SUCCESS STORIES

Green Bonds for Cities

Issuing green bonds allows cities to access low-cost capital earmarked for investment in climate-friendly municipal projects. This funding stream can be hard to access for many cities in developing countries for a variety of reasons. These can include a lack of knowledge around developing green bonds, low creditworthiness and weak or absent green project portfolios. 

Green Bonds for Cities has developed a set of tools to help cities navigate such obstacles to kick start new low-carbon developments and renovations to existing infrastructure.

Green Bonds for Cities is currently working with Mexico City, which aims to issue its first green bond – the first issued by any city in South America – in early 2017. The city intends to direct the proceeds towards existing plans to expand its bus network, improve its water infrastructure and invest in low-emission buildings.

Key points

  • Green bonds are bonds issued specifically to fund climate-friendly and green development
  • In 2015, €46bn of green bonds were issued globally, four times the amount issued in 2013
  • Cities produce 70 percent of the world’s energy-related CO2 emissions yet only a tiny fraction of the capital raised by green bonds has found its way to municipal projects in developing countries
  • Barriers to issuing green bonds include poor creditworthiness and lack of relevant expertise
  • A little support, however, can go a long way
  • Green Bonds for Cities aims to help cities to overcome these obstacles
  • The project expects to facilitate green bond issuance to fund up to 40 projects by 2020
  • Currently the project is working with Mexico City, which plans to issue its first green bond in 2017

Project Background and Drivers

Bonds are a low-cost form of debt for the municipal, national and corporate bodies able to issue them. They lend at a fixed-rate of interest, shielding the issuer from interest-rate volatility, and are generally cheaper than long-term bank loans, which, unlike bonds, often entail restrictive covenants.

Green bonds differ from their standard cousins in one fundamental aspect, however: their proceeds must be earmarked for spending on climate-friendly projects. For cities looking to raise cash to fund environmentally friendly upgrades to their infrastructure, or to fund brand new facilities, green bonds are a cheap way to do so – and one for which there is a huge, and growing, demand.

In 2015, the total value of green bonds issued globally was €46 billion, a fourfold increase on 2013. In 2016, more than €46 billion had already been issued by the start of October. Zurich Insurance alone has pledged to invest €2.2 billion in green bonds. But, only a tiny proportion of the money raised globally by green bonds, around 1.7 percent, has found its way to city-based projects in developing and emerging economies.

Cities contribute an estimated 70 percent of global energy-related CO2 emissions. The Cities Climate Leadership Group has found that 228 cities across the world, representing 436 million people, have pledged to reduce their emissions by a total of 13Gt by 2050. Improving their energy, transport and waste infrastructure will be key to achieving this.

“We know these sectors are crucial for reducing cities’ carbon footprints,” explains Viola Lutz, consultant at South Pole Group, the lead organisation for the Green Bonds for Cities project. Green bonds already play an important role in funding these improvements, she says. In the Swedish city of Gothenburg, for example, the first city to issue green bonds, the proceeds have been used to fund biogas production and the purchase of electric vehicles for municipal offices, among other projects. But tapping into the green bond market can pose significant challenges for cities in emerging economies for a variety of reasons.

“In developed countries, most cities are legally allowed to issue green bonds and they have decent budgets that allow them to issue debt,” says Lutz. “In emerging and developing economies, only 20 percent of cities is creditworthy in their local financial markets. That means the other 80 percent needs to find alternative avenues to issue a green bond.”

Those avenues do exist, she adds, but they all require specialist knowledge to unlock and access. Cities could look to improve their creditworthiness through credit enhancement, or they might be able to issue green bonds through affiliated municipal organisations with stronger balance sheets such as local utilities or public transport corporations, or to work with commercial or development banks. “A lot of cities fail to see this spectrum of options,” Lutz adds. “This is one of the barriers we see, and where we want to help cities structure their thinking.”

Finding a way to issue a green bond is just one step in the process, however. City officials must also make decisions – first, on which projects are suitable for funding in this way, and second, on setting-up the monitoring and reporting systems necessary to keep investors informed about the progress and environmental impact of their investment. Neither is straightforward.

Project Detail

In March 2016, the Green Bonds for Cities project began work under the umbrella of EIT Climate-KIC’s Low Carbon City Lab (LoCal) programme to help cities in developing economies negotiate the barriers hindering them from accessing this rapidly expanding supply of budget-friendly finance.

Green Bonds for Cities has developed a three-pronged set of tools to help cities in emerging and developing countries broach these obstacles and access the green bond market. First, it has produced a set of strategy guidelines, intended to help cities find the best pathways to access green bonds: what are the city’s bond-issuing options, for example, and what is the definition of a green project?

Second, cities will be able to use a newly developed green bond toolkit, a set of ready-to-use tools that can help identify suitable projects as well as assist in setting up the necessary reporting and monitoring systems. Finally, Green Bonds for Cities is developing person-to-person training sessions for city officials based on the information contained within the guidelines and toolkit.

Green Bonds for Cities is able to draw on the extensive municipal contacts of two of the project partners – ICLEI (Local governments for sustainability) and the Climate Bond Initiative – to make the first approach to cities’ environmental departments and, in some instances, their treasuries. Now that word is getting out, contact is being made in both directions. South Pole Group has been approached by several cities, according to Lutz.

EIT Climate-KIC Support

The project was born out of work done by South Pole Group last year under the LoCaL umbrella to identify innovative ways to scale-up climate finance investment in cities. “It emerged clearly that green bonds are becoming more and more important for cities to finance sustainable infrastructure, but that cities in developing countries are not using it yet,” Lutz explains. “Thus the project idea was born, and South Pole Group suggested the idea to EIT Climate-KIC.”

Most valuable about EIT Climate-KIC’s involvement, outside the project funding itself, has been its role as a network facilitator, especially bringing partners together during the programme’s early stages. “What has been most interesting for us when setting up the project was certainly the partner network that EIT Climate-KIC has,” she says. Partnering on the project are the Climate Policy Initiative and the Climate Bonds Initiative, both brought in as EIT Climate-KIC partners by South Pole Group.

“We are working very closely with ICLEI on this project, and that connection was also made initially through the EIT Climate-KIC network,” says Lutz. “We also collaborate with two other EIT Climate-KIC network partners – the Institute for Climate Economics (I4CE) on their city climate finance training and with CDP on our joint

matchmaker service between cities and investors”. The connections to them have been brokered by EIT Climate-KIC. They do some work on green bonds; we have shared our results with them, and they will be sharing their work with us, so that’s going to be very interesting.”

We think Green Bonds for Cities has the potential to support up to 40 projects up until 2020.

Viola Lutz, consultant at South Pole Group

 

For more information visit local.climate-kic.org/projects/green-bonds-for-cities-gbc

 
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