Bond Market Edge Seen Expanding for Sustainable Credit Bets

Ontario Power Generation, a utility company with over C$60 billion ($47 billion) in assets, sees the price advantage of green bonds over conventional securities expanding over time.

Considering “where the bond rates are right now, the ability to get a premium is limited” said Ken Hartwick, the company’s president and chief executive officer. “We are at the early stage of seeing investors -- whether that’s pension funds, asset managers and the like -- starting to say that they will pay a little more or charge a little less for green-related bonds.”

The so-called ‘greenium’ in the Canadian-dollar corporate bond market is at around a “handful” of basis points, according to Royal Bank of Canada estimates earlier this month. Over time, it may reach 10 basis points or even more, said Hartwick. In the U.S. dollar market, utility sector green deals were saving issuers around 8 basis points compared to conventional bonds, according to a Bloomberg Intelligence note released Jan. 20.

OPG, which started selling green bonds in 2018, sees an increase of the premium just as some of the country’s largest pension funds are stepping up efforts to ask companies to identify and address issues such as diversity and inclusion, human capital, board effectiveness and climate change. This could spur the bulk of financial market instruments to comply with certain environmental, social and governance disclosures in the medium term.

Bond Market Edge Seen Expanding for Sustainable Credit Bets

Still “we are a number of years away from basically every bond being a green or sustainability bond or bank financing,” Hartwick said in a telephone interview.

OPG last sold green bonds on April 2020, when it issued five-year and ten-year securities, according to data compiled by Bloomberg. The 2025 notes, which were priced at 229.6 basis points over government securities, were quoted at a spread of about 52 basis points Wednesday, according to Bloomberg Valuation bid prices.

Greener Hydrogen

The company is also looking at options to produce green hydrogen. The firm in November released its first climate change plan, which set a path for OPG to be net-zero in carbon emissions by 2040 by implementing measures including the rollout of a transportation electrification network via a joint venture with Hydro One Ltd.

Nonetheless, in order to produce greener hydrogen -- which is produced from clean sources of energy -- it will be necessary for “a policy bridge” to subsidize the extra-costs, said Hartwick. “That will be the next step from a federal and provincial standpoint.”

On top of green bonds, OPG signed in December a $750 million sustainability-linked credit facility and is looking at a number of other options for financing, he said. The climate change plan “will be the anchor for every investment we make and for every financing product option we look at,” said Hartwick, adding that the firm may explore themes related to diversity and inclusion or financial products linked to a specific element of its climate change plan.

©2021 Bloomberg L.P.

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