Climate and Municipal Bonds

Jordan Sabin

Climate bond issuance for 2015 still remains below the USD 100 billion estimate of the Climate Bonds Initiative and, as we are now well into the second half of the year, it seems unlikely that the market will reach such lofty goals. However, issuance is still tracking above the previous year, and the green bond universe continues to grow and diversify. For example, the first Chinese green bond was recently issued—as previously noted, China stands to play a pivotal role in the climate bond market, so the country’s first offering is particularly exciting. Combine this with the continued success of more “traditional” green bonds such as those offered by TerraForm, and it is obvious the climate bonds market should not be discounted as a viable way for environmentally conscious individuals to invest in line with their personal beliefs.

Even with such recent success, if climate bonds are going to accomplish their purpose of galvanizing governments and the public into action to mitigate climate change, then issuance must continue to grow; even after years of rapid growth, climate bonds remain a relatively small part of the overall multi-trillion dollar bond universe.

So far, corporations are responsible for the majority of climate bonds, with most of those companies focused on developing and deploying renewable energy technologies, mainly solar and wind. However, this need not be the case, and the municipal bond market offers one avenue for the rapid diversification of the climate bond universe. Municipal bonds are a sizable part of the global bond market and continue to enjoy investor confidence: green bond supporters stand to gain only if they can convince municipalities to issue climate bonds.

While the Commonwealth of Massachusetts has had success issuing green bonds in the past, municipalities have yet to fully embrace the benefits of climate bonds and green financing. As noted by a recent Climate Bonds Initiative report, municipalities in particular stand to gain from green bonds—60% of greenhouse gas emissions occur in cities. It is widely accepted that to remain within two degrees of warming will require renovating and retrofitting a large amount of the existing American infrastructure. Climate bonds can serve as one way for municipal governments to finance this goal.

Recently, there has been evidence that municipal governments, in addition to Massachusetts, have begun to recognize the potential benefit of climate bonds. In particular, Central Puget Sound Regional Transit Authority has announced a USD 923 million green bond offering to help finance environmentally conscious transportation-related projects in the Seattle area. The bonds were reviewed by Sustainalytics and received their approval as “robust and credible.” This will be the largest green bond issued by a municipality to date, and should serve to signal to other municipalities the ability of green markets to raise capital for cities.

Central Puget Sound Regional Transit Authority’s bond offering is also significant because it points to the ability of the green bond market to help advance and implement clean transportation technology. Transportation-related emissions account for over one-fourth of all greenhouse gas emissions, and any credible plan to limit climate change will require changing how the world moves people and freight. Increasingly, energy companies are using climate bonds to finance solar and other renewable technologies. However, the transportation sector has not truly explored green bonds as a source of financing. It is to be hoped that Seattle’s offering signals a turning point.

Regardless of the below-expected green bond issuance so far this year, it is reasonable to expect that climate bonds will become an increasingly mainstream financial instrument in the years to come. The market is diversifying and expanding, and will continue to serve as a preferable way to finance the energy revolution.


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