Canada’s first corporate green bond: TD Bank’s 3yr AA- CAD500m (USD454m) bond was 1.5 x oversubscribed. Our take: underlying structure & intent solid but better upfront disclosure needed + third party review.

A beautifully sunny day in Toronto today; the local weather's looking good for green bonds as well.


Nearly two weeks we blogged that TD Bank had become Canada's second "labelled" green bond issuer, with a CAD500 million, 3 year, fixed interest corporate green bond. Here's the review:

This is Canada’s first corporate green bond, and the world’s second green bank bond (Bank of America was the first). A corporate green bond means a bond fully backed by the company – and so AA/AA-/Aa1 rated in TD’s case – but proceeds are allocated to green investments. TD's pricing was around 60 basis points more than government benchmarks. Manager was TD Securities.

Of particular interest is that TD issued two bonds at the same time: a standard bond at 5 years, and the green bond at 3 years. Both bonds were over-subscribed and pricing was similar. The green bond was 1.5 times over-subscribed and attracted 39 investors, 12 of whom were new investors to TD.

Proceeds in the green bond will be “used by the Bank to finance its customers’ and/or its own projects/operations that support the green economy”.

As regular readers of this blog will know, we believe that standards around definitions of green and around use of proceeds are needed if we’re to avoid green washing and ensure confidence in the green bonds market.

TD has clearly set out to do a green bond as an example to others, which is a good thing. But in that context we have two concerns with the bond: its rather broad stated definitions of green and the lack of upfront external review of its green credentials.

TD lends some $2 billion a year to cleantech, so they have more than enough deal-flow to back a bond and justify its green credentials. But in this bond, as part of raising awareness among investors around the range of projects that can be considered green; they’ve chosen to say they will allocate funds to a broader set of investments. Fair enough; laudatory even. But the stated criteria are very open, making for potential uncertainty about what sorts of investments could be included. TD does say that they felt they couldn’t be clearer because of a lack of standard criteria in areas such as green buildings and infrastructure and that they’re “working with credible third parties to establish suitable criteria”. Apparently additional information will be coming soon; good, but should have been upfront at the time of sale.

In TD’s Green Bond FAQ, green is defined as:

1.    “Renewable and low carbon energy and related infrastructure, such as hydroelectric, wind, solar and geothermal.”

The term ‘low-carbon’ is, for some people, very broad. Our first question was whether bio-energy is included and if so, what forms – some forms of biofuels are a bad idea. Equally, gas is seen by some folk (and by gas companies) as low-carbon. TD have subsequently publicly confirmed that gas and biofuels are not included; of course it would, again, have been good for a demonstration bond to be explicit on these things upfront.

2.    “Energy efficiency and management, with a focus on green buildings.”

The Term Sheet notes that TD “has 127 LEED certified locations in North America and 100 facilities generating solar energy, including two branches designed to be net zero energy”.

Zero-energy performance is great; but LEED is not always an adequate proxy for emissions performance. Performance hurdle rates are needed as well. As the IEA says, small improvements can be counter-productive, locking in assets to emissions profile that are not adequate to the built or industrial emission reductions we have to achieve to address climate change. 5-10% is generally not seen as adequate, for example. Whatever, we would want to know what level of LEED certification - or Energy Star rating - the buildings achieve.

We’re worriers, and the next anxiety was, on the basis of the disclosed criteria, whether fossil fuel power plant retrofits be included in there? Are there any limits? For example, could loans to energy efficiency investments in the Alberta tar sands be included? Note that the World Bank has specifically excluded coal-fired power plant retrofits from its green bond, because CICERO (and they’re right) said that, in most countries, extending the life of coal-fired power plants was antithetical to the emission reductions trajectory the world needs. TD said no no no on fossil fuels – music to our ears. Again, please be explicit to show others.

3.    “Green infrastructure and sustainable land use management […]  includes municipal and regional infrastructure projects that contribute to energy reduction and projects that involve certified sustainable agricultural and forestry practices”.

Green infrastructure is a pretty wide definition. For example, will they expect water infrastructure to have climate adaptation plans?

Clarity of definition, so investors can easily compare apples with apples, is important if green credentials are to remain robust.

At the moment, the available documentation for the TD bond gives the perhaps unfair impression of TD judging by itself what is green.  Of course it’s true that the green bond market is taking off without protocols, standards, verifiers and reporting requirements fully established - a common feature of rapid market adoption.  We’re working to fix that with the Climate Bond Standards & Certification Scheme; for example we’ll be releasing green property and low-carbon transport definitions (eligibility criteria for certification) in coming months..

The lack of clear definition for this bond would be ameliorated by credible third party review of green claims, or even by referencing a recognized third party set of definitions, as per the Appendices of the Green Bond Principles, and outlining any specific areas of exclusion (e.g. gas). TD are working on this, but this should have been in place when the bond came out.

TD says that they “will provide investors with annual updates regarding the use of the TD Green Bond proceeds”. We understand an auditor will sign those reports off – excellent – but, again, details haven’t yet been announced. Sigh.

They’ve also said that: “pending the allocation to finance the above projects, the proceeds of the TD Green Bond will be segregated and invested in short term financial instruments.” Excellent.

By the way, TD bank says it “will fund new projects or refinance continuing business operations”. Sounds good to us; bonds are primarily a re-finance instrument; the easier it is for equity investors and lenders to re-finance the easier it is for them to decide to invest upfront. We need more examples that involve re-financing; this week’s Iberdrola bond was another.

Finally, TD notes that their bond is available to retail investors through TD Wealth Management. Given that we often get asked by individuals how they can get hold of green bonds, this is a useful add-on.