Since we limited the scope of our assessment to just 21 of the country’s largest public and private issuers, the actual potential is no doubt considerably larger. It’s a stunning figure given that the most recent annual quantification of Canadian bonds formally labelled as green stood at a mere $1 billion.

This $56.3 billion finding clearly dispenses with any remaining doubt about the potential for a sufficiently large and liquid green bonds market in Canada. And the benefits of capturing that potential could be massive.

Green bonds – meaning those from which the proceeds are restricted to uses that address climate change or otherwise improve environmental outcomes – have a compelling value proposition for both investors and issuers.

Most fundamentally, they respond directly to the various imperatives that are causing many institutional investors to seek increased exposure to low-carbon products – ones divorced from stranded-asset and other risks now linked to some traditional asset classes in Canadian markets.

For issuers, they are an entry point into a specialized capital market in which investor demand typically outstrips investment-product supply, and where preferential financing terms (a “greenium”) may be available. Ontario’s experience has already demonstrated that green bonds enable issuers to tap into expanded and deeper pools of global fixed-income capital.

Furthermore, they are a powerful mechanism by which governments can harness private capital to help fund ambitious infrastructure plans. This dovetails nicely with the ambitions of the new Canada Infrastructure Bank, which will focus on large, transformative projects such as regional transit plans, transportation networks and electricity grid interconnections – all eligible for green bond status.

The Ontario government entered the green bond market in 2014, and now has three outstanding issues totalling $2.05 billion that are funding projects such as Toronto’s Crosstown LRT. Quebec entered the market several weeks ago with an initial issue of $500 million.

The federal government is a natural candidate to follow suit and become the third national government to issue sovereign green bonds. Federal issuance of $2 billion to $3 billion per year would boost liquidity and offer a powerful signal to the marketplace that Canada is open for green bonds. This would help draw in the type of long-term green capital the government is targeting for transformative green infrastructure investments.

Simple self-interest makes green bond issuance a compelling proposition for the federal government, although there’s more it can and should do. Two specific measures are imminently implementable and have proven to be game changers elsewhere.

The first would be to establish standardized national qualification criteria for a bond to qualify as green – striking the right balance between clarity, flexibility and alignment with emerging international standards. China’s early action on guidelines catapulted it to market leadership in a matter of months. It would be feasible for Canada to develop a green bond standard over the next three to six months, in advance of its entry into the sovereign green bond club.

The second would be to offer direct grants that cover additional verification costs currently associated with green bond issuance. While usually nominal, these are a barrier to entry for many at this nascent stage in the development of the market. We estimate that for less than $10 million in direct grants, the government could likely catalyze tens of billions in new green bond issues across Canada. A recent program of this type on the part of Singapore’s government has received an initial positive reception in the market.

In taking these measures, the federal government would also be positioning Canada’s financial industry for leadership in the green financing space. This is mission critical for our economy given that over half of TSX 100 profits are generated by the financial sector. The UN has estimated that global green capital flows of more than $90 trillion (U.S.) will need to be mobilized over the next 15 years. Moreover, global investors with $60 trillion at their disposal are already explicitly targeting the purchase of more green bonds.

That’s an immense scope of activity, but given the still-early state of market development around the world it remains an open question as to which global financial centres will emerge as green bond centres of excellence.

Issue-guide-grant. It’s a formula for federal action on green bonds that could set the stage for increased funding for our infrastructure needs, for meaningful reductions in climate emissions and for Canadian leadership in the growing global market for sustainable financing expertise.

Research support for the Corporate Knights report – which can be accessed here – was provided by RBC Capital Markets.

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In many ways, China is an anomaly that is changing the rules of the game. It can call the fair and free trade shots in the World Trade Organization while domestically protecting its own nascent industries. It bankrolls cheap loans and subsidies, and grows national champions to compete on the international stage.

Even if the U.S. had the surpluses to replicate China’s strategy, its core values would inhibit it. This is simply not the American way. Yet the U.S., the driving force of the North American economy, still needs to be in the game.

What is the way forward? First, the U.S., along with Canada, has to break out of an old story: an oil- and coal-fuelled narrative that has denied real change. Within the pages of this story are the themes of high unemployment, house foreclosures, wages stuck at 1970s levels, environmental degradation and accelerated climate change.

Both countries, but particularly the U.S., need a new story of how they’re going to climb out of the doldrums, and do it in a way that minimizes the tax burden on citizens. It’s the same story being written by the Organization for Economic Co-operation and Development and others: economic revitalization driven by the vast investments needed to grow clean energy, boost energy efficiency, green our cities and build the industries that deliver all of the above.

The question is whether there’s a way to access the massive amounts of capital necessary to craft such a narrative.

Short answer: there is a way. The capital requirement to retrofit homes in the U.S. (selffinanced with energy savings!) is US$2 trillion. The capital needed to switch from dirty to clean energy over 20 years is in the order of $3 trillion.

Despite the market crash, the capital is there. The U.S. pension fund industry still manages $15 trillion and is always looking for investment safe havens. There are many ways to deliver those safe havens. Building solar plants in the desert that deliver a safe and secure return over 30 years is but one example.

Bonds, my area of work, can be useful tools for financing these kinds of initiatives. The U.S. bond market alone is worth $25 trillion. Compare that to total U.S. GDP of $15 trillion.

But the trick to tapping into this capital is to not assume bond buyers will wear risks; they need investment-grade deals. The good news is there are many ways that governments can help engineer investment-grade ratings; and when they do, the cash will flow, without the need to raise taxes.

In the area of energy efficiency, the U.S. has the beginnings of a model—the propertyassessed clean energy, or PACE, bond. Under this model, which still has some wrinkles to iron out, a loan to retrofit a house is collected back over time as a municipal charge, built into existing property taxes paid by the homeowner. There’s a low level of default, meaning bonds issued against a parcel of these loans are very safe.

Cities can also broker bulk deals with building companies to cut house-by-house energy use by up to 50 per cent. Home-owners in South Chicago, for example, can get a retrofit that reduces their power bill even after loan costs are included. Here, you have the genesis of a trillion-dollar energy efficiency bond market and some big wins in reducing emissions.

There’s a clue in that example: bonds are great to refinance projects once they’ve been set up and there are no longer development risks. A city might organize a $70-million energy efficiency lending fund (as Melbourne in Australia has recently done with some financiers). Every time the municipality depletes the fund it can borrow from pension funds against the security of those loans, using lowrisk bonds, and reinvest the $70 million in another round of buildings.

Renewable energy is starting to be financed this way as well. We just need to scale it up with government regulation to ensure the investments are safer than mortgage-backed bonds. This may require some guarantees that there won’t be any retroactive changes in policy (the investor’s nightmare).

Remember that this bond-backed green growth strategy is about building productive assets that have reliable revenue streams. It’s also about cutting energy bills and taking the savings to pay off a loan. The answers are there. We just have to work creatively to create the deals—fresh ways for investors, government and industry to work together.

These investments are long lasting, low in risk profile and highly secure; hence, they’re ideal holdings for pension funds. By providing a small slice of their capital through climate bonds, they could help create jobs at large scale, build a renewable energy export industry and finance a powerful tool against climate change.

So there’s still a chance to get on this train, if—and it’s a big “if”—we choose to write the story that way.

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