Looking for Greenium
Green issuers have sometimes pointed to a pricing benefit on an individual bond and Climate Bonds has been undertaking a longitudinal study of primary market pricing since late 2016 that commenced with an initial snapshot paper.
No conclusive trends have yet emerged.
UCL’s Two Research Papers
US green muni market performance is an area under study by two senior researchers from University College London (UCL).
In part, the interest is as a result of increasing momentum in green munis after issuance topped USD11bn in 2017, a new record from the USD7.11bn in 2016. The surge attracted new observers to the green segment.
UCL researchers Candace Partridge and Francesca Medda have produced two papers, both indicating evidence of a premium for green municipal bonds, via two different methodologies.
The first paper, Green Premium in the Primary and Secondary U.S. Municipal Bond Markets from Partridge and Medda, found that green muni bonds issued in 2017 entered the market with yields 7bp lower than their counterpart vanilla bonds, where each pair of bonds is identical except for the green label.
The data in this analysis spans the timeframe from January 2015 to October 2017 and both the initial offering yield and the yields in the secondary market were considered.
They also found that the green bonds in these pairs were sold on the secondary markets with yields of an average of 3bp lower in 2017.
In the second paper, The Creation and Benchmarking of a Green Municipal Bond Index, Partridge and Medda constructed an index using over 1,200 green and climate-aligned** bonds issued between 2009 and late 2017. When this index was benchmarked against the S&P Investment Grade Municipal Index, it showed an average annual price return of 4.5% compared with 3% for the S&P.
The researchers' climate muni index was also broken down into green-labelled only, and sector and state sub-indices, which also showed a trend for higher prices for green and climate-aligned bonds over this time period.
The research suggests investors may be drawn to green munis because they could enable them to implement a sustainable investment strategy: these bonds tend to be highly rated and cover a variety of projects that allow for a well-diversified green bond portfolio.
Additionally, a trend towards a premium for green muni bonds could translate to lower costs of capital for issuers. This could encourage greener infrastructure projects to fill the project pipeline, ultimately cutting emissions and contributing to more sustainable cities.
Linking Subnational Action & Green Muni Investment
While green muni bond numbers are down in 2018 compared to last year, there is also growing interest in green muni investment. This is being boosted in part by the increased focus at subnational level on climate risks and the need to more closely link city and state climate action plans with their borrowing programs, balance sheets and infrastructure development plans.
Our recent State of the Market report for 2018 shows that green bonds have been issued from 29 states. That’s over half the Union.
California and New York state are ahead in 2018, continuing the dominance of 2017, size does matter, but smaller states like Hawaii and Rhode Island are taking their own lead. Rhode Island is in the Top 10 issuers for 2018 to date, with both the State Treasurer and the RI Infrastructure Bank signing the Pledge.
Increasing green investment to match climate ambitions still remains the challenge.
The last word
These two UCL papers provide another clue as to where the market and investors may be moving to.
Issuance is yet to reach the density that’s needed but maybe, even a study on these limited volumes, are the UCL researchers on to something?
Our half yearly US Muni report from June looks at the market potential and we'll be having more to say on both green and climate-aligned investment in this space in January.
‘Till next Time,
** Definition: Climate-aligned: Municipal bond issuers from the United States, in particular dedicated authorities, agencies, departments and similar divisions with more than 95% of their revenue derived from climate-aligned water, transport, waste, land use and renewable energy operations.