But like many other developing nations that are feeling the increasing burden of climate change, the main challenge is finding the money. To assemble the financing, Nigeria is turning more and more to a tool that is already yielding results: the green bond. Late last year, the government issued its third and fourth tranche of sovereign green bonds totalling 300 billion naira (US$220 million).

Nigeria started down this path back in 2017 when it became the first African country – and the fourth worldwide – to issue a sovereign green bond, valued at ₦10.69 billion (US$7.85 million). Certified by the London-based nongovernmental organization Climate Bonds Initiative, investor demand outstripped the offer and the bond was oversubscribed.

Two years later, the West African nation issued another sovereign green bond valued at ₦15 billion (US$11.16 million). Like the first, the 2019 sovereign green bond saw a 220% oversubscription, bringing the total value of subscriptions to ₦32.93 billion ($23.57 million).

Like regular bonds, green bonds pay a fixed rate of interest to investors, but they keep the focus on raising capital for environmental and climate-related projects, from renewable-energy and clean-transportation to afforestation and climate-change-adaptation projects. The success of the inaugural 2017 green bond and the subsequent tranche in 2019 “signals growing investor appetite for green assets even in emerging markets,” says Dare Ogunbona, chief executive officer at Green Advisors Limited..

Green bonds gaining traction

Launched in 2007 by the European Investment Bank, the market for green bonds is growing steadily worldwide, reaching US$2,625 billion as of December 2024. In that year alone, $522 billion of new green bonds were issued, up from $135 billion the previous year, according to French asset manager Amundi’s 2024 Green Bond Impact Report. However, Africa is yet to fully tap into this potential. The continent accounts for about US$5.1 billion – less than 1% – of the total $2.2 trillion green bond market. But in recent years, the market on the continent is making major gains. For example, green bond issuances grew by 125%, from $600 million in 2022 to $1.4 billion in 2023.

Other countries on the continent are also picking up on the trend. In 2020, Egypt became the first country in the Middle East and North Africa to issue a sovereign green bond. That bond, too, was oversubscribed, leading the government to increase its initial offering from $500 million to $750 million.

Back in Nigeria, Ogunbona credits green bonds with “meaningful structural progress.” Proceeds from green bonds issuances have helped the Nigerian government to fund projects such as afforestation programs, the 10-megawatt Katsina wind farm power project, and off-grid solar power plants. However, these projects have been severely challenged, including by inadequate monitoring and weak sustainability frameworks. An investigation by a local newspaper also found that green-bond-financed afforestation projects failed largely because of poor implementation.

Given that so many climate projects still need to be funded, Ogunbona believes that green bonds will remain a viable option for the Nigerian government, especially as investors show increasing commitment to sustainability. “As of March 2025, 95.44% of proceeds from the 2019 green bond had been deployed to approved green projects,” he says. “For investors with a medium to long horizon and appetite for emerging market risk, Nigeria’s green space is very much in play.”

Saint Ekpali is a Nigeria-based journalist who covers the environment, health and energy in Africa.

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Decades later, that consensus is now breaking down. The environmental and economic risks of nuclear power are being overshadowed by mounting anxiety around the climate crisis. Pushed by governments in Europe and North America, the responsible finance industry is revisiting the nuclear energy exclusion.

“Nuclear energy will be an essential source of fuel in the transition to the renewable sources required to support a low-carbon economy,” said Marian Macindoe, head of ESG stewardship at San-Francisco-based Parnassus Investments, as the veteran sustainable fund company announced last year that it was dropping its nuclear exclusion, which had been in place since 1984.

More managers are dropping their nuclear exclusions. In a survey of 200 European and North American fund managers with social and environmental exclusions, 37% of funds reported having a nuclear energy screen in 2022, down from 43% in 2021.

This turnabout has been most pronounced in the green bond market, where power utilities have, controversially, been adding nuclear energy as an option for green bonds.

In a 2023 report, the International Energy Agency (IEA) estimates that to meet net-zero goals, electricity’s share of total energy demand needs to double between now and 2030 to accommodate the electrification of transportation, building heat, industrial processes, agriculture and information technology. At last year’s COP28 climate conference, 22 nations pledged to triple their nuclear energy capacity by 2050 to generate a large source of low-carbon “dispatchable” energy – meaning it can provide power when intermittent renewable energy isn’t available.

With this in mind, nuclear green bonds promise to help fund decades of net-zero energy for the public and years of clean financial returns for investors. But are nuclear green bonds suitable for ESG-focused investors, given the long delays, cost overruns, and safety and waste risks of nuclear plants? Is the nuclear industry using a smokescreen of net-zero to cover up its sustainability problems?

Nuclear green bonds hit the market 

The movement to think about nuclear as a green investment began in 2021, when seven European Union member countries – led by nuclear-heavy France – began pressuring the European Commission to ensure that the EU’s climate policy included nuclear. 

Meanwhile, Canada, and specifically the province of Ontario’s two nuclear utilities, became the first to push the envelope. The world’s first nuclear green bond was issued by privately owned Bruce Power, operator of the Bruce Nuclear Generating Station three hours north of Toronto, the world’s largest nuclear plant. The company issued a $500-million offering in late 2021 and two additional issues of $600 million each for a total of $1.7 billion. Proceeds are financing a refurbishment and 30-year extension at Bruce, in service since the 1970s and 1980s.

Investors – particularly institutions – welcomed the bond issues. Demand for both issues was about six times higher than the amount issued.

By 2022, the conversation around nuclear was shifting around the globe. After months of contentious debate, the EU agreed to add natural gas and nuclear to its EU taxonomy, the official list of acceptable sustainable investments to help Europe finance its ambitious climate goals. That same year, Ontario Power Generation, owned by the provincial government, issued $300 million in nuclear green bonds to refurbish its Darlington Nuclear Generating Station.

This year, the Canadian federal government became the first national government to issue a green bond that included nuclear expenditures.

The bonds are ranked “medium green” by investment rating service S&P Global. Refurbishments are ranked higher than new builds, and Canadian CANDU reactors are ranked higher than other reactors because CANDU reactors use natural, rather than enriched, uranium. The depleted natural uranium in spent CANDU fuel bundles is considered at lower risk of being turned into weapons, which typically use enriched uranium. Also, recent refurbishments in Ontario have been completed on time and on budget, in contrast with cost overruns and delays typical of the nuclear industry.

However, Canadian reactors lose points in the S&P Global ratings because Canada hasn’t yet developed a permanent nuclear-waste disposal solution, something environmental advocacy groups say should negate nuclear bonds from being labelled green.

In January of this year, the government of Ontario went ahead and added nuclear energy to its green bond framework in anticipation of a planned major expansion, including refurbishment of its Pickering Nuclear Generating Station, construction of four new small modular reactors and a new plant capable of almost doubling Bruce’s output. If implemented, the plan will be the largest nuclear construction program in the Americas or Europe, although approvals from the Canadian Nuclear Safety Commission and other bodies such as local First Nations could present roadblocks. 

A few weeks after Ontario’s announcement, the Canadian federal government became the first national government to issue a green bond that included nuclear expenditures.

Canada is no longer the only hot spot for nuclear bonds. In France, Électricité de France  – the country’s publicly owned power utility – issued a €1-billion nuclear green bond for refurbishments in November, making it Europe’s first green bond for nuclear energy. A few weeks later, Teollisuuden Voima Oyj, Finland’s privately owned nuclear utility, launched a €280-million nuclear green bond to refinance a new plant and to refurbish two older plants.

These offerings are just the beginning, says Nick Pfaff, deputy CEO of the International Capital Market Association. In an interview with Responsible Investor, he said nuclear green bonds could make up more than 10% of energy sector green bonds, especially in jurisdictions like Canada and France where nuclear energy is predominant.

The state of the debate 

Both sides of the nuclear ESG debate agree that a reduction in carbon dioxide emissions and fossil fuel use is desperately needed. Some climate deniers argue for nuclear energy, but the disagreement in the ESG community is whether nuclear qualifies as a sustainable energy option. 

A long-standing thought leader in this debate is Amory Lovins, co-founder of the Rocky Mountain Institute (now called RMI), the famous Colorado-based think tank and advocacy centre for low- and renewable-energy alternatives. He argues that by conserving energy and creating it more sustainably through wind, solar and other small-scale, distributed and renewable  “soft-energy” paths, large-scale and centralized “hard-energy” systems like fossil fuels or nuclear power aren’t needed.

Lovins, now 76, argues that renewables are cheaper and much more efficient than nuclear power, which requires at least a decade of planning and construction. “It’s better to use fast, cheap and certain rather than slow, costly and speculative,” he said in a recent interview in The Denver Post.

It’s better to use fast, cheap and certain rather than slow, costly and speculative.

 

– Amory Lovins, co-founder of the Rocky Mountain Institute

While nuclear megaprojects like Britain’s Hinkley Point C lumber along overbudget and years late, lower-cost renewable energy grew by 50% in 2023, the 22nd year in a row that global renewable capacity additions set a new record, according to the IEA.

Environment professor Mark Winfield, at York University in Toronto, shares Lovins’s view that nuclear energy could serve to delay the energy transition, rather than accelerate it. Winfield argues that efficiencies are reducing electricity demand, and even if more generation is needed for electric vehicles and heat pumps, this doesn’t mean that this “demand can only be served by large centralized, capital-intensive, high-risk and inflexible generating assets like nuclear power plants.”

One of the leaders on the other side of the debate is climate scientist James Hansen, who is famous for raising awareness of the climate threat at U.S. congressional hearings in the 1980s.

Nuclear is “one among several technologies that will be essential to any credible effort to develop an energy system that does not rely on using the atmosphere as a waste dump,” he wrote in a letter to world leaders in 2013 with other climate scientists.

Hansen notes that nuclear can provide enough power for “whole civilizations,” something that would make it easier for small-scale and intermittent renewable energy to fill any remaining gap in fossil-free generation. 

Samuel Miller McDonald, a geographer and the author of a forthcoming book on the science and history of progress, steers a middle ground and warns against listening to commentators who make strident claims in one direction or the other. 

In a 2021 article in the Boston Review, he argues that nuclear energy could accelerate the energy transition and reduce emissions in places with stable, centralized grids, but these hard-energy systems are dependent on bureaucratic state planning. Renewable energy – by contrast – holds potential for cooperative ownership and local management. Choosing between these doesn’t doom societies for all time, he argues, but it does narrow the range of short-term possibilities.

“The debate that needs to occur around nuclear is not just whether it can reduce carbon emissions or provide efficient electricity, or whether it is ‘safe and clean,’” McDonald says, “but also whether it should be part of the vision for how human societies adapt and, with any luck, thrive in the new and more dangerous world we have created.” 

Eugene Ellmen writes on sustainable business and finance. He is a former executive director of the Canadian Social Investment Organization (now Responsible Investment Association).

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Backed by government taxing powers, Canada’s provincial and territorial bond market receives high scores from credit rating agencies. The $1-trillion market for these bonds helps to finance schools, hospitals, social services and other provincial spending. Institutional investors have traditionally had little concern about environmental, social and governance (ESG) risks on these bonds since they are used to provide needed public services.

But climate risks are beginning to change this picture, according to a new report released last month by the Principles for Responsible Investment (PRI), a global network of more than 5,000 investors representing US$121 trillion in assets.

This is especially the case in Alberta and Saskatchewan, where provincial governments are determined to maintain fossil fuel production, despite the scientific consensus that carbon emissions must be curbed.

“Climate transition risks are significant for Canadian provinces with substantial fossil fuel sectors,” says Jasper Cox, a fixed-income analyst with PRI, in an email interview.

“Provinces’ economies and revenues can be heavily exposed to these industries, and to any fall in demand or more stringent regulations.”

With such heavy dependence on the fossil fuel industry, Alberta and Saskatchewan are susceptible to declines in their tax bases and growing transition costs due to changes in fossil fuel demand or regulation. The report notes that revenues from oil sands bitumen account for 17% of Alberta’s total revenues.

As the province with the largest greenhouse gas (GHG) emissions, Alberta faces the largest risk. In 2019, it released 58,000 tonnes of GHGs per 1,000 population, or 755,000 tonnes per 1,000 units of gross domestic product (GDP) (units are expressed in constant U.S. dollars).

Saskatchewan’s emissions were lower than Alberta’s, equating to 56,000 tonnes of GHGs per 1,000 population, but represented a higher proportion of its economy, at 834,000 tonnes per 1,000 units of GDP.

By comparison, Quebec emitted 9,000 tonnes of GHGs per 1,000 population (the lowest emissions per capita in Canada), with Ontario close behind at 10,000 tonnes per 1,000 people. By GDP size, both provinces came in at 179,000 tonnes per 1,000 units.

“Investors must assess the practical ability of provinces and municipalities first to meet net-zero targets and secondly to succeed economically during and after the low-carbon transition,” the report says.

Higher borrowing costs coming, just not yet

The strong implication in the report is that climate transition risks are likely to make debt from provinces with large fossil fuel industries less attractive to investors, eventually forcing these governments to issue bonds at higher interest rates to stay competitive in Canadian and international bond markets.

“Higher credit risk would put upwards pressure on borrowing costs, although the latter will also depend on a range of other factors,” Cox says.

High on the list of other factors is the price of oil and gas, which, at least for the time being, is far more significant to issuer ratings than ESG risk.

In January, Moody’s Investors Service upgraded Alberta’s credit rating, citing “high oil prices above pre-pandemic levels.”

Last September, DBRS Morningstar upgraded its trend on Alberta bonds from stable to positive, noting recent “strong energy prices” and plans to reduce the government’s deficit. The company acknowledged that Alberta has the largest provincial emissions but noted it has achieved a recent decline in emissions intensity.

For Saskatchewan, DBRS Morningstar recently confirmed its stable trend, also noting a “recovery in resource revenue” and deficit-reduction measures. However, it noted that Saskatchewan’s carbon and GHG costs pose “modestly negative” risk, citing its dispute with the federal government over Ottawa’s plans to phase out of coal-fired electricity by 2035.

Current high oil and gas prices could be a temporary situation as the world adjusts to shortages created by the war in Ukraine. This could mean raters are underpricing climate transition risk, especially if there is a rapid decline in oil and gas prices or the global climate continues to deteriorate badly.

This is a possibility that was raised at a PRI webinar in June on Canadian government bonds.

Climate transition risk “has faded a bit into the background at the moment,” said Saad Qazi, associate portfolio manager at Manulife Investment Management. “From a longer-term perspective, you could argue that it is being mispriced.”

Eugene Ellmen is a former executive director of the Canadian Social Investment Organization (now Responsible Investment Association). He writes on sustainable business and finance.

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Corporate Knights and Climate Bonds Initiative assessed 7,000 of the world’s largest companies, representing all publicly traded companies with US$1 billion+ in revenues. Collectively, these companies were found to have made capital and research and development expenditures of $3.6 trillion in 2017. We then applied a recently developed, sector-specific taxonomy to determine what proportion of their revenues – and, by extension, their capex and R&D – can be classified as having clear and specific environmental benefits. This yielded a figure of $611 billion in green investments by non-financial sector corporations in 2017.

In order to reach “SDG alignment”– which must include urgent action to combat climate change we estimate that total corporate capex and R&D spending needs to be boosted from $3.6 trillion to $3.8 trillion annually, while the green component of that investment needs to rise from $611 billion (17 per cent of the total) to about $1.07 trillion (28 per cent of the total). Over 87 per cent ($399 billion) of the additional annual green investments required arise in the most transition-exposed sectors (energy, utilities, automotive, steel and cement).

While large, the incremental investment requirement identified in the report is modest in proportion to the estimated $117 trillion in assets under management and loan books held via publicly traded financial corporations. There is also strong and growing investor interest in financing green activities. But with 2018 annual issuance of certified corporate green bonds of only $78 billion (including $49 billion from financial corporations and $29 billion from non-financial corporations—the same figure for 2017), much stronger linkages are needed between green-motivated capital providers and the corporate initiatives that urgently require such funding. Potential solutions include:

• Agreement on taxonomies and definitions for green activities, revenues and investments, in particular to facilitate “Clean Transition Bonds” – a form of green bond that would finance de-carbonization activities within high-carbon sectors that would otherwise likely be bypassed by conventional green bond issuers.

• Broader efforts on the part of banks and other financial issuers to raise and recycle capital through securitization of their green loan books (the report estimates banks have outstanding fgreen loan books of $390 billion, which could be securitized and issued as green bonds).

• A move away from strict, in-or-out specifications of how green bonds proceeds are used by companies, in favour of an approach though which companies that pass a credible test for their own SDG-alignment would see all of their debt issuance qualified as green.

This report also evaluates the green bond issuance potential of a representative cross-section of 21 of the 2019 Global 100 Most Sustainable Corporations in the World. This includes a determination of likelihood of green bond issuance, and percentage of green investment requirements that could be covered by such an issuance. These companies alone have incremental green capital requirements of approximately $43 billion annually in order to move to full SGD alignment, a significant portion of which could be covered by green bond offerings.

Download the full report: 2019_Corporate_Green_Investment

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The CTB Guidelines cover the oil and gas, mining and metals, heavy industry, and energy utilities sectors. They resulted from an extensive consultative and collaborative effort over the course of 2018, and reflect input from over 40 bond issuers, raters, underwriters and institutional investors. Their creation aligns with a recommendation made today by the federal government’s Expert Panel on Sustainable Finance. “Green transition bonds and loans are markets where Canada can lead the world,” said Tiff Macklem, Expert Panel Chair, adding “this is an opportunity for us to be shapers, not takers.” Canadian Minister of Finance, Bill Morneau, followed up these comments remarking that “there is a huge opportunity for Canada’s financial sector to become stronger,” by leading the charge on sustainable finance. “Our financial sector is stepping up. We can be the country finding and financing the solutions,” said Canadian Minister of Environment and Climate Change, Catherine McKenna, noting that meeting the climate change challenge represents a $26 trillion global growth opportunity.

The CTB Guidelines define sector-specific categories of activities, which reduce carbon or otherwise improve environmental outcomes, while often also establishing market advantages or new products and revenue streams. For downstream oil and gas companies, for example, qualifying project categories include emissions-intensity reductions in refining, development of bio-based polymer products, renewable jet fuels, and development of electric- and hydrogen-vehicle fueling infrastructure. The guidelines define the maximum percentage of proceeds from a CTB issue that can be directed to each activity, ranging from 25 to 100 per cent, depending on the activity’s impact.

“There’s strong and growing investor interest in financing projects that help address the carbon challenge and that reduce stranded-asset risk,” said a statement issued by the Council for Clean Capitalism. “These guidelines will help ensure that some of Canada’s most important industries can tap into green capital flows as they transition to a clean-growth future. And since these industries account for most of our carbon emissions, targeted investment will be hugely helpful in meeting our climate-related goals.”

Concurrent with development of the CTB Guidelines, Corporate Knights analyzed the scope of opportunities for non-combustion uses of bitumen from the Alberta oilsands (using data provided by Alberta Innovates). Some of the most promising product types leverage some of the same attributes that result in bitumen’s heavier footprint when burned, and include use of carbon fibres for steel replacement and in concrete and wood composites, along with pelletized asphalt.

With sufficient investment – through CTBs and other means – the annual market value of just these four product lines could be US$218 billion by 2030. The analysis suggests an annual market opportunity of US$1.5 trillion by 2030 based on a wider range of sustainable commodities derived from bitumen and other abundant feedstocks (see below).

Unlocking this market opportunity will require significant investments of at least $US$1.8 trillion between now and 2030, Corporate Knights estimated based on industry data assembled by Alberta Innovates. The scope of that investment requirement underscores the need to increase capital flows towards transition activities in high-carbon industries, Heaps said.

“Sustainable finance is about speeding up the transition to a low-carbon economy consistent with the Intergovernmental Panel on Climate Change recommendations to keep global temperature increases below 1.5°C,” said Sean Kidney, CEO of the Climate Bonds Initiative, an international NGO working to mobilise debt capital markets for climate solutions. “These draft guidelines are an important contribution to enabling full participation in that opportunity across carbon-intensive industries.” He adds that financing transition activities of carbon-intensive sectors is a global priority, and that the initiative announced today creates the potential for Canada to shape emerging global norms around clean transition finance.

A roundtable discussion co-hosted by the federal Expert Panel, and Toronto Finance International  is scheduled in Toronto for November 16, at which refinement of the draft CTB Guidelines released today will be discussed. “We would ultimately like to see some form of federal endorsement of the finalized guidelines,” Heaps said, adding they will likely be updated on an annual basis.

Canadian green bond labeled issues – currently typically focused on projects such as renewable energy and transit and other forms of sustainable infrastructure – reached a new record of C$3.8 billion in 2017. Demand from investors continues to outstrip supply even as new private and public issuers enter the market. Global green bond issues are expected to total US$210 billion in 20181

*based on an aggressive investment scenario facilitated through Clean Transition Bonds and other means

[1] Bonds & Climate Change 2017: Canada Report; and Climate Bonds InitiativeSource: Corporate Knights analysis using data from Alberta Innovates.

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According to the Climate Bonds Initiative (CBI), about $19 billion (U.S.) worth of green bonds have been issued during the first six months of this year. That’s far short of the organization’s aspirational “stretch” target of $100 billion, and still a long way from its updated – and more realistic – target of $70 billion.

In fact, results so far only put 2015 on track to match the $36.6 billion issued last year. But Sean Kidney, chief executive officer of CBI, said he’s confident green bond issues will pick up significantly in the second half of the year. He acknowledged, though, that hitting $70 billion is going to be a challenge.

“The second half should double the first, but given it’s July we may even have trouble getting beyond $60 billion,” he said in an e-mail.

Kidney said there has been “oddly minimal” U.S. corporate participation in the green bond market this year, and the Chinese entered the market much later than anticipated. Still, hitting $60 billion in 2015 would represent year-over-year growth of 61 per cent. Not the tripling of growth experienced last year, but “still good,” he said.

It’s not that the opportunity for continued massive growth isn’t there. A CBI report released last Wednesday estimates that the universe of bonds considered “climate-aligned” stands at $598 billion, which is a 20 per cent increase over last year. This demonstrates that more capital is flowing to climate-themed projects.

Out of this universe, $532 billion don’t carry a certified green bond label, while the remaining $66 billion carry a green bond label. A healthy majority (70 per cent) of projects being funded by climate-aligned bonds are categorized as low-carbon transport, including rail infrastructure. About 20 per cent has been earmarked for clean energy projects, while the remaining 10 per cent is composed of a mixed of green building, agriculture, forestry, waste, pollution mitigation and water projects.

Within the more narrowly defined green bonds market, the majority of proceeds are financing renewable energy or energy efficiency projects.

Green bonds, significantly, have started to gain traction in emerging markets. “India and China are leading the way and, judging by the size of the unlabeled climate-aligned bond universe, there is potential for plenty more issuance from these markets, particularly China,” according to CBI.

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Ontario and EDC turned to the University of Oslo’s Centre for International Climate and Environmental Research to help smooth their first forays into the fast-growing market for “green bonds,” fixed-income investments used to finance projects that help combat or adapt to climate change. The Norwegian group, known as CICERO, has emerged as the most influential arbiter of which borrowings qualify as “green.”

CICERO’s work underscores one of the biggest challenges facing the green bond market as it makes the transition from a pet project of environmental activists into the mainstream of global finance.

Which projects deserve to be classified as green? Who is best qualified to be the judge? Should there be a single set of international standards for green bonds? Should such standards be voluntary or mandatory? The answers to such questions will determine the future credibility of the green bond movement.

Demand for green bond issues has ballooned in the past two years as pension funds and other pools of capital – joined increasingly by retail investors – have sought to burnish their social-responsibility credentials.

“Green bonds are building an investor base that’s more aware of what the money they’re investing is achieving in terms of impact and outcomes,” says Heike Reichelt, head of investor relations and new products at the World Bank, which has raised over $7 billion (U.S.) from 77 green bond issues in 17 currencies since the market’s inception in 2007.

Investors bought less than $5 billion of green bonds a year between 2007 and 2012. But demand soared to $11 billion in 2013, and to more than $35 billion last year.

The market took an important step forward in January 2014 when 13 of the world’s biggest banks agreed on a set of voluntary Green Bond Principles that set out a process for designating, disclosing, managing and reporting on green bond issues. The original signatories included Bank of America, Citigroup, Crédit Agricole, Deutsche Bank, Goldman Sachs and HSBC. Several others, including Royal Bank of Canada, have subsequently signed on.

The market has gained sufficient traction that U.K.-based Barclays and MSCI, a compiler of capital markets data, launched a green bond index in mid-November. A bond’s eligibility for inclusion in the index is judged according to four criteria: use of proceeds, project evaluation, management of proceeds, and reporting.

Green bonds “have got a lot of momentum, but they’re still such a marginal portion of the bond market,” says Christa Clapp, CICERO’s head of climate finance. Clapp estimates that green bond issuance still makes up just 0.04 per cent of a total that amounts to about $80 trillion a year. “There’s just not a big awareness of it yet,” she says.

Educating the market

The time and effort involved in educating investors means that issuing a green bond requires more preparatory work – at least for the time being – than a regular public borrowing.

“The marketing process is maybe a little more involved than when we do a benchmark, plain-vanilla type issue,” says Michael Manning, executive director for capital markets at the Ontario Financing Authority, which launched the province’s maiden $500 million (Canadian) green bond last October.

Susan Love, EDC’s treasurer, says the Ottawa-based export-finance agency spent two years laying the groundwork for its first green bond, a $300 million (U.S.) issue.

“With a green bond there’s more information that has to be conveyed to investors,” Manning adds. “Sometimes you’re not just dealing with the portfolio manager. You might be dealing with a sustainability officer or the socially responsible investing manager. The fact that it’s a newer instrument means that we have to be a bit more patient in how we issue it.”

Negotiations on the pricing of the Ontario bond took six days, compared with as little as 10 minutes for a regular domestic deal.

But patience has paid off. Sixteen of 27 investors that subscribed to EDC’s issue last January had no previous dealings with the corporation. Similarly, Ontario’s green bond drew five new investors.

Love says in her almost three decades at the export-credit agency, “this is probably something where you feel you can really make a difference for my kids, and for the kids that come after that.”

On a less sentimental level, green bonds provide a rebuttal to the argument often heard around boardroom tables that protecting the environment runs counter to maximizing corporate profits.

Interest payments on a green bond are generally no more – and sometimes even less – than a conventional public borrowing. Conversely, for investors, “green bonds could be a good way to be responsible without taking a bigger risk,” says Olaf Weber, associate professor and chair of the sustainability management program at the University of Waterloo.

The recent Ontario bond, which is being used to help finance Toronto’s newest light-rail transit line, was more than four times over-subscribed. In a sign of investors’ enthusiasm, the bond was trading 35 basis points (0.35 of a percentage point) above the benchmark Government of Canada issue in mid-November, three basis points tighter than a similar conventional Ontario bond.

“It means that it’s a very easy credit committee argument to buy these bonds because they’re the same rating and yield as other bonds,” says Sean Kidney, chief executive of Climate Bonds Initiative, a U.K.-based non-profit. “The green feature addressing climate change is a bonus.”

Explosive growth

Kidney predicts that green bond issuance could more than double this year, and that a total of $300 billion in financings is “eminently achievable” by 2018. He cites several promising areas for growth – among them, private-sector companies, China, and the municipal bond market.

Corporate issuers have been a driving force in the explosion of green bond issuance over the past 18 months. Borrowers have included companies as diverse as Toyota, Unilever, and Stockland, Australia’s biggest real-estate trust.

Reichelt at the World Bank says many corporations are genuinely changing how they operate and are starting to incorporate these types of aspects into their business. “Green bonds are a good way to communicate that,” he says.

Then there’s China. Kidney sees the Chinese green bond market exploding over the next 12 months as Beijing steps up its anti-pollution drive and investment in renewable energy.

Ma Jun, chief economist at the People’s Bank of China, has pointed to green bonds as one of the financial instruments that China needs to put in place to support government policies. “They should have lower financing costs and greater support from the government, such as tax exemptions,” Jun reportedly said last spring.

Municipalities are also an obvious target for the green bond movement. Not only are they among the biggest borrowers on global capital markets, but much of the money they raise is spent on infrastructure well suited to closer environmental scrutiny.

The Swedish city of Gothenburg has issued two green bonds to finance public transport, water management, energy, and waste management projects. Other municipal issuers of green city bonds include Paris, New York and Johannesburg.

At the national level, there has even been talk of “green quantitative easing,” through which central banks would inject money into the economy by purchasing only green infrastructure bonds. The idea is to both stimulate economic activity and boost the availability of capital for climate mitigation and adaptation projects.

Sir David King, the U.K. government’s former chief scientific advisor, has been a strong promoter of such programs, and proponents include the Green Party (U.K.) and Green Party (Canada). Kidney is also a fan of the idea. “Crazy that it’s taken so long to get on the agenda,” he says.  “We’re pushing it with our EU engagement.”

Whatever the attractions, the market’s long-term credibility – and thus its growth –

hinges on confidence among investors that projects financed by green bonds genuinely contribute to a cleaner environment. Clapp says her biggest fear is that “some sort of headline shows up that a green bond is invested in a coal plant, and investors start fleeing. That’s what we want to avoid.”

There’s also the issue of so-called additionality. In other words, if a green bond isn’t attracting new – additional – investment to low-carbon projects, is it anything more than just an exercise in greenwashing?

Renat Heuberger, chief executive officer of carbon management consultancy South Pole Carbon, recently elaborated on this concern in a Huffington Post commentary: “How can the issuer ensure that the proceeds are indeed used for the declared ‘green’ purpose and that the new green bond is not just a re-branded normal bond that would have been issued anyway?”

The same question has long plagued the credibility and growth of the market for carbon offsets.

Shades of green

Meanwhile, a vigorous debate has erupted in the green bond community – researchers, bankers, issuers, investors and environmental activists, among others – over what criteria should determine whether a project is eligible to be financed by a green bond, and who should decide whether those criteria have been met.

Some banks favour a minimum of outside supervision. Deutsche Bank’s chief sustainability officer Sabine Miltner told a conference in London last September that calls for eligibility standards and requirements were premature and risked choking the fledgling market. The focus “should be on expanding issuance and investor interest,” Miltner said. “Over-burdening the market with prescriptive green standards is counter-productive at this stage.”

Others take the opposite view. According to Love at EDC, “what’s important is that we need to have high standards in the process and high standards of transparency. We heard from many investors that it was very important to have second-party validation.”

The Climate Bonds Initiative has set up several working groups to draw up eligibility criteria for specific sectors, similar to the Fair Trade designation on products as varied as coffee, gold, wine and clothes. “Some banks think we’re killing the market, but so be it,” Kidney says. “We would argue that we’re not being stringent, we’re just being clear but also science-based.”

Adds Kidney: “Clarity will be the friend of a long-term sustainable market. But it’s tough for a capital markets person who sees his clients walk away because it all looks a bit too hard.”

Some take a more middle-of-the-road approach. The World Bank, one of the first and still one of the biggest issuers of green bonds, has developed its own criteria for eligible projects. In doing so, it sought advice from investors and a second opinion from CICERO. “This was the investors telling us, ‘These are the types of projects you finance that we want to support’,” Reichelt says.

Reichelt is among those who question the practicality of a “one-size-fits-all” standard. “There are differences within countries and from country to country as to what people think is green, or good for the environment,” she notes. “People in countries like France, for example, may tend to be more supportive of nuclear energy than in Germany. Some people might see a mix of energy sources, including ‘cleaner’ fossil fuels, as important for going forward, and others may say definitely not.”

CICERO also favours a balanced approach. “The most important thing is that investors have disclosure,” Clapp says. “That’s done through a second opinion or through a standard. I just don’t see that one standard fits all – not right now”.

The Norwegians have so far issued second opinions on about 30 bond issues – including the recent EDC and Ontario bonds. They broadened their base last June by joining forces with four other research groups to set up an Expert Network on Second Opinions, known as ENSO. The new partners include the International Institute for Sustainable Development, based in Winnipeg; the others are in Spain, China and Sweden.

Announcing the new network, CICERO insisted that it “will operate independently from the financial sector and other stakeholders to preserve the unbiased nature and high quality of second opinions (on green bonds).”

Clapp says CICERO’s work is based, above all, on science. “We are trying to tie our second opinions to … what we know to be the climate risks on investments and what we know to be in line with the pathway towards a zero-carbon future in the long term.”

Even so, the group stops short of prescribing specific criteria or standards for green-bond eligibility. Citing the example of different biofuels, Clapp says a lot of questions are asked of the issuer about the context a project. “The regional context is important – how they view the lifecycle analysis and greenhouse gas emissions,” she explains. “We dig into those grey areas and try to provide context, rather than just saying you can include or exclude that specific category.”

CICERO is working on a green-bond grading system that Clapp describes as a “menu of choices,” ranging from dark green for projects that are most effective in combating climate change, to lighter shades for those that make a more modest contribution but need to take other realities into account.

“I think there’s some value for investors in being able to choose their own environmental risk profile,” Clapp says. “We’d love to see the whole record be dark green, but if that means fewer green bonds, we haven’t made much progress towards our ultimate goal of an improved climate. We recognize that some investors care somewhat about the green, but don’t need it to be the darkest, perfect colour.”

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“There have been new issuers, new currencies, new underwriters, new areas of issuance and, for the first time, a green bonds index,” according to Bridget Boulle, the initiative’s program manager, in a blog update posted in April.

Development banks continue to lead the way with issues of $4.9 billion, but corporations are not far behind at $4.02 billion. For the corporate side, this is a major achievement given that the first corporate green bond was only issued in November 2013. Development banks, on the other hand, have been issuing since 2007.

Export Development Canada (EDC) was the latest development bank to issue a green bond, which was priced at $300 million (Canadian) and received $500 million in orders within 15 minutes.

Ken Kember, chief financial officer, said the bank sees green bonds as becoming a regular part of its funding program. “The green bond is a nice balance to EDC’s corporate focus on clean technology, an area that will feed new green bond issues in the years to come.”

Toyota, Unilever and TD Bank were among the new corporate issuers, which also included Sweden’s SCA, a producer of personal care, hygiene and forest products. Toyota was the second-largest issuer at $1.75 billion, but the European Investment Bank once again dominated at $2.9 billion, representing six bonds issued in five different currencies.

Again, most green bond issues in the quarter were oversubscribed.

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