As mining companies start to incorporate renewable energy into their mining operations, they should consider the environmental and sustainable finance tools that could be available to them. These tools allow an issuer to project its green credentials into the capital markets and potentially differentiate itself from its peer group, attract new investors and potentially realize pricing advantages when issuing corporate bonds. This post looks at green bonds.
The Green Bond Principles (GBP), prepared by the International Capital Market Association, set out voluntary process guidelines that can be followed by a company issuing bonds in order to label those bonds as “green bonds” in a way generally acceptable to the market (Dentons Canada was the first Canadian law firm member of the Green Bond Principles). The green bond label can be applied to any type of bond a company might otherwise issue, including project bonds, medium-term notes, high-yield or investment-grade bonds.
The key requirement for a green bond is that the use of proceeds from the bond offering be designated for a green project. What constitutes a green project is not a closed set, but is understood to include renewable energy, green buildings and sustainable water management. The type of business that an issuer of a green bond engages in is not supposed to be relevant since the focus is on the use of proceeds. However, in practice, a miner of fossil fuels (e.g., coal or oil sands) may be challenged in labelling a bond “green” even if the use of proceeds is for a solar power generation facility, just because of how the green bond market has developed. Those issuers could consider the newer variant of bond labelling called “transition bonds”, which are intended to finance activities that will make a brown issuer less brown. The same obstacle should not exist for hard rock miners.
Other elements of the GBP guidelines are (i) that the issuer discloses to investors how the particular use of proceeds satisfies the green project requirement; not difficult where the use of proceeds is renewable energy, (ii) that the issuer has in place a system to track the amount of the net proceeds of the bond issuance to the designated use of proceeds, and (iii) that the issuer commits to report at least annually on the use of proceeds. In respect of the tracking of the net proceeds, the market has accepted that bond proceeds may initially be used to pay down bank indebtedness which, in turn, is then drawn on to fund the green project. Reporting can be done on an issuer’s website, and should address qualitatively, and where feasible quantitatively, the green impact of the use of proceeds (e.g., volume of greenhouse gas avoided).
Finally, the GBP recommend that an issuer of green bonds have an external review of their compliance with the principles laid out in the context of the bond offering. Over the last few years, and as the number and accessibility of verifiers has increased, an external review has become more standard market practice.
While there are protocols to follow when issuing green bonds (or transition bonds) and using other sustainable finance tools, as companies are otherwise producing sustainability reports and social responsibility reports, often the work required is already being done. Investors are also increasingly asking for these types of products.
For more information on alternative finance opportunities, check out our recent presentation on Alternative capital markets financing options.