How Communities Can Utilize Municipal Green Bonds to Advance Community Sustainability Goals
By Mrunal M. Shah, Best Best & Krieger LLP
The San Francisco Public Utilities Commission issued two series of green bonds last spring that collectively raised over $408 million for sustainable water projects. This marked the seventh time the Commission has issued municipal green bonds to attract sustainable investors.
Since issuing its first, self-certified green bond in 2015, the City and County of San Francisco’s utility commission has sold over $1.4 billion in certified green bonds for its three enterprise utilities: water, wastewater and power. These bonds have supported projects to increase water storage, upgrade renewable energy generation facilities and use green infrastructure to divert stormwater from treatment plants.
The latest in green bond notes, which will fund significant sewer system improvement projects, were sold to international investors in the United States, United Kingdom, European Union, Switzerland, Indonesia, Japan, Singapore and Taiwan.
So, how can other public agencies utilize green bonds to attract environmentally driven investors and advance community sustainability goals?
This second installment in the municipal green bonds series takes a deeper look into how public agencies can issue green bonds to fund and refinance public projects with positive environmental impacts.
How Do You Designate a Debt Issuance as a Green Bond?
There is no uniform method for designating green bonds; therefore the approach and execution can be tailored specifically to fit a public agency’s sustainability goals, funding needs and resources. There are, however, widely used guidelines aimed to promote the growth of the green bond industry.
The Green Bond Principles were developed by investors, issuers and underwriters with the International Capital Markets Association to help identify key considerations for green bond projects.
- Use of Proceeds: Identify the environmental benefit of the project that can be assessed and, where possible, quantify.
- Process for Project Evaluation & Selection: Green bond issuers should clearly communicate to investors the project’s environmental sustainability goals, the process used to determine that the project was deemed an eligible green project as well as any other process applied to identify and manage any environmental and social risks associated with the project.
- Management of Proceeds: To ensure that investors are aware of how the bond proceeds will be managed, the issuer should identify the allocation of the bond proceeds, tracking method for the use of such proceeds, management of the proceeds and whether the funds will be audited by a third party.
- Reporting: Identify what information investors can expect to receive (and when) regarding the use of proceeds, if any. Will there be annual reports? If so, what information will be included in them? Are there measurable environmental milestones that can be reported both during construction of the project and during the duration of the bonds?
How Can a Public Agency Issue a Green Bond?
The first step an agency will take toward issuing a green bond is identifying eligible projects.
This step can happen at different stages. Eligible project determination could take place when an agency’s establishing its capital facilities plan or it can be done at the start of the financing.
The green bond then needs to be certified.
There are various means of doing this, including self-certification using the Green Bond Principles or other similar guidelines.
Agencies can also use verification, or an independent external review, of the criteria and framework the agency established for the certification of the green bond designation to verify the information on which the green bond designation is made is valid based on internal standards and claims.
Third-party certifications are also a method for certifying green bond designations.
Such certifications are similar to a verification, or an external review of all the internal standards but may include additional criteria with which an agency must comply. Rating agencies such as Moody’s and S&P also provide green bond evaluations, as do some bond insurance companies, such as Build America Mutual Assurance Company.
Are There Any Annual Reporting Requirements?
Although, there are no established parameters for ongoing reporting on municipal green bonds, most issuers do provide some form of annual disclosure.
The San Francisco Public Utilities Commission, for example, produces an annual public report that details the impacts of its projects while highlighting the environmental, social and governance programs and policies that are supported by its issued green bonds.
For new money financings, most issuers will annually report how proceeds are expended until proceeds are expended. Many issuers will report on the environmental benefits produced by the project financed, if measurable.
With green bonds issued for refinancing a project, there may not be a need for annual reporting, as the project has already been built and its impacts are likely known at the time of the refinancing.
Additionally, issuers should keep in mind that public offerings are subject to the ongoing reporting requirements in Rule 15c2-12 of the Securities and Exchange Act of 1934.
It’s important to remember green bond investors are largely investing because of the environmental impact, so voluntarily releasing accurate and pertinent information on a project’s performance is key to building continued trust in green bond investing.
For a look at the public projects that could be financed, and refinanced, utilizing green bonds, check out part one of the Utilizing Municipal Green Bonds to Advance Community Sustainability Goals series.
Mrunal M. Shah, a partner in Best Best & Krieger LLP’s Public Finance practice group, serves as bond, special and disclosure counsel for public agencies throughout California. She is well-versed in a variety of public finance transactions, including the financing of environmental and sustainable projects. She can be reached at firstname.lastname@example.org.