Green bonds, which offer a source of low-cost capital earmarked for climate-friendly municipal projects, can be hard to access for cities in developing countries for a variety of reasons. The Green Bonds for Cities project has developed a set of tools to help municipal authorities overcome these barriers.

The problem

Like their standard counterparts, green bonds are a form of low-cost debt issued by municipal, state and corporate bodies – the difference is that green bonds must be earmarked for sustainable development projects. Only a small fraction of the €127bn of the capital raised by green bonds in 2017 went to cities in developing countries, for whom the barriers to accessing this funding stream can include poor creditworthiness or a lack of expertise.

“In emerging and developing economies, only 20 per cent of cities are creditworthy in their local financial markets,” says Viola Lutz, a consultant at South Pole Group, the lead organisation for the Green Bonds for Cities project. “That means the other 80 per cent needs to find alternative avenues to issue a green bond.”

The solution

The project has developed a set of tools to help cities in developing countries broach these obstacles and access the green bond market. First, it has produced a set of strategic guidelines to help cities find the best pathways to access green bonds: what are the city’s bond-issuing options, for example? Could it work with affiliated municipal organisations such as utility companies, or with commercial or development banks, to issue bonds? 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.

The impact

The project worked closely with Mexico City, which issued its first green bond – also a first for Latin America – in early 2017. The $50 million bond will fund energy-efficient lighting in the city as well as upgrades to its transportation and water infrastructure. And now that word is getting out, several other cities have been in touch, says Lutz.

EIT Climate-KIC’s role

The project took shape in March 2016 as part of EIT Climate-KIC’s Low Carbon City Lab programme, which helps identify innovative ways to scale-up climate investment in cities. South Pole Group identified both the growing importance of green bonds and their inaccessibility for many cities in developing countries and suggested a project to help overcome those barriers to EIT Climate-KIC.

According to Lutz, the most valuable aspect of EIT Climate-KIC’s involvement, outside the project funding itself, has been its role as a network facilitator.

“What has been most interesting for us when setting up the project was certainly the partner network that Climate-KIC has,” Lutz says. “We are working very closely with ICLEI [Local governments for sustainability] on this project, and that connection was made initially through the Climate-KIC network.”