Toronto-Dominion Bank is launching a "green bond," becoming the first major lender to get behind the environment-focused debt trend.
Canada's second-largest lender by deposits will offer a $500-million bond with maturity date of April 3, 2017. Proceeds will be used to fund initiatives related to more efficient energy and land use, while offering investors a competitive yield.
TD spent a lot of time outlining the where the proceeds should be invested in order to define what makes the bond "green," according to Patrick Meneley, vice-chairman of investment banking at TD Securities, the capital markets arm of the bank.
The bank settled on three core areas. Projects or companies focused on renewable and low-carbon resources qualify. So do those that help reduce energy consumption, or help manage and store energy. And the third category relates to infrastructure and land use that promotes conservation, in areas such as waste and water management.
Many of the investment candidates are located in Canada, and are already involved with the bank.
"We have a strong constituency of clients who are involved in renewable energy and are doing things like hydro and wind projects," Mr. Meneley said.
The proceeds may fund new projects or refinance continuing business operations. The bank said the money will be invested in short-term financial instruments. But for the bond's investors, the terms on the debt are the same as any other TD bond. Payment of principal and interest will come from the bank's general funds, and not from the success of the green projects.
TD says it will target institutional investors and asset managers who have a socially-responsible investing (SRI) mandate. "Those types of investors are becoming more numerous and there are more funds being allocated to these portfolios," Mr. Meneley said. Investors who might already invest in other non-green three-year deposit notes would also be candidates.
Other Canadian banks such as Royal Bank of Canada are also preparing to launch their own green bonds.
A RBC Dominion Securities report out this week highlighted the opportunity the bank sees for these securities around the world. "In 2013 alone, green bond issuance totalled $11.8-billion (U.S.), up from $2-billion in the prior year," the paper said. The biggest global issuer of green bonds in recent years has been the World Bank, which did 46 new issues worth $3.8-billion between 2007 and 2013.
Up until this point, Export Development Canada, a Crown corporation, was the only Canadian institution to have issued a green bond, and it was denominated in U.S. dollars, according to RBC.
But green bonds from the government of Ontario are expected to follow TD's inaugural green bond. The province's Premier Kathleen Wynne said last year that she planned to introduce green bonds as soon as this year to fuel environmentally friendly infrastructure construction and smog-reducing transit system upgrades.
"There are a lot of [government] policy incentives and policy objectives … so what we're saying is we believe in that and we're going to add to those objectives though the green bonds," TD's Mr. Meneley said.
The RBC report speculates that the green bonds could also emerge in the corporate sector, where real estate, power generation and utilities "lend themselves to climate-themed initiatives." These sectors have about $100-billion in outstanding bond obligations already.
Mr. Meneley agrees there's lots of potential. "The green bond market itself is relatively nascent, but you do see companies going out and doing these. Just last week Unilever PLC did a green bond," he said, referencing a recent £250-million ($460-billion) offering. He expects there will be more companies that follow this example.
But exactly how large the demand is for green bonds continues to be unclear, especially since the term is ill-defined. TD estimates that market demand for green bonds could range between $10-billion and $350-billion.
TD also wants to solidify its position as a leader in environmental initiatives. The bank employs a chief environment officer, for example, and has been underwriting World Bank Climate Bonds for the last five years.