Toby Heaps is chief executive of Corporate Knights Inc. and Annette Verschuren, O.C., is chair and CEO of NRStor Inc.
The rising tide of investor interest in green bonds – which has tripled since 2015 – and in clean finance more generally is indisputable. But if we are going to navigate our way to safer climate-change waters while continuing to grow our economy, we need to be sure that tide is indeed lifting all boats. In other words, we need mechanisms that finance climate-friendly projects, not only for solar panels and transit tracks, but also for a massive transition in carbon-intensive industries.
The federal government’s expert panel on sustainable finance shares that view, and in October endorsed “transition-linked financial products” to help channel green investment to high-emitting industries. It also called for standards regarding what the types of activities would quality for this kind of investment. Standards-based clarity in this area was also an important theme in a recent report on clean finance from Toronto Financial International. A “shared language” for green and sustainable finance across all industries is similarly a priority for the FC4S Network, a global platform of leading financial centres working on sustainability that will hold its next annual meeting in Toronto. Corporate Knights – as with some 40 other organizations representing Canadian bond issuers, raters, underwriters and investors – has been working on such standards and shared language for several months to provide guidelines for industries and financial-services companies.
The result is a set of just-released clean transition project standards covering the oil-and-gas, mining and metals, heavy-industry and energy-utilities sectors. The standards are a crucial first step in establishing an important new type of green bond. “Clean-transition bonds” will help these vital sectors further reduce their emissions, while leveraging massive opportunities to improve processes and develop new products.
The draft guidelines define sector-specific activities that reduce carbon or otherwise improve environmental outcomes while often also establishing market advantage, and 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 and renewable jet fuels, and provision of infrastructure for fuelling electric and hydrogen vehicles.
The standards then define the maximum percentage of proceeds from a clean-transition bond issue that can be directed to each activity, ranging from 25 per cent to 100 per cent, depending on the activity’s beneficial impact. In this way, the standards open the door to wider investor participation in decarbonization in these sectors, accompanied by assurance for investors that they are in fact financing climate-friendly projects that reduce climate-related risk.
Work remains to finalize the guidelines, and bond-market participants and heavy-industry finance officials will gather next month at a round table co-hosted by the federal expert panel and Toronto Finance International. Their goal will be to establish a made-in-Canada definition for how heavy industry can be part of the low-carbon transition. Ultimately, we hope the federal government will endorse the finalized standards, which are being crafted to integrate seamlessly with broader frameworks such as the green-bond principles established by the International Capital Market Association.
It’s worth noting too that, while Canada has depended on high-emitting economic sectors, the challenge of adapting clean finance for application within such contexts is global. By moving quickly to put standards in place here, Canada can become a leader in the burgeoning market for clean-finance expertise and mechanisms (itself a major growth opportunity for this country’s financial companies). At the same time, we will help facilitate a transition that will not only combat climate change, but also, we are convinced, lay the foundation for tremendous growth within core economic sectors. To test that belief – and concurrent with the development of the new investment guidelines – Corporate Knights recently drew on data from Alberta Innovates to quantify the market opportunities for non-combustion uses of bitumen from the Alberta oil sands. The outcome is tremendously heartening for anyone who fears a hollowing out of the economic opportunity currently derived from this resource. The most promising product types leverage the very attributes that give bitumen a heavy footprint when burned. They include use of carbon fibres for steel replacement and in concrete and wood composites, along with pelletized asphalt. The annual market value of just those four product lines could be US$218-billion by 2030. Add in a wider range of sustainable commodities that could be made from bitumen and other abundant raw materials and the analysis suggests a market opportunity of about US$1.5-trillion annually. Of course, none of that will happen without substantial investment – in fact, Corporate Knights estimates the cost to be at least US$1.8-trillion.
More of that needs to come from the growing number of investors who are specifically looking for green assurances, and bypassing sectors such as oil and gas. Where clean finance is concerned, it is time to make room on board for a broader range of Canadian industries and to put the entire Canadian economy, and heavy industry around the world, on a surer course to clean growth.