How the green bond market can
help fund protected areas

By Jeremy Guth, trustee of the Woodcock Foundation and chair of the Yellowstone to Yukon Conservation Initiative development committee

Developments in global bond markets combined with the resolution of the Canadian government to undertake Target 1 provide a unique opportunity to efficiently meet the funding requirements for the initiative. As a part of Canada’s biodiversity targets, Target 1 committed our country to conserving 17% of Canada’s terrestrial areas by 2020. Recently, the goalposts have been shifted down the field to 25% by 2025 and 30% by 2030 with each percentage of increased protection composed of 92,000 sq. km. The cost to procure and secure a landscape on that scale will be in the billions of dollars.

The Green Bond Market

Since their debut in 2007, there has been a surge in the issuance of a new form of debt instrument: the green bond. In the past thirteen years, their total value worldwide has grown from $4 to $500 billion. Issuers range from ENGO’s such as the US Nature Conservancy (TNC) to sovereign entities such as Poland, France and China. The range of activities underwritten is broad but include “…terrestrial and aquatic biodiversity conservation (including the protection of coastal, marine and watershed environments)…” as stated in the standard-setting Green Bond Principles’ Voluntary Process Guidelines for the Issuance of Green Bonds.

In Canada, Ontario has led the way in the development of green bonds issuing. To date, some CAN$5 billion have been issued to support public transit, LEED-certified public buildings, green energy projects and the like. Remarkably, demand for these bonds has continued to outstrip supply. In the case of Ontario’s 2016 issue, subscriptions (or buyer interest) were twice the value of the offering totaling over $1.5 billion. Investors, both individual and institutional, are increasingly aware and committed to investing sustainably, and, in the case of some individuals and institutions such as Social Return on Investment (SROI) fund managers and foundations, there’s a willingness to combine a “social” with a financial return on their investment. In other words, these investors are willing to accept a less competitive yield in consideration that their investment will also return the benefit of a more sustainable future.

An opportunity for Canada

As a sovereign bond issuer in possession of a AAA credit rating, Canada can already borrow at the lowest market rates. Combining this creditworthiness with a commitment to using the proceeds from the sale of green bond to protect landscapes on an unprecedented scale could generate a great deal of interest from investors. These are also promising conditions to create bonds with a combined financial/social return, which would further lower the cost of borrowing. Even a small reduction in the coupon rate at the scale of a $1 billion offering is significant: a percentage point equaling $5,000,000 in reduced annual payments.

Many green bonds are revenue bonds: income from the investment is tied to the revenue generated from the particular project financed. This may be a possible means to finance the securement of lands protected by particular ‘Other Effective Area-Based Conservation Measures’ (OECM’s) (e.g. a forest wherein logging is permitted but limited to protect biodiversity), but those lands protected by the more conventional regimes, such as parks, will require a “recourse to issuer” bond where the revenue to meet interest payments cannot be tied to the objective — for now. As the world’s carbon markets continue to develop and grow, opportunities to accept payment from carbon emitters will increase, and the bulk of Canada’s protected lands could begin to generate revenue for their environmental services. Careful consideration should be given to determining the term of the “recourse to issuer” bond issues, as they may well be in a position to convert or roll over into revenue bonds in 5-10 years’ time.

Finally, unlike Ontario, Canada both collects and sets the rates for income and capital gains tax. The cost of borrowing through bond issuance is recouped to some extent in the taxation of those bondholders whose income is subject to the CRA. Furthermore, a reduction on the tax rate for income of its green bonds could well increase the incentive for Canadian taxpayers to buy and may be more cost-efficient to the issuer than trying to sell bonds with a combined financial/social yield. The cost of the reduced tax rate may well be offset by the increase of Canadian taxpayers in the mix of bondholders: a greater proportion of interest paid out to those holders will still be taxable.

What can you do to make biodiversity count?

Investment managers are responding to a higher demand for environmentally-friendly investments and are providing more socially and environmentally responsible options in a diversity of investment sectors. For your personal investments, we encourage you purchase such products as green bonds and both mutual and index equity funds. If you contribute to a pension fund, you can still write to urge your fund managers to make environmental considerations a priority in their portfolios.

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