_This article was written by Carter Vance, Associate Economist/Policy Analyst, Department of Finance, Government of Canada. _

  • The problem: Government performance metrics around climate and environmental goals are often poorly tracked and not useful in measuring genuine progress.
  • Why it matters: Governments are key actors in the race to net zero, and ensuring their performance is adequately tracked is key to achieving environmental goals.
  • The solution: Use of greens bonds can provide greater tracking and accountability for environmental and climate spending by governments._ \_

The idea of sustainable finance has been met with equal parts enthusiasm and scepticism as one method to address climate change and other environmental issues. For some, greening the financial system is a key way to direct capital towards a net zero future and use the power of markets to drive climate actions. For others, high profile instances of "greenwashing" and other suspect behaviour have created a high degree of suspicion around any claims of positive impact. Though the debate around the parameters of sustainable finance is very much an ongoing one, it is clear that governments across the world are increasingly viewing the financial system as both a problem to be solved (in terms of mandating disclosure of climate impacts and other regulatory changes) and a contributor of solutions in order to meet environmental goals.

One tool that has come to be used by many stakeholders within the sustainable finance space, but is especially popular amongst governments is the green bond. A green bond is any type of bond instrument, whose proceeds are exclusively used to finance or refinance eligible “green” projects. These bonds have been subject to some controversy, particularly those that were labelled as “green” in earlier years, due to a lack of binding global standards. At this point, though there are still no official rules on what can be self-labelled as “green”, there are general standards that have evolved, most crucially those put forward by the International Capital Markets Association (ICMA). These principles define what use of proceeds can be considered “green” but also, perhaps just as critically, define procedures for reporting on allocation and impacts of the associated spending.

A successful, well-run green bond program is one tool to add to the credibility of government climate change and other environmental pledges.

A number of countries, both developed and developing, have put forward green bonds as a compliment to their conventional bond programs in recent years, with the majority of G7 nations now having a green bond program with regular issuances. These bonds serve a number of purposes, including meeting the demands of investors who have “green” or other ESG (environmental, social and governance) mandates for their investments, demonstrating tangible government commitments to environmental priorities, and potentially earning a “greenium”, which allows for lower debt servicing costs.

Some may question the utility of green bonds within the context of sovereign government debt as they do not, by themselves, authorise incremental spending on green projects. Rather, green bonds essentially allow governments to re-allocate previously-approved spending to the green bond, rather than financing it through their conventional bond program or via general government revenues directly. However, this perspective ignores the critical element of additional reporting requirements and transparency that green bonds impose upon governments, or other issuers, who choose to issue them. Making green bonds a success requires a whole-of-government commitment to increased transparency, and timeliness of reporting on both financial expenditures and the real-world results of those expenditures.

The Government of Canada issued its first green bond, worth $5 billion (CAD) in March 2022, after an announcement that it would pursue such a program a year earlier. As part of the allocation exercise for this program, the government created an Interdepartmental Green Bonds Committee (IGBC), co-chaired by the Finance and Environment, and Climate Change ministries. The IGBC allows departments to work collaboratively to ensure the success of the green bond by verifying expenditures and impacts, and assessing eligibility of programs for green bond inclusion amongst other tasks. The Committee is currently in the process of preparing the inaugural Allocation Report, which is required to be released before the end of March 2023, in accordance with Canada’s Green Bond Framework. The green bond process has allowed the departments within the IGBC to ask critical questions about how the impacts of their programs are tracked and whether they are consistent with global green bond standards.

A successful, well-run green bond program is one tool to add to the credibility of government climate change and other environmental pledges. The increased transparency required from green bonds in order to satisfy investor demands for transparency and genuine impact from their dollars. They also present an opportunity for government departments to up their game in terms of tracking and reporting, asking more from both themselves and their non-governmental partners.

There are legitimate criticisms of the processes around green bonds, and debates will likely always be had over what exactly to categorise as “green”. However, the increase in collaboration that green bonds have already fostered at the Government of Canada, in the short time since their introduction, is a sign of the progress they can create on the wicked problem of aligning government financing with environmental sustainability.

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(Image Credit: Pat Whelen, Unsplash)