Municipal Bonds for Green Investment. Candace Partridge-Sykes UCL QASER Laboratory

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1 Municipal Bonds for Green Investment Candace Partridge-Sykes UCL QASER Laboratory

2 Investment in green urban infrastructure Over half of the world s population live in cities, and this trend is growing. 70% of global energy demand comes from urban areas. IoD estimated a 500bn infrastructure investment gap for the UK from , 300bn for energy alone.

3 Why do we need Green Bonds? Clean energy needs $1 trillion more per year over the next 36 years The Clean Trillion, but we have levelled off at $300bn/year since Only ~0.1% of institutional investment is allocated to clean energy infrastructure (CERES 2014). Are green bonds a good way to help close the green infrastructure gap?

4 Green Bond Terminology Climate-aligned Bonds Unlabelled climate-aligned bonds are bonds whose proceeds are used to finance climate solutions but do not carry the green label. Green Bonds Labelled bonds are self-declared to be in compliance with the Green Bond Principles. Certified Bonds Green bonds that have gone through an additional step of thirdparty verification. Newly launched MTA NY first issuer in February Why Label? Aids Discovery: easier to find labelled green bonds. Opens up new investment base: some SRI investment mandates require the green label. Why Certify? Investor confidence: Helps to ensure that proceeds go where they are supposed to go. But is there a price premium for labelling and/or certification?

5 The Climate Bond Market $694bn in total climatealigned issuance. Increase of $96bn over previous year. 78% are investment grade. Average coupons: investment grade 3.7%, high yield 3.7%. 70% have tenors of 10 years or more. Source: Climate Bonds Initiative & HSBC State of the Market 2016 Report

6 Labelled Green Bonds $118bn outstanding, $42bn issued in EIB is the largest issuer ($17bn to date). Almost 50% of proceeds are for energy or energyrelated infrastructure. 80% are USD or EUR denominated. China is the largest issuer in 2016 ytd, overtaking the US. Source: Climate Bonds Initiative HSBC State of the Market 2016 Report

7 The Green Bond Market Source: Climate Bonds Initiative HSBC State of the Market 2016 Report

8 Green Municipal Bonds in the US 2015 $3.7tn outstanding $30bn climate-aligned $4.7bn labelled green

9 Green Muni Bond Issuance Types Issuance by Sector 2014 Issuance by Sector % 7% 4% 4% 3% 3% 22% 10% Buildings & Industry energy Multisector Transport Waste & Pollution water 1% 21% Buildings & Industry energy Multisector Transport Waste & Pollution water 55% 67% Why is transport so big? Rail bonds!

10 Types of Municipal Bonds General obligation bonds: Principal and interest are secured by the full faith and credit of the issuer and usually supported by either the issuer s unlimited or limited taxing power. Revenue bonds: Principal and interest are secured by revenues derived from tolls, charges or rents from the facility built with the proceeds of the bond issue. Asset-Backed Securities: A security whose income payments and hence value are derived from and collateralized by a specified pool of underlying assets.

11 Green Municipal Bonds in the US The US has a long history of using municipal bonds to finance infrastructure: $400bn issued p.a.; nearly half of bond buyers are retail investors. (U.S. Securities and Exchange Commission 2016) There is a growing awareness and demand for muni bonds that are focussed on green projects. (Barclays 2015) Wide variety of policies to support local development via bonds, including tax exemption/credits, subsidies, etc. (Milford et al, 2014) ARRA 2009: $31bn invested in energy infrastructure and $80bn to energy efficiency (US Department of Energy 2016)

12 CREBs/QECBs CREBs and QECBs account for 15-20% of all green muni issuance. (BNEF 2016) CREBs = Certified Renewable Energy Bonds QECBs = Qualified Energy Conservation Bonds CREBS are used by public sector entities to finance renewable energy projects. Bondholder receives federal tax credits instead of some of the traditional bond interest, results in lower interest rate for issuer. $2.4 billion in capacity. (US DoE, 2016) QECBs enables local governments to invest in energy conservation projects. The U.S. Dept of Treasury subsidizes the issuer s borrowing costs. Can be structured as tax credit or direct subsidy bonds. $3.2 billion in capacity. (US DoE, 2016)

13 CREBs/QECBs Amt Issued USD ytd Climate-aligned NOS $7,107,439,019 $9,728,895,990 $4,067,026,000 Green Bond $2,223,602,817 $4,708,160,000 $2,283,085,000 CREB $168,095,000 $40,745,000 QECB $31,376,000 $33,215,000 $1,240,000 Grand Total $9,362,417,836 $14,638,365,990 $6,392,096,000 $1.4 billion in remaining volume cap for New CREBs. $2 billion in remaining volume cap for QECBs. Also need to look in detail at PACE and WHEEL bonds for residential EE retrofitting.

14 Green University Muni Bonds Issuer Date Amount Purpose Board of Regents of University of Texas 01/01/2016 $206M Green Buildings Vermont Educational and Health Buildings 10/11/2015 $18.5M St Michael's College renewable energy and energy efficiency projects Board of Governors of Colorado State Uni 16/09/2015 $42.1M Green building: medical centre Virginia College Building Authority 15/07/2015 $66.8M Marymount University green building Rector of University of Virginia 08/04/2015 $97.7M Green building: medical centre, residence halls, rec centre, chiller plant Board of Regents Arizona State University 07/04/2015 $182.6M Green building: Arizona Center for Law and Society Indiana University Student Fees Bond 14/01/2015 $59M Green Arts and Sciences building, EE renovation University of Cincinnati 19/12/2014 $30.4M Residence hall EE renovation Massachusetts Dev Fin Auth 16/06/2016 $50.3M Emmanuel College green building: residence hall

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17 International green muni bond market Market # Issuances Total US 1419 $7.7bn International 21 $3.7bn TfL Green Bond: 400m issued April 2015 for low carbon transport. International bonds have been issued by the following municipalities: 1. Ontario, Canada 2. France: Île-de-France, Calais, Essonne, Provence-Alpes-Côte d'azur 3. Himachal Pradesh, India 4. Johannesburg, South Africa 5. Stockholm, Gothenburg, Örebro, in Sweden

18 What does this have to do with the UK? In the UK, 40% of CO2 emissions currently result from building heating and use (Committee on Climate Change 2014) Regionally up to 15% of households are living in fuel poverty (Laybourn-Langton & Quilter-Pinner 2016). The Green Deal was killed off in 2015 due to lack of interest. Post-Brexit reality? Uncertainty leads to lack of investment. EIB invested 7bn into the UK last year 2/3 of UK infrastructure deals come from overseas Current focus on mega-projects doesn t help small-scale municipal investment.

19 Why no UK muni bond market? High transaction costs: The UK currently finances infrastructure through PPP or by low interest rate PWLB financing by local authorities lower cost than muni bonds due to lack of precedent/scale. No tax credit mechanisms in place to encourage investment. Inability to leverage local property taxes: business rates taxes were used to support bonds for Crossrail. Lack of engagement with retail investors: the focus in the international capital markets is on benchmark size deals, yet 50% of muni bonds in the US are bought by individuals, not institutions. Increases local engagement/decreases NIMBYism. Leadership and influence from the bottom up. Conduit to retail market: British green muni ISAs?

20 Is there any interest in the UK? Councils should use bonds to fund much needed green infrastructure projects such as renewable energy and flood defences, according to the Lord Mayor of London. [ ]Sir Roger Gifford said, 'There is great potential for the UK to follow the Scandinavian or North American models. -- The Independent, 27 February billion could contribute to the funding package for London infrastructure but only if property taxes were devolved. -- The London Infrastructure Plan, Mayor of London, 2014

21 Recent developments Swindon, UK council solar bond launched in February 2016 in partnership with Abundance. Kommuninvest (Swedish Local Government Debt Office) is launching its first green bond: $500m, 4 year tenor, AAA. Rise in US green corporate bonds? Apple recently issued $1.5bn in green bonds. Labelled AND certified green muni bonds in US: MTA NYC $500M deal Feb 2016

22 $185 million in war bonds were sold during WWII in the US. This is equivalent to $2 trillion today.

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24 Thank you! Candace