The next phase in the evolution of the Canadian capital markets will see the introduction of more rigorous standards to improve investor protection, reduce market fragmentation, and better access to capital for small and mid-sized businesses. As part of this transition, investors should expect a new flood of ESG disclosure. 

The Canadian capital markets have been evolving for some time now, but with the introduction of the Canada-Germany Accord in June 2017 and other regulatory initiatives, it has accelerated into a new phase. This article provides an overview of this phase, focusing on what you need to know about the upcoming rollout in Canada.

So far this year, Canadian dollar ESG bond sales have reached $17.8 billion (US$13.7 billion), up from $17.6 billion in the same period last year. On Aug. 24, the country’s largest pension fund manager sold green bonds due in 2028 for $1 billion. 

A number of major developments took place in Canada this year, including the sale of the country’s second nuclear-power green bond by Ontario Power Generation. Earlier this year, Anglian Water Services Financing Plc became the first non-Canadian company to sell green bonds in loonies, and Capital Power had the first green hybrid transaction in Canadian currency.

SUSTAINABILITY-LINKED BONDS

Sustainability-linked bonds are bonds that offer a credit-quality guarantee from a third party. Bondholders agree to provide a set percentage of their investment income to a sustainable development trust (or similar non-profit organization) for a certain period. These are new addition to the Canadian market, but they are already attracting interest from investors and issuers in other countries. 

Introducing these bonds has many implications for investors and the capital markets. Firstly, they offer a new way of accessing the equity markets, in that the percentage of the returns is linked to the success of a particular cause. 

In addition to investing in bonds designed to finance investments in renewable energy and urban infrastructure, big institutional lenders are exploring programs to contribute to  climate and social goals

INVESTORS’ OVERSIGHT

In addition to expanding the range of ethical securities, investors are monitoring how borrowers’ environmental plans, such as net-zero emissions commitments, are being implemented. In an initiative called Climate Engagement Canada, investment managers of over $3 trillion of assets are getting in touch with the the management of some of Canada’s biggest polluters.