Green bonds can raise capital for transit and energy efficiency

A plan to float a “green bond” to finance transit and potentially other investments in sustainability was presented yesterday by the Ontario government.  Nothing new about bonds – they are a tried & true way for governments to raise cheap money anchored by their favourable credit rating.  However, there is a growing interest in bonds backstopped by specific, certified “green” projects because an increasing number of major investors want to have ‘impact investments’ in their portfolios.

The government indicates that local and international investors will be consulted regarding how to structure the offering, that internationally-recognized certification will be sought, and that legislation would be needed.

The global volume of green bonds is tracked by various organizations including HSBC and the Climate Bond Initiative. An Economist article cites their estimate that about $174 billion in climate-themed bonds (mainly transport, but also clean energy and building efficiency) have been issued since 2005. Most green bonds (82%) are issued by corporations followed by private and development banks, but there is huge potential for governments to get into the game.

Green bonds would be an excellent and affordable source of capital for energy efficiency retrofits as well. A provincially-issued bond for retrofitting the public sectors’ building portfolio might even fit the definition of a revenue bond, returning resources to the public coffers as well as investors.  The opportunity to aggregate and package already-financed retrofits is also a green bond strategy, providing a new source of capital for more retrofits.

It will be interesting to see if some of the offering is targeted to retail purchasers (as well as the big institutional investors) – that could be a great way to engage the public feel directly invested in The Big Move while making some money.

But let’s not forget that bonds are simply borrowed capital – this is government debt that has to be paid back.  The costs of transit expansion must ultimately be covered by new revenue raised over time through a variety of revenue-generating tools available to the government.  The key will be to ensure that the new funds raised are clearly designated, dedicated and transparently used for transit expansion, ie: paying back that green bond.

I attended a session about green bonds last year hosted by Sustainable Prosperity and TD Bank (which just released a paper on the subject), headlined by Climate Bond Initiative sparkplug Sean Kidney.  A key conclusion was that “in this early stage of development for green bonds, governments can play a role in growing the market by creating a secure policy environment for environmental technologies, which creates investment opportunities, and providing guarantees, tax incentives and other support.”

A great opportunity for Ontario to get transit built and leverage responsible investing globally!