With the Ontario Government’s recent announcement of its intention to issue Green Bonds, it will become the first Canadian province to issue Green Bonds — a rapidly emerging financing tool being used by governments and quasi-governmental institutions to fund environmentally friendly projects. As the North American Green Bond market develops, investment banks are increasingly focused on establishing principles to create consistency and improved disclosure in respect of Green Bond offerings.

The Ontario Government has become the first Canadian province to announce its intention to issue Green Bonds as a method of financing environmentally friendly capital projects. Green bonds are increasingly being utilized by public and private issuers to raise capital to fund investments in projects having environmental benefits. According to the Climate Bond Initiative, the aggregate size of the Green Bond market is estimated at US$346 billion and is only expected to increase as more issuers finance projects using Green Bonds.

Green Bonds — Background

Green Bonds were first developed in 2008 in connection with the World Bank’s funding of certain environmentally friendly projects. The World Bank has issued over US $4 billion in green bonds to date. Green Bonds are increasingly being viewed as an attractive funding mechanism to allow public and private issuers to tap into investors’ growing interest in investing in environmentally friendly projects. Institutions such as the European Investment Bank, the International Finance Corporation, the African Development Bank, the Asian Development Bank, the Nordic Investment Bank and the State of Massachusetts have all issued Green Bonds. Green Bonds have been issued to finance projects related to clean drinking water, mass transit, waste management, solar and wind energy production and other renewable energy projects. Although there is yet no precise definition of what constitutes a “Green Bond”, in very general terms it can be a bond the proceeds of which may be used for a range of uses from financing a specific project to more generally promoting environmental sustainability or the mitigation of climate impacts.

Green Bonds can take one of the following forms:

  • A Proceeds Bond: a bond with recourse to the issuer, the proceeds of which will be used for a specified purpose.
  • A Proceeds Revenue Bond: a bond without recourse to the issuer but only to the cash flows generated by the project in which the proceeds of the bond issuance are invested.
  • A Project Bond: a bond without recourse to the issuer, the proceeds of which will be used for one of more specific projects, the risk of which will be borne by the investor.
  • A Securitization Bond: a bond collateralized by one or more specific projects.

Green Bond Principles

On January 13, 2014, a consortium of major international investment banks published Green Bond Principles as guidelines to assist issuers in the key components involved in issuing a credible Green Bond offering (the Green Bond Principles can be found at https://www.ceres.org/resources/reports/green-bond-principles-2014. The Green Bond Principles are a clear indication of the increased market interest in Green Bonds and the desire to improve disclosure and consistency to foster the emerging Green Bond market.

The Green Bond Principles have four major components:

  • Use of proceeds disclosure with respect to the category of green initiatives to which the proceeds will be applied. The potential categories suggested by the Principles include:
    • Renewable energy
    • Energy efficiency (including efficient buildings)
    • Sustainable waste management
    • Sustainable land use (including sustainable forestry and agriculture)
    • Biodiversity conservation
    • Clean transportation
    • Clean water and/or water treatment
  • Project evaluation and a selection process that allows investors to understand the investment decision-making process used by issuers to determine how a particular investment in a particular project fits within the categories identified in its use of proceeds disclosure.
  • Disclosure with respect to the management of the proceeds from a bond issuance. It is recommended that the net proceeds of an issuance are moved to a specific sub- portfolio or that the proceeds are tracked by a formal internal process. Until the proceeds are invested, it is recommended that the issuer disclose to investors the intended types of instruments in which the unallocated proceeds will be invested. Depending on the circumstances, it may be appropriate for such internal process to be audited, particularly by a third party.
  • Standardized periodic reporting of the use of Green Bond proceeds and project investments, including the use of impact reporting standards through performance indicators which measure the environmental impact of a particular project (e.g. reductions in greenhouse gas emissions).

In addition to these broad principles, the Green Bond Principles also highlight that it may be appropriate for the disclosure provided by issuers, and used by investors, to be verified by external parties. Such verification may be performed by a consultant retained by the issuer (which verification may be kept private) or by independent accredited third parties.

Ontario’s Green Bond Initiative

In fall 2013, the Ontario Government announced that it plans to issue Green Bonds to fund transit and other environmentally friendly infrastructure projects. Ontario’s proposal would allow the Province to issue Green Bonds as part of its regular borrowing program and would be used to fund specific environmentally sustainable projects that would qualify for ‘green’ certification. If Ontario proceeds to launch a Green Bond offering, it would be the first Canadian province to issue Green Bonds and only the second government in North America (following the State of Massachusetts) to successfully issue Green Bonds.

As Ontario moves forward with its Green Bond program, some of the considerations for the province and investors will include:

  • Whether the bonds will primarily be Proceeds Bonds or whether the Province may issue other forms of bonds that may be appealing to investors
  • Whether any of the specific verifications, audits and disclosure proposed by the Green Bond Principles will be appropriate for bonds issued by governments and if so, could such verifications and audits be performed by one or more ministries within the Government?

With the announcement of the Ontario Government proposal to issue Green Bonds and the newly published Green Bond Principles, it appears that Green Bond offerings will become more common in the North American market and may even support a retail investor base. With many North American governments facing significant infrastructure expenditures in the short term, we expect Green Bonds to become an increasingly important financing source for many issuers. As the terms of Green Bonds evolve, the application of the principles set out in the Green Bond Principles to different types of issuers is also expected to evolve.


Gordon G. Raman 

Other Author

Paul A. Simon


Securities, Capital Markets and Public Companies