Sales of sustainability-linked bonds out of Canada are poised to take off after two first-time issuers showed companies can tap lower borrowing costs than conventional securities.
Telus Corp., which sold C$750 million ($606 million) of SLBs last week, saved about six basis points versus the cost of selling conventional debt, said Stephen Lewis, senior vice-president and treasurer at the telecom firm. Oil pipeline operator Enbridge, which sold $1 billion of the bonds last week, realized a so-called greenium of at least five basis points, Max Chan, the company’s vice-president of treasury, said in an interview last week.
Sustainability-linked bonds are a nascent asset class that generally penalizes issuers with higher borrowing costs if they don’t meet certain environmental, social and governance metrics. In contrast to green bonds, companies can use deal proceeds as part of their general funding plans, so SLBs could play a role in helping key industries such as oil and gas – the country’s largest source of greenhouse emissions – to gradually transition their operations into cleaner technologies.
“There is nothing to prevent this asset class from becoming the new normal in Canada,” said Diane Young, a Guelph, Ontario-based, senior portfolio manager at Addenda Capital Inc. “Quite frankly we have a unique economy and asset base and we need to support the idea of transition. SLBs as a component of overall debt will grow materially in the near future.”
Canada would need to invest around C$128 billion over 10 years in order to reduce greenhouse emissions by its initial target of 30 per cent below 2005 levels by 2030, according to a report from the Institute for Sustainable Finance in September. Since then, the federal government has bolstered its goal of cutting greenhouse gas emissions twice and is currently aiming for a reduction of 40 per cent to 45 per cent below 2005 output.
SLBs have been gradually gaining traction since Italian utility Enel SpA became the first to issue such notes in dollars and euros in 2019. Earlier this month, Italian energy giant Eni SpA was the first oil company to sell euro bonds tied to cutting carbon emissions.
Global sales of SLBs are close to $40 billion this year, according to data compiled by Bloomberg. Sales could reach $75 billion to $100 billion by the end of 2021 as the structure continues to gain momentum in harder-to-decarbonize sectors, according to Steven Nichols, head of ESG capital markets for the Americas at Bank of America Corp.
More to come
“I think it’s pretty clear that Canadian investors have a strong appetite for SLB product,” said Enbridge’s Chan. “It makes a lot of sense that we would follow on from here to a Canadian-dollar offering,” said Chan, who said that the deal may be carried out this year.
Telus may also continue issuing SLBs, though it doesn’t have any immediate plans.
“Given the significant interest that we had in this spot it wouldn’t surprise me if we issue more SLBs,” Telus’ Lewis said in a telephone interview Tuesday, adding that while not necessarily all future debt offerings would be SLB format, “we will be looking very closely at how we might bring sustainability-linked financing to the full spectrum of our bond offerings.”
Both Telus and Enbridge gathered demand not only from Canadian and U.S. dollar-based investors, respectively, but also from other regions. Enbridge placed around 10 per cent of the deal with buyers based in Europe while a small portion of the notes were placed in Asia and Australia. Telus saw European Union investors make up five per cent to 10 per cent of the allocation.
“The capital is forming very rapidly around it,” said Chan. “Not all but many of the investors we have been speaking to in the last few days have dedicated SLB funds or ESG-focused funds. Right now it’s a bit of supply issue. There are not enough issuers.”
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