Global green bond issuance hit a record high last year, and a record transaction in Canadian dollars by a pioneer in the space is a sign of the growing demand in Canada as well.

The European Investment Bank (EIB), the lending arm of the European Union, last month issued the largest-ever seven-year climate awareness bond in Canadian dollars by a foreign entity, also known as a Maple Green Bond.

Close to half of the orderbook, in excess of $1.4-billion, was placed into Canada, signalling that the EIB’s stringent approach for what qualifies as green projects was appealing to domestic investors.

Given EIB’s pedigree as a first-mover in the green bond space back in 2007 and its rigorous commitment to best practices, it has enabled participants to import high green financing standards to further enhance the growth of the Canadian market, said Jason Taylor, Director of Sustainable Finance at Scotiabank, which acted as a bookrunner on the transaction.

“The green bond market originated and grew up in Europe in the early 2000s, and EIB has been heavily involved in developing best market practices,” he said. “When they come to Canada, they provide a catalytic effect on the market, on both the issuer and investor side. And they do it in a really high-quality manner. We learn by participating in their underwriting syndicate and investors learn by buying their bonds and looking at their frameworks more closely.”

Green bonds – a specific kind of fixed-income security used to raise funds for projects that are positive for the environment, such as clean transportation – represent a small portion of overall bond issuance, but demand has grown steadily over the years.

Green Rush

Even as the world’s focus turned to the COVID-19 pandemic last year, green bonds saw volumes rise 13% to a record of US$305.3 billion, according to BloombergNEF.

After a strong first quarter, green bond issuance was impacted by COVID-19 in the second quarter but surged during the third quarter – momentum that is expected to continue in 2021, according to the Climate Bonds Initiative (CBI).

“The resilience of green finance markets led to a record year of issuance at US$269.5 billion issuance, albeit a small increase over 2019.” the CBI said in a recent report.“2021 may enable a sustained resurgence.”

There has been a heightened focus on environmental, social and corporate governance (ESG) factors since the onset of the pandemic, not limited to COVID-19 related issues, and Scotiabank analysts forecast that sustainable debt, which includes green bonds, could reach as much as $1 trillion in 2021.

EIB has been a pioneer in this space, issuing the world’s first green bond, or Climate Awareness Bond, in 2007.

By the end of 2020, EIB had raised more than 33.7 billion Euros worth of green bonds across 17 currencies, including Canadian dollars.

The proceeds of EIB’s Climate Awareness Bonds (CABs) are earmarked for projects contributing to climate change mitigation, such as wind, hydro, solar and geothermal energy production projects.

In November 2019, the EIB’s board of directors decided to increase the level of climate and environment commitment, part of which involves gradually bumping up its share of new finance dedicated to green investment to over 50% by 2025 and beyond.

“The 2020s is the critical decade to meet the long-term temperature climate-resilience goals of the Paris Agreement and to address the environmental crisis,” EIB said in its EU Climate Bank roadmap for 2021-25.

As part of this roadmap, a key goal for the EIB is to accelerate the transition to a low-carbon economy through green finance within the EU and beyond its borders.

'Maple market has become integral'

The recent transaction marked the EIB’s largest Maple Climate Awareness Bond issue to date, says Dominika Rosolowska, EIB’s Sustainability Funding Officer, Capital Markets Department.

“Over the past few years, the Maple market has become integral to EIB’s green issuance — a reflection of the increasing appeal of sustainable investment to the domestic base,” she said.

A CAB with a 7-year maturity, which the EIB had not tested in Canadian dollars before, is a “welcome extension to our Maple curve,” she added.

“We were encouraged by the strong response to the transaction, in particular from domestic accounts: around half of the issue was placed into Canada, with both bank treasuries (for whom dedicated ESG portfolios are gaining in importance) and institutional investors. Some accounts were new to us – not only to our Maple program but also to EIB’s funding endeavours more broadly.”

The fact that this transaction involved a fully European entity is impressive, said Cesare Roselli, Global Head of SSA (Sovereign, Supranational, and Agency) Origination at Scotiabank.

“Many other borrowers who operate in a Maple format in the Canadian market are multilaterals with Canadian participation, and therefore are more naturally close to the domestic market. The fact that EIB was able to achieve such a large transaction in a developing maturity, with such a big take-up from a wide range of domestic Canadian investors, is an achievement.”

EIB follows one of the strictest standards when it comes to green finance, said Laura Desclaux, Associate Director at Scotiabank’s Group Treasury, which participated in the transaction as an investor on behalf of the Bank.

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The domestic response to EIB’s transaction is a demonstration of how much this market, and demand from investors, for green bonds has grown in Canada

 — Laura Desclaux, Associate Director at Scotiabank's Group Treasury

“Group Treasury committed to invest in and support the development of the green bond market in Canada and internationally; it was a great opportunity to participate and be able to do so in our domestic currency. The domestic response to EIB’s transaction is a demonstration of how much this market, and demand from investors, for green bonds has grown in Canada, she said.”

As Canada and the world strive to reach net-zero emissions by 2050, sustainability, environment and climate change are increasingly top of mind for citizens, investors and corporations.

For example, Scotiabank earlier this month established a $1-million Net Zero Research Fund to advance research and leadership in support of global decarbonization efforts.

In November 2019, Scotiabank outlined its Climate Commitments aimed at supporting the transition to a lower-carbon and more resilient economy. Among them was a commitment to mobilizing $100 billion by 2025 to reduce the impacts of climate change as well as enhance integration of climate risk assessments in lending, financing and investing activities.

“People and institutions increasingly want to put their funds toward green initiatives,” said Mike Field, Director at Scotiabank’s Group Treasury. “So, you are seeing pools of capital looking for opportunities to drive that initiative, whether it is specific investment funds that are dedicated toward this type of investment or banks like us that are starting to take up the mantle. It's a change that’s come into the world and you're seeing it in the dollars that are being spent.”