Using Capital for Change: Green Bonds and Canada’s Transition to a Sustainable Economy

Infrastructure/Green bonds/Transition/Public Sector

Green bonds have been touted for their ability to drive sustainable economic growth by channelling capital toward environmentally-friendly projects, ensuring long term financial sustainability for countries. Canada’s recent re-opening of its second Canadian-Dollar denominated green bond has raised an additional C$2 billion. The 10-year bond is part of the government’s commitment to regularly issue green bonds through its Green Bond Framework. This framework includes certain nuclear energy projects, making Canada the first sovereign issuer to integrate nuclear funding into green bond proceeds[1]. This is a unique pathway taken by Canada to support clean energy while addressing their climate goals of reducing national greenhouse gas (GHG) emissions by 40% relative to 2005 levels by 2030[2].

Through this article, we explore why green bonds are an effective channel for investment, the challenges faced and a possible solution to improve investment efficacy with regards to Canada’s new bond issuance.

Green bonds can improve public sector access to green finance by tapping into private investments which steadies financing. Firstly, relative to direct government investments, green bonds can tap into vast pools of private capital [3]. This allows the Canadian government to mobilise funds from large investors who increasingly utilise ESG criteria to inform investment decisions. The expanded capital base allows green projects to be more ambitious in scope in comparison to public sector funded initiatives. This is especially the case with investments in renewable energy and wastewater management that have longer time horizons. To exemplify, the Low Carbon Economy Fund (LCEF), which supports projects that help reduce Canada’s GHG emissions, boost clean growth, and create good jobs, was funded $1.9 million using green bonds in 2022. This enabled them to install new equipment at a biogas plant in Toronto, expanding the plant’s processing capacity and improving organic waste management, which will result in the abatement of over 15,000 tonnes of GHG by 2030 [4].

Second, unlike one-time government grants or investments, green bonds can create a steady funding stream, and can be continually refinanced, creating a flow of funds to reach long-term environmental goals without needing to dip into their annual budget. To further elucidate, Canada’s government often sets aside budgets to invest in infrastructure development or maintenance each year, however, funds are typically disbursed as lump-sums, and there may be many competing projects which might lead to the side-lining of green projects. A green bond however, would ensure that such projects are more directly targeted with necessary funding that need not dip into government coffers [5][6].

While green bonds can channelise more funds for environmentally conscious projects, they may inadvertently favour certain kinds of investments over others. In the case of Canada, a large proportion of green bonds investments are being directed towards nuclear energy. The efficacy of nuclear power in many Canadian provinces is questionable. Nuclear energy is typically used for base-load, the minimum amount to be generated based on daily electricity demand. In the case in British Columbia and Manitoba which generate all their base load via hydroelectric plants, nuclear energy would not provide as positive an impact as it would [7]. Moreover, as purpose-specific green bonds gain popularity among investors, essential yet less appealing areas such as bonds for the maintenance of infrastructure or tax systems may face a possible shortage of funding, as investors only choose to invest in high-demand or higher-return areas.

To overcome this shortcoming of green bonds, transition bonds can be leveraged to target these systematically underinvested spaces.Transition bonds are focused on funding projects that transform traditionally high-emissions industries to operate with lower emissions. There are currently no such transition bonds being floated in the Canadian financial market. Since Canada relies heavily on natural resources, such as oil, gas and mining, a credible transition finance market would allow Canadian companies to access capital more easily. Canada’s Sustainable Finance Action Council (SFAC) has noted that in order to incorporate transition bonds, a science-based taxonomy would help promote investor confidence in the transition label and reduce greenwashing claims [8]. By adopting such a dual-approach model, Canada could support its existing high-emissions sectors which would accelerate its progress towards its 2030 GHG emissions target.

Ultimately, green bonds can effectively divert capital investment to environmental initiatives, given that they could target specific sectors. Nevertheless, it must be used as a part of a toolkit, with complementary funding strategies such as transition bonds. This can create a financial ecosystem that could support Canada’s pursuit of a sustainable transition towards a greener economy.

Research Analyst: Rhea Amit Samel

Research Editor: Pranav Shankar Kaundinya

References

8] Bardswick, Kathy, Sustainable Finance Action Council, Jonathan Arnold, and Sustainable Finance Action Council. 2023. “Investing in Transition – Exploring Canada’s New Transition Taxonomy Framework.” Sustainable Finance Action Council.

[1][3][4][6] Department of Finance Canada. 2024. “Canada’s Green Bond Program.” Canada.Ca. August 7, 2024.

[2] Haig, Steven. n.d. “The Critical Next Step: What You Need to Know About Canada’s 2030 Climate Target.” International Institute for Sustainable Development.

[5] Infrastructure Canada. 2024. “Housing, Infrastructure and Communities Canada - Funding Delivered Under the Investing in Canada Plan.” September 13, 2024.

[7] Wilde, Cassandra, Kinsey Nickerson, Josephine Deleon, and National Energy Board. 2018. “Nuclear Energy in Canada.” Report. Nuclear Energy in Canada - Energy Market Assessment. National Energy Board.