San Francisco city utility's green bond strategy evolves
The San Francisco Public Utility Commission's evolving approach to green bonds has garnered increasing interest from sustainable investors.
When SFPUC sold its first green bond deal in 2015, it self-certified — and gained two investors focused on green bonds that had not previously bought the utility’s bonds, said Mike Brown, the commission's environmental finance manager.
The commission sought outside certification when it priced $657 million in taxable water revenue refunding bonds on Dec. 12, drawing 15 investors, and one-third of the bonds went to impact investors, Brown said.
The $623 million Series A were green bonds, while the $16.4 million Series B and $18 million Series C were not.
Morgan Stanley ran the books. Montague DeRose & Associates and Backstrom McCarley Berry & Co. were co-municipal advisors. Norton Rose Fulbright was bond counsel.
The bonds were rated AA-minus by S&P Global Ratings and Aa2 by Moody's Investors Service.
The deal achieved $87 million in present value savings over the 17-year life of the debt, said Rich Morales, the commission's debt manager.
"We are pleased with the results," Morales said.
Marketing the deal as green bonds provides the opportunity to get a better price, said Morales, adding that he can't measure precisely, but is sure that the designation helped.
“In the past, we haven’t had enough green bond investors on a single maturity to make a difference,” Morales said. “Here we did have enough green investors to buy an entire maturity.”
According to Brown, green orders accounted for 16% of total orders for the Series A bonds, representing $288 million out of $1.8 billion, and 46% of total $623 million in par on the Series A bonds. The deal was oversubscribed in green orders alone in maturities 2020 through 2031, he said.
“We had enough orders from green investors to be oversubscribed in 10 maturities,” Brown said.
Though part of the increased interest from investors is likely due to growing investor interest in green bonds generally, the City and County of San Francisco's utility arm has increased the sophistication of its process for selling and marketing green bonds as the market evolved.
In 2016, it began working with Sustainalytics, a company that rates companies based on their environmental, social and corporate governance performance, and the Climate Bonds Initiative, an organization focused on accelerating the transition to a low-carbon economy by shifting the $100 trillion bond market to green financing.
The two organizations determined SFPUC's $4.8 billion Water System Improvement Program involving 87 capital projects met sustainability requirements needed for certification.
The certification comes with a $20,000 fee and a requirement to report annually on projects funded by the bonds. The latter requirement involves a time commitment from the utility’s engineers and the debt management team.
“The biggest hurdle to certification is often the resources required to pull the certification together,” Brown said. “We have three dedicated people in our debt group. Some agencies might only have one debt person, who is also filling other roles. It’s easier for large organizations to attain certification.”
Since issuing its first green bond in 2015, the SFPUC has sold more than $1.4 billion in certified green bonds for all three of its enterprise utilities: water, power and wastewater, according to its 53-page fiscal year 2018-19 green bond report for its water enterprise.
The utility’s green bond sales represent a significant chunk of total green deal volume out of California.
Since 2016, 54 green bond transactions have come to market in California totaling over $8.7 billion in par amount as of Sept. 10, according to Bloomberg data referenced by Raul Amezcua, a managing director with Stifel Financial Corp. during an Oct. 2 California Debt and Investment Advisory Commission webinar on green bonds. Green transactions have ranged in par amount from $9 million to $635 million, Amezcua said.
Among SFPUC’s advancements are the green bond report it releases annually providing detail on the environmental, social and governance programs supported by the green bonds it issues.
“In addition to providing project impact information, this report seeks to highlight associated co-benefits as well as describe the context in which climate and social inclusion informs the SFPUC’s capital planning decisions,” according to the report.
Brown said both the city's and the state’s commitment to environmental goals have made it easier to create a vibrant green bond program.
In August 2018, California State Treasurer John Chiang signed the green bond pledge, committing to a strategy of financing infrastructure and capital projects that meet the challenges of climate change with green financing. A month later, San Francisco Mayor London Breed committed to issuing more green bonds, along with three other policy pledges to reduce waste generation, decarbonize buildings and for the city to convert to 100% renewable energy by 2030.
The current state treasurer, Fiona Ma, chairs a California Green Bond Market Development Committee created with the intent of “developing the strategy and tactics necessary to lead California to a functioning green bond market that will be a model for other states and countries.”
The committee comprised of 27 academics, engineers, public policy experts, attorneys and climate scientists meets quarterly and had its first meeting in June.
The ultimate goal for green bond backers is to achieve a “green premium” or better pricing than other bonds.
Amezcua said during his presentation that more instances of pricing differentials have been seen with taxable green bonds, because there are more dedicated green bond funds. But he added that as dedicated municipal green bond funds are created, there will begin to be a differential.
“Green bonds do attract new investors that would otherwise not participate,” Amezcua said. “We feel the size of orders are often larger for the green bond labeled bonds, even with traditional investors.”
There is a clear, and known, preference for green investments throughout the world, California's deputy treasurer for public finance, Tim Schaefer, said during the webinar.
“This growing emphasis in the environmental purpose of fixed income investment reflects a fundamental shift in the bond market since the Great Recession,” Schaefer said. “However, the U.S. lags the worldwide effort to convert governmental finance to a green-based model.”