Canada’s Inaugural Green Bond

• On Tuesday, March 22, 2022, the Government of Canada successfully priced its C$5 billion long 7.5-year inaugural Green Bond following the publication of its Green Bond Framework a few weeks earlier
• The transaction was met with strong demand from ESG-focused investors and the final order book was over C$11 billion, the largest on record for a CAD Green Bond from any issuer in the Canadian market
• The issuance will support Canada’s transition to a net-zero emissions economy by providing new investment opportunities across a wide range of climate and environmental initiatives and advancing the development of Canada’s sustainable finance market

Overview of the Green Bond Market

Green bonds are like regular bonds with one key difference: their proceeds are earmarked to finance projects with environmental benefits, including renewable energy, green buildings, and clean transportation. Green bond issuances have accelerated in recent years, driven by multilateral efforts to address climate change, such as the Paris Agreement, and strong investor demand for green assets. The global green bond market grew significantly in 2021 with US$620 billion in total issuance, nearly doubling the total issuance of the previous year. ^[1]  The global green bond market is anticipated to continue its rapid growth in the years ahead, with the Climate Bonds Initiative suggesting that annual green bond issuance could hit US$1 trillion by 2023.^[2]

The Government of Canada’s Green Bond Program

In the 2020 Fall Economic Statement, the Government of Canada announced its intention to issue green bonds to help finance government investments in green infrastructure and other environmental initiatives.^[3] Through green bond issuances, Canada intends to mobilize capital in support of its climate and environmental objectives and to further develop the Canadian sustainable finance market. ^[4] Mobilizing private sector capital is an important part of Canada’s efforts to meet its 2030 emissions reduction target and to achieve net-zero emissions by 2050.

The Government of Canada’s Green Bond Framework was published on March 3, 2022, and defines the types of projects that can be funded with the proceeds raised from Government of Canada green bond issuances. Eligible programs and expenditures are expected to deliver environmental benefits, including lower greenhouse gas emissions, expanded clean transportation, and an increase in Canada’s renewable energy production. ^[5]

The potential for blue hydrogen production is a notable inclusion within the Framework’s “Renewable Energy” project category. The Framework specifies a threshold carbon intensity for hydrogen production that is approximately 60% below the carbon intensity of hydrogen produced from natural gas. This threshold leaves open the possibility of hydrogen production using fossil fuels employing carbon capture and storage, often referred to as blue hydrogen. ^[6]

The Government of Canada will provide annual reporting to investors for each green bond issuance. These annual reports will include details on the allocation of proceeds to eligible green projects along with the actual or expected environmental impacts and social co-benefits; for example, annual greenhouse gas (GHG) emissions reduced, number of zero emissions vehicles deployed, renewable energy produced, and jobs created.

Sustainalytics provided an independent, external review of the Framework, confirming its alignment with the global best practice guidelines established by the International Capital Market Association (ICMA) Green Bond Principles.

Inaugural Transaction Highlights

On Tuesday, March 22, 2022, the Government of Canada, rated Aaa/AAA/AAA, successfully priced its C$5 billion long 7.5-year inaugural Green Bond with RBC acting as a Joint Lead Manager on the transaction. The issue priced at a spread of +0.5 basis points (bps) over the Government of Canada’s 2.25% bond due June 1, 2029, 2 bps tighter than initial price thoughts (IPTs) on the back of strong demand. The transaction also achieved 2 bps of cost savings compared to the Government of Canada’s conventional borrowing, highlighting the incremental benefits of issuing Green Bonds.

The final order book attracted demand of over C$11 billion from 98 institutional investors, with 46% distributed internationally, illustrating strong appetite for CAD Green Bonds globally. This was also the largest order book on record for a CAD Green Bond from any issuer in the Canadian market. ESG-focused investors represented 72% of final allocations. Following the transaction the issue performed well in the secondary market trading -4.5 bps through the conventional curve within two days of the deal pricing.

What Does This Mean for Canada?

Canada’s transition to a net-zero emissions economy by 2050 will require significant investment and expertise from both the public and private sectors. The Government of Canada’s inaugural green bond issuance will support this transition by providing new investment opportunities across a wide range of climate and environmental initiatives, creating new employment opportunities across the country, and setting a path for future issuances. The issuance also serves to advance the development of Canada’s sustainable finance market, creating a more mature market for investors looking for green investment opportunities with a strong credit rating.

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