Canada's first green bond focuses investment on sustainable solutions, infrastructure, and jobs

• Canada just issued its first-ever green bond on March 23, 2022.
• The proceeds from the issuance will fund sustainabilty projects, infrastructure, and jobs in the sector.

Canada's 7.5-year inaugural green bond was issued on March 23, 2022, drawing attention from investors from around the world.

For Canada, the $5 billion transaction fulfills the country's commitment to issue a bond of this amount within the fiscal year and is earmarked for financing the country's sustainable infrastructure projects, all while creating new jobs as part of Canada's newly published Green Bond Framework.

Green bonds have become more common for companies, but countries like Canada, which have also seen regular climate crisis protests and demands for meaningful progress, are also looking to leverage these financial instruments to drive progress.

Canadian finance department spokesperson, Anna Arneson, said, "the government is focused on developing the green bond program to develop the sustainable finance market in Canada, which will help to mobilize capital that will aid Canada in achieving its 2030 emissions reduction target and net-zero emissions by 2050."

To measure the success of the bond, Canada will publish both an allocation report and an impact report, detailing the projects that the bond's proceeds are funding. "The government of Canada will provide very transparent information on both of these aspects," said Valerie Lemieux, HSBC's sustainable finance lead for global banking and markets, who acted as joint structuring advisors, along with TD Securities, on the deal.

It's the first issue of what is hoped will be many financial instruments set to catalyze Canada's liquid green bond program. As Trevor Bateman, head of credit research at CIBC Asset Management, explains, "Canada has studied the framework underlying green bonds and how they can be applied to its finances and economy, deciding now is the time to issue."

"The government looked at their renewed climate change targets, and their need to generate capital as soon as possible, and decided now is the right time," said Jonathan Laski, director of corporate solutions at Sustainalytics, the independent environmental, social, and governance (ESG) research group who provided an assessment of Canada's framework.

This timing is not incidental, and with European financial heavyweights historically leading the charge on bonds such as these, the issuance has long been expected.

A long time in the making

Reaching beyond initial expectations, however, was the deal's final order book which reached $11 billion, securing a price advantage for investors of two basis points and a subsequent yield cut for investors. The basis point reduction relative to Canada's non-green curve represents a savings known as a ''greenium" and reflects the broad interest in the issuance from both ESG/SRI and non-ESG buyers.

Insiders say this marks it as in-line with what other domestic government issuers, as well as other sovereign borrowers, have issued relative to their respective non-green curves. Canada's Deputy Prime Minister and Minister of Finance has celebrated this success, saying, "The strong demand for this inaugural green bond issuance — the first of many issuances to come — is a sign of Canada's future as a sustainable finance leader."

The transaction, which ultimately attracted 98 investors, has been a long time in the making, pulling together top financial minds from the likes of TD Securities and HSBC, who acted as co-structuring advisors on the project over the previous year. Advisors helped the government develop alongside market best practices and the International Capital Market Association's Green Bond Principles, advising on aspects as varied as marketing to investors to the development of the green bond framework itself.

"As a joint lead book runner on the transaction, we, along with the other joint leads, provided the government with advice on investor preference relating to bond characteristics such as maturity and pricing, and how to obtain the best execution on a $5 billion transaction," says Trevor Thom, managing director and head, government finance at TD Securities.

Canada was advised to exclude activities from the bond's proceeds such as transportation, fossil fuels, and nuclear energy to meet market expectations and the criteria of major green bond indices. "After the framework was finalized, it was published. Then we did investor marketing globally, across America, Europe, and Asia. And finally launched the integral green bond in March," Lemieux said.

The final list of investors is one that, according to Lemieux, includes some interesting names. While unable to say exactly who, she tells us that "there were some very strong ESG-focused investors that participated in that transaction," who spanned multiple continents in categories from central banks, reserve managers, pension funds, insurance companies, and asset managers.

Some 72% of buyers were environmentally and socially responsible investors, and 45% of the investor base came from outside of Canada. "Post transaction, we have seen a very positive reaction from the markets," she added.

While there are continued criticisms of Canada's huge fossil-fuel industry, and concerns over green bond's exclusion of nuclear — something seen as crucial on the path to net-zero — more generally, the significance of this deal should not be underestimated.

As Arneson explained, "With investors increasingly seeking green investment opportunities backed by triple-A credit ratings — as evident by the final order book of over $11 billion —Canada's successful $5 billion inaugural green bond issuance will help meet that global demand."