Last winter we noted the rise of the corporate green bond; this seems to be the winter of the green muni (municipal) bond. The past few weeks have seen three green munis totalling $328m, from across United States. The bonds have quite a bit in common; all from first-time green bond issuers; and all use proceeds for water projects.
- Connecticut, a north eastern state, issued a $60m inaugural green bond. Interest rate across the 5 tranches ranged from 3.25% to 5%, with tenors varying between 14 and 17 years. Lead manager was JP Morgan.
- East Central Regional Wastewater Treatment Facility (ECR), based in Florida’s City of West Palm Beach, issued an $87m inaugural green bond. 16 tranches offered a range of 5-5.25% interest rate with tenors between 9-20 years. Lead manager RBC.
- City of Spokane, in NW Washington State, issued the largest inaugural green bond of the lot – more than both Connecticut and ECR combined: $181m split in 20 tranches. Interest rates varied between 3-5% on tenors from 1 to 20 years. Lead manager was Citi.
Great to see such a flurry of issuance! But what are the green and climate credentials of the bonds? They all fund water projects – but as we have previously mentioned water projects are not automatically great climate investments.
One key challenge from a climate mitigation perspective is that water can be incredibly energy intensive - for example it accounts for 17% of California’s total electricity use (yes, almost one-fifth!). The good news is that there are many opportunities for energy saving in better water use and management, so water is a promising potential area for green bonds also from a climate perspective. Two of the bonds, Connecticut and East Central Regional (ECR), both direct proceeds towards energy efficiency improvements in existing facilities. ECR’s bond funds projects to improve biosolid treatment processes that lead to reduced energy consumption. Proceeds of the Connecticut bond in part finance energy efficiency upgrades to waste water treatment plants across the state. This is what we hope to see.
The other main climate concern with water projects is the need to incorporate climate change adaptation measures: making our cities resilient to extreme weather is becoming more important with climate change. For water projects this, for example, means building infrastructure to manage sudden large flows of storm water. Proceeds from Spokane’s green bond will improve storm water management systems and overflow sewers. As many of City of Spokane’s water pipes date from WWII, they are definitely in need of updates and improvements to become climate resilient!
(CBI has launched a Climate Standard group for water to provide criteria in this space; the group will report in stages over 2015).
Proceeds from these bonds also go to green projects that sit outside the climate umbrella. Such projects can be tricky to evaluate because of the lack of non-climate green definitions. However, pollution reduction is one area, which we expect everyone can agree is green, and that is the category where the non-climate components of these bonds fit. Wastewater treatment facility improvements as a result of Florida’s ECR green bonds aims to reduce the volume of bio-solids generated from the process. Similarly, Connecticut is funding projects to improve wastewater treatments plants to reduce pollution as part of a wider aim to protect river and watershed vitality.
In terms of verification, Spokane was the only bond that chose to get a second opinion on the bond. The opinion was from a previous service provider to Spokane – CH2M Hill, so not strictly independent, and looked at the bonds adherence to the Green Bonds Principles. However, it is fantastic that Spokane decided to be a market leader and get an outside review on the bond. This marks a new era for US green munis.
Municipal bonds have huge potential in the green space. Detailed disclosure of use of proceeds is already provided in the bond documents because of the public accountability of municipal bonds. Transparency on use of proceeds is important for investors in green to understand the impact of their investment. All three of these bonds disclose details of projects or project criteria. ECR and Spokane have set out the exact projects the bond will fund. Connecticut will move proceeds into a “Clean Water Fund” and provide reports on where the proceeds are allocated over time. We think there are lots of US municipal bonds out there funding green projects but not labelled. So do our friends at the Green Municipal Fund. Making investors aware of these bonds through labelling may be a key step in developing a deep liquid green muni market in 2015.