TD Environment and BMO

Tara Perkins and Shawn McCarthy

TORONTO and OTTAWA — From Monday's Globe and Mail Published on Monday, Nov. 23, 2009 12:00AM EST Last updated on Tuesday, Nov. 24, 2009 3:25AM EST

A first-of-its-kind voluntary emissions reduction fund for large Canadian corporations is getting off the ground after securing Bank of Montreal and Toronto-Dominion Bank as initial investors.
The fund, which is being launched by Greening Greater Toronto, will buy carbon offset credits from green projects around the country and pass those credits on to the companies that invest in it.

Its managers and backers say they think the project will contribute to the development of an environmental finance sector in Canada, as lawyers, accountants, fund managers and bankers wrap their heads around the dollar side of carbon credits.

The fund is for voluntary investors in the sense that it's aimed at companies that are not required by regulations to reduce their carbon emissions.

"It's not impossible for an industrial emitter to invest in this, but most industrial emitters figure that they've got carbon emission regulations coming at them, and - while we have a couple discussions under way - we don't think that's going to be a big area for us," said Gerry Rocchi, the CEO of Green Power Action, which was chosen to manage the fund. "They're waiting to see what the regulations look like."

How the fund works
Investors in the fund are looking for carbon credits to offset their own environmental foot print.
They invest their money in the fund, which then invests it in green projects in return for the credits that those projects produce.
For example, if the fund invests in a solar project that produces X credits, then the fund's investors apply those credits to their own emissions.
The goal for the investors is to become carbon neutral, rather than to earn money.

TD has committed $3-million of capital over 5 years, while Bank of Montreal has committed $10-million. Both banks have stated voluntary plans to become carbon neutral, with BMO chief executive officer Bill Downe having committed to make his bank's operations carbon neutral around the world by 2010.

"Our goal, realistically, is that we'd like to see this fund reach $50-million in capital," said Mr. Rocchi, who was the CEO of Barclays Global Investors Canada from 1997 to 2004. "We think it can do a lot more than that, we think there are lots of projects it can fund, but it would be a great success to get to that level."

The carbon offset market is just developing. "You'll see in the so-called compliance space, when the carbon regulations start, the numbers will be much higher," Mr. Rocchi said. "Eventually, there will be funds like this for individuals."

Several companies have launched carbon funds in the past, but Ottawa's delay in regulating emissions has driven them out of business.

However, Western Canada is seeing a growing market for offsets - credits generated by emission reduction projects. In Alberta, the only province to impose regulations on industry, companies can purchase offsets to meet their regulatory emission limits. The British Columbia government is sponsoring the B.C. Carbon Trust, which buys credits from projects for the purpose of reducing the provincial government's own carbon footprint.

But across North America, the voluntary market has been hammered by regulatory delays and the recession.

Several Canadian firms, including Potash Corp., Domtar Corp. and Manitoba Hydro, have joined the Chicago Climate Exchange, a voluntary market that allows companies to buy and sell offset credits. Carbon credits that were selling for $8 a ton a year ago on the Chicago Exchange are now fetching a price of 35 cents per ton.

Typically, industrial companies have traded carbon credits as a way of gaining experience in the market, to prepare themselves for the day that they face regulation. Increasingly, banks and retailers are wading into the voluntary market as they seek to reduce their carbon footprint and demonstrate good corporate citizenship. (Emission caps are expected to impose limits only on major emitters, such as power plants, chemical factories and oil sands upgraders.)

Environment Minister Jim Prentice released broad guidelines for Canada's offset market that will be part of a national cap-and-trade system, primarily projects that reduce emissions in forestry and agricultural practices, as well as municipal waste handling. Under the federal plan - as in Alberta and B.C. - project originators will have to meet standards and be certified to have their offsets accepted.

Mr. Prentice says Ottawa won't release final regulations on the cap-and-trade program until the United States has decided how it will proceed. The U.S. Senate is currently studying a climate bill, similar to one passed by the House of Representatives, but the Senate is not expected to vote on the highly controversial legislation until well into the new year.

The fund being backed by TD and Bank of Montreal has been structured as a limited partnership for tax purposes, and so it's only being sold to domestic companies.

Unlike most investment funds, the companies that put their money in it won't see a net asset value or rate of return. Rather, their money will be used to fund projects that will deliver them with carbon offset credits. "We are trying to deliver them a steady stream of credits, the same amount each year," Mr. Rocchi said.

Projects could be anything from putting new windows or heating systems into the schools within a particular school board to landfill gas firing.

The fund is currently in negotiations with a number of projects and intends to begin buying credits within a month.

"The types of credits we're buying, some of them will comply in the [regulation-based] compliance system, and some of them won't," Mr. Rocchi said. "They're high-quality credits, at least as high quality as what will be in the federal system, but as a small project they may not want to bother going through all the registration steps as an example."

Karen Clarke-Whistler, TD's chief environmental officer, said that the implementation of the fund should help in the broader development of Canada's carbon offsets market because the regulatory framework is still only in draft form.

"While we certainly don't have carbon regulation yet, at the federal level we do see that we have a lot of reason to be preparing for it," she said.

"Part of what we're collectively building here is the infrastructure and the backbone for the green economy," Mr. Rocchi said.