Friday, 8 November 2013

Green Bonds - The Fixed Income Way to Invest by ESG/SRI Principles

Investing in equities that meet ESG / SRI criteria is well established in Canada. Investors can pick from a reasonable smattering of mutual funds and ETFs, or pick out companies that either rate better than others (e.g.  our posts on mining companiesoil and gas producers, and consumer stocks). Beyond companies that adhere to a higher standard, it is possible to choose those that specifically provide products or services directly benefiting the environment e.g. see the 118 TSX Clean Technology index members. But equity capital is not the only way to invest.

Fixed income investment - buying the debt issued by such companies - is an option too. In some cases, the lending is tied to a project with specific environmental benefits and they are called Green bonds. Such bonds are mainly from companies in transport (rail, electric vehicles, mass transport) and energy (renewables like hydro, solar and wind) with a tiny portion in forestry. As with all debt, holders take precedence in getting paid before equity holders receive dividends so the investor has greater security. Yields from Green bonds will be in line with their credit rating.

TD Economics' 1st November report Green Bonds: Victory Bonds for the Environment gives an overview of what's happening with Green debt, as do Sustainable Prosperity's June 2012 briefing,'s Bonds and Climate Change: The State of the Market in 2013 and their joint Canadian update of September 2013.

Worldwide Market - US Dollar, Euro, Pound Sterling Bonds
Most of the Green bonds in existence have been issued by large international financing institutions such as the World Bank (rated an ultra-secure AAA), which lists its Green bonds here, the European Investment Bank, the International Finance Corp, the Kommunalbanken AS, the African Development Bank, the European Bank for Reconstruction & Development, the Asian Development Bank and the Nordic Investment Bank. The main currencies of issuance have been US Dollars, Euros and Pound Sterling.

Discount brokers such as TD Direct Investing and BMO InvestorLine at the moment unfortunately do not appear to hold any bond inventory of these big international issuers. It may be possible to phone the broker's bond desk and ask them to find such bonds but since Canadian discount brokers deal only with Canadian and US dollars we should only expect to get USD bonds, if any.

Canadian Dollar Bonds and Debentures
A better bet, though still likely hard to find, is to buy bonds issued in Canadian dollars on the Canadian market. In Canada, the Green bond market is still in the early stages, so there's not much available yet. The main issuers and issues on the market include the following. Most are investment grade, meaning that they are rated BBB or higher by ratings agency DBRS.
  • The biggest issuer (per this report) is apparently Brookfield Renewable Energy Partners (DBRS Credit rating BBB).  The company builds and operates hydro power, primarily and some wind power plants. Issues include: five medium term notes maturing in 2016, 2018, 2020, 2022, 2036; long term in 2053
  • The two national railways since rail is such a low-carbon transport method: CN Railway (rated A low). Morningstar has a handy list of its bonds here. Canadian Pacific Railway (rated BBB low) lists its long term debt on page 104 of the 2012 Annual Report. Note that in its list of Green bond issuers includes CNR but excludes CPR for unspecified reasons.
  • Northland Power produces electricity from biomass, solar, wind and hydro sources. Most of its debt appears to be privately placed and is unlikely to come on the market. It has issued convertible subordinated debentures (that can be exchanged for common shares under certain conditions - see p.32 of the Annual Information Form) that are traded on the TSX under symbol NPI.DB.A. This debt is not credit rated.
  • St Clair Holding Inc (rated BBB) operates a solar energy site near Sarnia in Ontario. The facility was bought in 2012 by NextEra Energy, whose renewable energy portfolio is about a quarter nuclear, which may not fit some people's definition of environmentally friendly. Does a bond dedicated to a solar facility still qualify as Green? It's up to each individual investor decide. The $175 million bond matures in 2031
  • Canadian Hydro Developers was acquired by TransAlta (rated BBB) and relaunched as TransAlta Renewables (TSX: RNW) in mid 2013 with a mix of wind and hydro power assets added from TransAlta's other assets - see investor presentation here. TransAlta retained 80% ownership.
  • Newalta Corporation provides industrial waste management services (rated BB high, one level below investment grade)
  • Boralex is a producer of all types of renewable power, except nuclear (not rated)
  • Run of River Power, operates hydro power (not rated)
  • Innergex Renewable produces hydro, wind and solar power. It also has convertible subordinated debentures traded on the TSX as INE.DB (rated BB high, one level below investment grade)
  • New Flyer Industries makes buses. It's USD denominated convertible debentures mature in 2017 and trade on the TSX under symbol NFI.DB.U
  • Capstone Infrastructure, which acquired Sprott Power Corp a few months ago, is another renewable power generation company. It has one small bond maturing 2016.
  • Millar Western Forest Products has a callable bond with an 8.5% coupon maturing April 01 2021 (not rated)

A future possibility is that the Ontario Government (rated AA low) has just proposed to issue green bonds in 2014 to fund mass transit projects in the province. 

Brookfield, CNR and CP Railway bonds should be the easiest to find; they will be listed in the fixed income section at discount brokersThe Northland, Innergex and New Flyer debentures are readily available through the equity trading section.  Other debt issues in the list are likely to be difficult to find. Though the debentures are debt and pay interest the fact that they are convertible into common equity is the reason they are traded on the stock market. 

Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comparisons are not an investment recommendation. They rest on other sources, whose accuracy is not guaranteed and the article may not interpret such results correctly. Do your homework before making any decisions and consider consulting a professional advisor.

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