The public university green bonds follow Massachusetts Institute of Technology’s (MIT) green bond in September this year. MIT’s offering was the first ever by a US university.
First the University of Cincinnati (UC) issued US$29.5 million of green bonds to raise funds for the $35 million renovation of a residential student hall. I say “bonds” because Cincinnati actually issued a series of bonds with varying tenors and interest rates. Tenor ranged from 7 to 27 years, and coupons from 3.25% to 5%. Wells Fargo was the lead underwriter for the deal. The bonds were rated AA- by S&P and Aa3 by Moody’s.
The University of Indiana (IU) then issued US$66m of green bonds – again a series of bonds - with 1-20 year tenor and 3-5% coupon. The bonds were rated Aaa by Moody’s and AA+ by S&P; Indiana’s bonds are secured by student fees and loans. Morgan Stanley was underwriter.
Both issuances use the proceeds for green buildings. Cincinnati will focus on renovation of a 50-year old residential student hall, while Indiana will partially fund a student hall renovation project and partially a new art and science building.
Green buildings are crucial to addressing climate change, but what makes a building green is complicated. Improving energy efficiency in existing buildings is a critical step in climate mitigation because buildings account for over one-third of total final energy consumption (IEA). The key challenge is that we need mitigation projects to provide deep emission cuts, as building upgrades lock in emissions for decades to come and a “shallow” retrofit effectively cuts out the chance to make the improvements needed in a building.
Both these bonds will finance several upgrades that improve the building’s energy efficiency. The Cincinnati upgrades will include glass panels that help control the buildings temperature, mechanical systems designed for energy efficiency, energy recovery systems and comprehensive LED lighting; the Indiana bonds specify “energy-efficient mechanical systems, high-efficiency glass windows and roofing, and efficient lighting with timer and motion-senor functionality”. Sounds good – but do these upgrades provide the deep cuts we need?
We’re happy to see that Cincinnati provides estimates of reductions in energy use from the investments by stating the measured emissions reductions seen after similar renovations in an identical student hall to be 46%. Not only do they provide numerical estimates of the emission cuts; the numbers show that they are targeting the ambitious deep cuts we need to see. No such quantified information from Indiana, unfortunately. But they do state that they will expect to earn a LEED silver certification from the upgrades (as does the UC, by the way).
Now, a key difference between the MIT bond and both these bonds is that MIT was re-financing existing green buildings. Investors knew that the buildings in the MIT bond had achieved either LEED Gold or Silver certification. Cincinnati and Indiana are using proceeds for new projects with and are aiming to achieve LEED Silver. The outcome of the projects is not guaranteed. This is where reporting on the environmental outcomes of green property is important. At a minimum we would expect reporting on certification and energy performance achieved (like Cincinnati has done for Morgens Hall). Both universities have committed to reporting the allocation of proceeds (which is great) fingers crossed they will report on LEED rating and subsequent energy performance of the buildings at the same time.
Overall though - great to see universities in the US catching on that green bond financing is a good option to upgrade the huge stock of old buildings that require renovation, by making that renovation energy efficient. Nicely done Cincinnati and Indiana!
