First Climate Bonds US muni briefing paper identifies USD264bn outstanding bonds from climate-aligned municipalities
Substantial opportunities to expand US muni green bond market
What’s it all about?
Climate Bonds Initiative has conducted a scoping exercise to identify potential US Muni green bond issuers. We looked at specialised municipal entities which operate in climate aligned sectors: water, waste, transport, renewable energy and land use. These are key sectors under the Climate Bonds Taxonomy. We also consdiered the upcoming bond maturities of these entities.
We acknowledge that there are many municipal entities issuing bonds for climate-aligned projects but for the purpose of this scoping exercise, we honed in on those specialised agencies focussed on climate solutions. (pure-plays).
The analysis reveals USD250bn of outstanding bonds from specialised US municipal issuers, which are climate-aligned, but not labelled ‘green’.
Refinancing needs from these issuers offer an opportunity to label bonds as green, improve discoverability for investors and consolidate US municipals’ position in the green bond market. USD14bn has already been issued by climate-aligned US Muni entities in green bond format.
US Muni bond issuance plummeted in H1 2018
Thirty one US states have issued green bonds to date. The top 3 states account for 64% of US Muni green bond issuance: New York ranks first (USD7.2bn issued as of end Q2 2018), followed closely by California (USD6.9bn). The third largest is the pioneering Commonwealth of Massachusetts (USD2.9bn), the first state to issue a green bond in 2013.
However, overall US Muni green bond issuance dropped in H1 2018 compared to 2017. This is in line with a wider trend in US Muni issuance. The passing of the Tax Cuts and Jobs Acts of 2017 by Congress in December 2017 resulted in a major alteration to US tax law, and this has negatively impacted the issuance of refunding bonds in particular, according to SIFMA monthly data.
SIFMA data shows a very clear trend: US Muni issuance decreased 22% from Jan-May 2017 (USD162bn) to Jan-May 2018 (USD127bn). While issuance of new capital bonds has increased 19%, refunding bond issuance has plummeted by 58%, dragging overall numbers down. The trend is even more apparent for Q1 2018: refunding bond issuance was 65% below the Q1 2017 level.
Green bond growth opportunities
1,436 climate-aligned issuers were identified with USD264bn in bonds outstanding (these include USD14bn in green bonds outstanding already issued by 23 pure-plays). Over half the volume (54%) is attributable to 50 pure-plays with USD1-10bn of outstanding bonds.
Issuers from the transport and water sectors account for most of the related bonds. The two issuers with outstanding debt exceeding USD10bn are also from these sectors and account for a quarter of volume. The smaller issuers are primarily from the water industry.
At USD170bn, water accounts for 64% of the identified climate-aligned bond universe. It also features the highest number of climate-aligned issuers: 1,141 pure-plays. Transport comes in second with USD78.5bn outstanding (30%), with the remaining 6% (USD18.5bn) split between waste, energy and land use. Transport sector climate-aligned issuers have, on average, the largest amount of bonds outstanding (USD1.5bn), while water sector pure-plays have, on average, USD149m of bonds outstanding.
The Last Word & the Green Bond Pledge
This research uncovers many avenues for municipals to become a more dynamic sector in the overall US green bond market, especially in the areas of water, waste, energy and land use where the market has not yet seen regular green bond issuance.
Whilst several US municipals have issued green bonds in all these sectors, entities identified in this study could build on their peers’ early work to grow the market. These issuers could also seize the opportunity to join the Green Bond Pledge signatories and demonstrate their commitment to financing environmentally beneficial and climate-resilient projects.
You can find our latest opinion piece on the Green Bond Pledge A Climate Finance Framework for Cities & Sub-nationals – Linking action agendas to financing strategies here.
It is worth noting that these sectors are also being financed by municipalities that fund a variety of projects without setting up dedicated authorities, departments and similar divisions. Green labelling could be even more beneficial for them to signal their climate-conscious policies and programmes.
‘Till next time,