100 years is the longest maturity we’ve seen in the green bonds market by quite some way. Typically, DC Water have issued 30-35 year municipal bonds but they thought a century bond would better match the life of the tunnel system … which is expected to last one 100 years. DC Water also noted that a 100 year bond means repayment of project costs will be spread across all the generations that benefit. They call it “intergenerational equity and fairness”. Perhaps just as importantly, the bond allows DC Water to lock in historically low interest rates.
According to the FT, there’s been a strong demand for ultra-long bonds in 2014 as investors seek the higher yields they offer.
Interest on the bond was a fixed rate of 4.81%, compared to 3.37% from 30-year US Treasuries. Credit ratings are Aa2/AA+/AA from Moody's, Standard & Poor's and Fitch, respectively. Underwriters were Goldman Sachs and Barclays.
This bond marks a big step for the US green bond market – it’s the first that has had and independent review, or “second opinion”, on the green credentials of the bond. It was done by Vigeo. A second opinion is essential to comply with the Green Bond Principles as well as the Climate Bonds Standard.
The proceeds will be used to construct a tunnel to transport stormwater and sewage to a wastewater treatment plant and reduce sewage overflows to waterways.
Sewage system overflows are becoming more common as climate change increases rainfall intensity in many cities with older systems – for example, 30% of the US sewage system dates back to the 19th century. We need to see a lot of these infrastructure adaptation projects.
The environmental outcomes of the project were identified as:
- Improving water quality
- Improving climate resilience (climate change adaptation: flood relief/mitigation)
- Improving quality of life (facilitate recreational river use from waterway restoration; biodiversity improvement from nitrogen and phosphorus removal)
Water bonds are not green by default given that many projects can have conflicting environmental and social outcomes. As a minimum, green bonds for water investments should be linked to climate adaptation plans. Although it’s not referred to in the press release or bond documentation, we found some documents demonstrating that DC Water is working on adaptation planning.
One small disappointment: there’s no mention of energy use management - climate change mitigation. As we discussed in a recent blog post on Dutch Water Utility NWB, water infrastructure is a huge consumer of electricity (e.g.: 17% of California’s), and managing energy use is important to keeping greenhouse gas emissions down. DC Water does have a good general policy around reducing energy use, but it would be good to explain what they’re doing here.
DC Water say they will report annually in their auditor reviewed “Comprehensive Annual Financial Report”. This doesn’t quite sound the same as an annual disclosure about bond proceeds, but hey they’ve done such a wonderful job on so many fronts let’s wait and see what they actually do here.
Bravo DC Water!