Municipalities should consider green investment bonds as an alternative way to fix their infrastructure, says a new commentary by Morningstar DBRS.
Nine of the 10-highest insured severe weather loss years in Canada have occurred over the past 15 years, Morningstar DBRS says, highlighting the need for municipalities to adapt for climate resilience.
Given the huge insurance losses caused by natural catastrophes across the country in recent years, funding the upgrades to infrastructure comes at no small price tag. Take, for example, the more than $40-billion worth of Canada’s wastewater and stormwater assets are in either “very poor” or “poor” condition and in urgent need of repair, per a report by Statistics Canada.
Though proactive climate adaptation could increase “near- to medium-term debt levels for the larger municipalities,” DBRS authors Cheryl Saldanha and Thomas R. Torgerson write, “making this investment now could mitigate economic disruptions and prevent municipalities from drowning in debt in the future.
“The increasing use of green bonds to fund climate adaptation strategies provides for somewhat better cost financing in an area where there is growing investor interest, potentially allowing municipalities to achieve more bang for their buck.”
What are green bonds? And who’s using them?
Green bonds are a fixed-income investment used exclusively to fund environmental or climate change-related projects.
Like traditional bonds, green bonds offer investors a “stated return and a promise to use the proceeds to finance or refinance sustainable projects, either in part or whole,” according to Investopedia. The timeframe for paying back the investors is stated in the bond’s terms and conditions.
A municipality would then use the money raised from investors to raise finance initiatives that create a more sustainable — or in this case, resilient — economy.
Financially, green bonds perform similarly to traditional bonds, and have comparable borrowing rates and returns for investors.
“Projects funded by green bonds include renewable energy, energy efficiency, clean public transportation, pollution prevention and control, conservation, sustainable water and wastewater management, and green buildings that meet internationally recognized standards and certifications,” Investopedia says.
The market for green bonds is growing exponentially across the globe, according to the World Economic Forum. “Strong demand for green bonds is also driving growth, with major investors from asset managers to insurers and pension funds keen to scoop them up.”
China and the U.S. take the top spots as the largest sources for green bonds.
Across Canada, Toronto and Vancouver (via its public transit system Translink) have issued green bonds at the municipal level. Québec has a provincial Green Bond Program, for which some of the funding has gone to the Société de transport de Montréal, to improve the resilience of its transit infrastructure against climate change, DBRS reports.
Both federal and provincial levels of government have programs in place to mobilize capital for climate adaptation initiatives that aid with their broader climate action strategies.
Since March 2022, Canada has issued green bonds to support its climate and environmental objectives.
“Government of Canada green bonds meet the demand of investors who are looking for green investment opportunities backed by Canada’s AAA credit rating, and which contribute to the development of a stronger, more sustainable Canada,” according to the federal government.
Feature image by iStock.com/Sakorn Sukkasemsakorn
