the more vital. Only six Canadian climate-aligned issuers in the Climate Bonds Initiative's 2021 North American market report have certified bonds.

Canada's capital markets' self-regulating organizations (SROs) are national entities, and they are governed and funded by their members, who are various types of dealers, advisors, and analysts. SROs are often touted as having superior positions to government regulation by virtue of their national governance and their proximity to the markets. The Ontario task force that recommended mandatory disclosure for green bonds also recommends consolidating Canada's SROs in the same report. These consolidated bodies can set their own disclosure requirements based on their knowledge of the practical realities for their members. The Ontario task force's "comply or explain" approach to ESG disclosure prompts questions from these parties about what might be required in the "explain" function. When dealers and advisors themselves can inform the creation of regulatory disclosures for green debt instruments, this adds to investors' confidence that fair balance is achieved, and it ensures all parties will have the information they require to assess the impact of their investments.

Financial experts possess the expertise and industry acumen to understand limitations to financial reporting and other disclosures. They also understand the impact that disclosure requirements can have on various issuers. By collaborating with these parties, Canada's regulators can build market-friendly solutions they may not otherwise consider.