Why Muni Green Bond Issuance Is Growing Fast

PHOENIX - Green municipal bond issuance increased by almost half in 2015, with water infrastructure making up the biggest chunk of the bond sales, according to a new report.

Green municipal bonds were just one topic in the Climate Bonds Initiative's annual State of the Market report, released Monday.

In 2015, labelled green muni bond issuance was up 47% over 2014, reaching $4.7 billion, the report said.

The report is commissioned by the HSBC Climate Change Centre of Excellence and covers green bond issuance, to which the muni market is a relatively new entrant, around the world. The London-based Climate Bonds Initiative describes itself as "an investor-focused not-for-profit, promoting large-scale investment in the low-carbon economy."

"Labeled" green bonds are those specifically tagged as green by their issuers.

The Climate Bonds Initiative also seeks to tally "unlabeled" green bonds, which finance environmentally-friendly projects but don't carry an official "green" designation or certification.

The largest municipal issuers of labeled green bonds in 2015 were Washington State with nearly $1 billion, followed by Massachusetts at $915 million and New York at $479 million.

While the green bond market has existed for almost a decade, U.S. muni issuers have only started participating in the last couple of years. The Climate Bonds Initiative credits a 2013 Massachusetts issuance as the first green muni bond, while the first Climate Bonds certified muni bond was issued in February by the Metropolitan Transportation Authority of New York.

Alan Rubin, a green bond financing expert, said the growth of the U.S. green bond market is the result of increasing standardization in how the market understands these securities.

"For many years, people have wanted to invest in green projects," Rubin said, but added that the major rating agencies didn't have in place a way to rate the "green-ness" of green bonds.

In the last 18 months, and particularly in the last six months, Rubin said, criteria for green bonds have been increasingly standardized in a way that makes them easier for the rating agencies to evaluate. That, in turn, helps attract investors.

"That has really increased the comfort level," said Rubin. "Now it's just going to start snowballing."

Rubin said green bonds are increasingly attractive because not only do they have a political and social cache that regular munis may not, they can also result in better yields as a large number of investors look to buy them quickly.

Climate Bonds CEO Sean Kidney said that the U.S. has a lot of opportunity for green bond investment, and that the muni market is a major part of that.

"The USA is well placed to build its domestic green bond base through the municipal markets and more high-profile corporate issuance," Kidney said. "Further opportunities exist in clean energy, infrastructure, transport, water and low carbon commercial buildings, particularly in major cities."

The report said the total climate-aligned muni bond market is roughly $30 billion, and that munis account for 44% of labeled U.S. green bonds, even though individual corporate issuances have been larger. The unlabeled market is much larger than the labeled one, and munis account for a much smaller slice of the U.S. total by that measurement: 23%.

Water infrastructure has accounted for 46% of labeled green muni issuance, while transport made up 25%. When looking at the unlabeled market, transport accounts for 58% of the U.S. market with energy at 25% and water at 6%.

Some muni issuers have gone out of their way to obtain third-party verification of their green bonds' green status, a move the report cited as helpful particularly for water issuers.

"The common concern with the labelled U.S. municipal green bonds is the low levels of disclosure on climate resilience in the water authorities overall investment plan," the report said. "If this disclosure is missing and there is no review from an independent party, it is difficult to determine how aligned these green bonds are. One bond which stands out in this regard is the 2016 San Francisco Public Utilities Commission's $240 million green bond for water. It was certified under the Climate Bonds Standard. Recent droughts have put water issues at the top of the agenda in California and certified green water bonds are part of the financing solution."

The Climate Bonds Initiative released the report to coincide with the Climate Week conference in New York that kicked off Monday.

For reprint and licensing requests for this article, click here.
Buy side Infrastructure
MORE FROM BOND BUYER