Green bonds are going from 'niche' to 'mainstream': Can Canada catch up?

At 16, Hirji, is younger than most organizers in her youth-led climate change advocacy group, Fridays for Future Toronto. She studies the financial markets and their intersection with climate change.

“A lot of adults in my life have thought that I’m ‘going to grow out of it,’” says Hirji, referring to her climate activism.

“And dealing with those (critics) is not always the most fun. But it’s part of the job.”

Hirji’s job is a part-time youth climate activist, pushing for more green investments.

During the pre-COVID-19 days, Hirji and the other climate change activists with Fridays for Future Toronto would hit the streets with signs advocating for a greener economy.

That protest is now part of a larger campaign targeting one of the country’s richest investors: the multibillion-dollar Ontario Teachers’ Pension Plan (OTPP). A key part of that protest is an open letter that congratulates the plan for “laudable first steps” in green investments but pushes for even more.

Hirji says her clean investment message to teachers is simple: “Your savings are being used to negatively impact the world I live in and the leaders of tomorrow (who) you teach.”

She hopes that enough teachers sign the letter so it can be sent to the pension plan executives in the new year.

Central to this letter-writing campaign and other clean investment initiatives are so-called sustainable bonds, an umbrella term for bonds with built-in commitments to reduce carbon emissions.

Green bonds are a type of sustainable bond that reward companies for specific initiatives that reduce carbon emissions through targeted industrial strategies such as making buildings more energy-efficient, building public transit and using clean sources of energy.

Governments and companies around the world, including the OTPP, the City of Toronto and Quebec, have issued them.

According to many leading experts in sustainable finance interviewed by Canada's National Observer, pressure from young activists sounding the alarm about the “climate crisis” has nudged green bonds out of the “niche market” and into the “mainstream.”

“Without a doubt, the younger generations are behind a very significant push to promote green and sustainable finance. And it goes from people in their 20s and 30s all the way to kids,” said Nicholas Pfaff, managing director, head of sustainable finance and member of the executive committee of the International Capital Market Association, a non-profit international association that develops best practices and standards for debt capital markets.

“When you talk to them about the way the markets operate, they kind of stare at you. What they want to know is, ‘Where’s the money going? And is the money going to good purposes?’” Pfaff said in an interview with National Observer from his home in Paris.

Young activists like Hirji have a point, says Andy Chisholm, who was an international investment banker with Goldman Sachs for 30 years before retiring and returning to Canada, where he is now a sustainable finance advocate.

All of a sudden the (young activists) … are saying ‘I’m not letting you off the hook this time.’

“They’re in that constructively naive phase ... and that’s putting a lot of pressure on these investment committees because all of a sudden the (young activists) … are saying ‘I’m not letting you off the hook this time.’”

Chisholm describes the green bond market as a “puzzle piece in the context of a much larger puzzle,” which is the sustainable bond market.

Green bonds help to pay for new or existing climate-friendly projects in areas such as energy, transport and waste management. According to Bloomberg, governments at all levels, companies and banks from more than 50 countries have them on offer.

In the first three quarters of 2020, green bond sales globally topped “(US)$200 billion, about 12 per cent more than the same period in 2019, which itself was a record year.” Since green bonds first hit the market about 12 years ago, more than US$1 trillion have been issued, Bloomberg reports.

Although the cumulative total may sound impressive, it’s only one per cent of the US $100 trillion global market, says Sean Kidney, CEO of Climate Bonds Initiative, an international organization that promotes low-carbon investments such as green bonds.

Still, he points out that despite the pandemic, demand continues to outstrip supply, as more and more investors are thinking green.

Ever since some of the world’s largest banks and governments began issuing green bonds, interest has been growing, Kidney says, who also follows the growth of the bonds in Canada.

“These (green) bonds were so successful. There were a lot more buyers than there were bonds for sale,” he said in an interview.

But despite their popularity, investors, issuers and regulators are still struggling to define green bonds. What is green?

Climate activists such as Aliya Hirji are asking many questions: “What (company activities) are really having an impact on the climate crisis? And what really should count as a green bond?”

They are also concerned about “greenwashing,” a deceptive practice where companies make misleading sustainability claims.

“We haven’t seen any major greenwashing cases in the green bond market yet,” said Christa Clapp, co-founder and managing partner at CICERO Shades of Green Ltd., in an interview from her home in Oslo, Norway.

“There’s been some things on the fringe that were questionable. But I think we haven’t seen big cases of it because nobody wants their reputation tarnished. Nobody wants to be in the headlines with greenwashing.”

To ensure credibility, Clapp’s firm reviews the claims made by those issuing green bonds before they are issued. These “green reviews” or “second opinions” have become accepted practice in the bond market. CICERO has conducted reviews for the Canada Pension Plan Investment Board and, recently, Ontario Teachers’ Finance Trust.

Clapp says in both instances her company awarded Canadian issuers high marks.

Still, concerns about the effectiveness of green investments persist.

A recent study from the Bank for International Settlements concluded that green bond projects “have not necessarily translated into comparatively low or falling emissions at the firm level.” The bank is now pushing for more rigorous assessments.

As a counter to pressure for more accountability, many institutions issuing green bonds stress that they adhere to what’s called the Green Bond Principles, a set of rules released by the International Capital Market Association in 2014 to support market transparency and integrity.

Those rules, or “taxonomies,” allow investors to see what promises are being made and hold issuers to account.

“The development of taxonomies makes the discussion around green much more tangible,” says Pfaff.

“(Because the taxonomies) aim to tell us what’s green and what’s not.”

Despite the fact that Canadian institutions already issue green bonds, the discussion around sustainable investments is not as advanced in this country as it is in jurisdictions such as the European Union.

In Canada, any discussion about sustainable finance is further complicated by the elephant in the room: Oil and gas.

Should fossil fuel companies be allowed into the growing sustainability market? Should they be able to one day issue green bonds if they promise to transition to cleaner sources of energy?

For many Canadian activists leaning on universities and pension funds to divest from fossil fuels, the answer is simple: No.

But experts who have spoken to Canada's National Observer suggest it makes more sense to help the oil and gas sector reach sustainability than it does to simply shut the door.

A large question yet to be answered is, what position will the Canadian government ultimately take when it comes to sustainable investments?

Canada is urged to play catch-up.

As a starting point, Chisholm, the sustainable finance advocate, says he pushed for the establishment of an expert panel to study ways of helping Canadian markets adapt their normal patterns to explicitly consider the implications of climate change and incorporate the key notions of sustainability.

“Because China had ... (developed expert committees). The EU had done it. The U.K. had done it. France had done it. And it proved to be very beneficial for them as a means to create a roadmap for action with the objective of avoiding systemic risk and seizing economic opportunity while preserving the planet for future generations,” he said.

We believe the implications (and opportunities) for Canada are profound.

“And ultimately we convinced the government to do that. And they were tremendously hands-off and allowed us to conduct our work independently ... We worked for a year. Did an enormous (number) of consultations. Hundreds and hundreds of phone calls and meetings ... And put out a final report last year. We believe the implications (and opportunities) for Canada are profound as we have a carbon-intense economy and must act strategically to adjust and adapt while ensuring a bright future.”

One of the experts who worked with Chisholm to craft the report was Tiff Macklem, now Canada’s top banker.

The Department of Finance Canada, the lead federal institution on this topic, declined National Observer’s interview request to discuss the report's recommendations to, among other things, help Canadians make “climate-smart investments.”

However, in a statement, spokesperson Chelsea Steacy said the government followed up on a number of the report’s recommendations, including the creation of “a public-private Sustainable Finance Action Council, which will launch in early 2021 and aim to develop a well-functioning sustainable finance market in Canada.”

Steacy also said last month’s economic statement made it clear the direction the government is heading.

“The Government of Canada intends on issuing its first ever green bond in 2021-2022,” Steacy wrote, echoing a promise made in the economic statement.

When that happens, it will help stimulate even more activity in this country, say the experts interviewed by Canada's National Observer.

As proof, they point to the explosion in the bond markets in countries such as Germany and France after those national governments shifted to green bonds. Government involvement lends greater credibility and helps to set a standard, giving other issuers the green light to follow suit, the experts say.

Aliya Hirji will be watching the developments in the sustainability and green bond debate very closely, as she and the other young advocates vow to sustain the pressure for more green investments.

Learning about the world of finance at such a young age has been challenging, but she’s determined to keep pushing for change.

“I don’t even feel 16 at this point,” she said.

“Climate action has aged me 20 years — in a good way.”