Green bonds grow as financing option

Green bonds are a rising source of funding as project developers widen their search for financing beyond stock markets, according to a panel at a New York mining conference.

There are more green bond products – debt designed to fund environmentally friendly projects – in more countries than there used to be, according to Erin Boeke-Burke, director and lead analyst for Americas sustainable finance at S&P Global Ratings. She put the amount at about 14% of the total bond market, or nearly US$1 trillion by the end of this year.

“It’s still not old enough to drive yet,” Boeke-Burke told a May 21 session at the event run by the Society for Mining, Metallurgy & Exploration. “But that said, it has grown up a lot over the last decade.” 

A combination of fewer banks and funds supporting mining as inflation raises capital costs is requiring developers to tap multiple types of financing besides traditional equity markets. These include royalty companies, streamers, export credit agencies, traders and private equity and credit funds besides banks. Green bonds and sustainability-linked loans are a more recent development that help developers try to finance projects while improving mining’s environmental credibility.

Canadian mining specialist funds from a group of lenders including RBC, Mackenzie Investments and 1832 Asset Management fell to $2.8 billion in 2022 from $16 billion in 2010, according to Bloomberg figures presented at the annual conference on mine financing trends.

Target-linked loans

Neil Pereira, principal investment officer for metals and mining at the International Finance Corp., the World Bank lender to the private sector, recounted financing for an Allkem (TSX: AKE; ASX: AKE) greenfield lithium project in Argentina last December. It comprised a green bond and sustainability-linked financings with three key performance indicators: women in the workforce, reduced emissions and renewable energy.

In 2022, the IFC completed financing for Anglo American (LSE: AAL) in South Africa that financed its local economic development program for schools, Pereira said.

“We coordinate very closely with host governments,” he said. “When you add it to the capex, you know, putting in renewable power for a community is almost negligible in the scope of the larger mining project.”

The bank is considering two projects. One is in an undisclosed but difficult jurisdiction where it lent money at lower than the market rate to attract investors and used a special purpose vehicle to pool investors’ funds. The financing is tied to targets in gender, water use and renewable energy, he said.

The second is a mine where the operator wants nature-based solutions to meet global commitments on greenhouse gas reduction. The IFC is rehabilitating national forests and coastal wetlands in and around the operation, he said.

Greenwashing

Chloé Tacconi, director of mining, metals and industries finance at Société Générale, France’s third-largest bank by assets, said its most popular green products are the same kind of sustainability-linked loans. They tie a company’s targets to become more green, such as increasing renewable energy as well as goals to expand workforce diversity, to improved terms. But the targets must be substantial enough to withstand claims of greenwashing, she said.

“Even for critical mineral projects, it’s been difficult to be able to label them green,” she said. “For a battery project, it’s a lot easier even though one needs the other.”

Boeke-Burke said political backlash and fears of greenwashing contributed to a slowdown in environmental financing products in North America among corporate issuers. Even so, Nasdaq added a green certification and other exchanges have been considering them, she said. Europe has been strong while Latin America, the Middle East and North Africa have expanded, she said.

The concept of a transition bond for companies with projects that don’t qualify as green but are part of the move to more sustainable energy is gathering pace after Japan created the class this year and others such as Canada may follow, Boeke-Burke said.

About two-thirds of targets in the green loan space concern greenhouse gas emissions, the S&P analyst said. The green label may apply to the water supply for a mine, on-site renewable energy for pollution prevention and power supplies, efficiency improvements, as well similar advances in refining and processing at refineries and smelters, she said. It can also apply to post-closure plans that embrace possibilities for greenspace use, not just limiting a site’s potential liabilities, she said.

Challenges

David Rhodes, managing director of London-based Endeavour Financial, said he sees problems in the green bonds route because so many projects depend on diesel power. They’re in remote locations and current battery technology limits the size of haul trucks, he said.

But he said miners should be practicing greener methods not only to get less expensive financing when banks are nervous about lending to mining unless it’s battery metals, but to improve the industry. Private credit funds have grown over the past decade, but they aren’t as strict about environmental targets as banks are, he said.

Public support is a concern in Canada, said Braden Jebson, a partner at law firm Torys in Toronto.

“Mining can be a can be viewed as a potentially dirty industry and that has been a challenge for the industry in Canada,” he said. “Its public perception is not always as positive as it can be. There’s an effort to change that as part of the green transition, but there’s certainly still some historical challenges with that.”