September 01, 2021
The interest of investors and municipal or public agency issuers to offer green bonds has been building in recent years, mainly driven by sustainability mandates and climate goals. The emergence of a green premium discount (lower cost) – also known as a greenium – to these issuers has become an additional incentive for the increase across multiple uses of proceeds. Until recently, no analysis had been carried out to evaluate the impact of this growing trend and to assess whether the greenium effect observed nationally and globally is also evident in the Great Lakes St. Lawrence region. Furthermore, the Great Lakes Impact Investment Platform sought to explore what types of green bonds are offered, and how they may impact and grow sustainable investments in water and sewerage infrastructure with positive impact on the region’s waters.
A total universe of over 900 green and standard issue (vanilla) municipal bonds was issued in 2019-2020 capturing water/sewerage, housing, transportation, and renewable energy investments, based on data from the Bloomberg terminal. With US$8.7 billion outstanding over 465 issues, the last two years have seen a 25% increase in green bonds as compared to 2008-18, but only in four US States (New York, Ohio, Illinois and Pennsylvania). The total value of green bonds is more than three times that of vanilla bonds and saw particular growth in water/sewerage and energy. Most of the water bond universe is comprised of agency issuers (393), who backed 125 green and 268 vanilla issues in the same timeframe. Using a statistical matching technique, the greenium effect was estimated at 23 basis points across all bonds, mainly driven by mass transit and renewable energy issues. When just water bonds were considered, 6 basis points of greenium were observed in the primary market, well exceeding discount expectations by municipalities in the region.
The growth trends in green bonds, increasing issuance for water infrastructure and evidence of greenium effects portend an attractive value proposition for the region’s States and Provinces towards building a sustainable future. The trends also present an opportunity for the projects on the Platform to attract capital flow for protecting the region’s waters while driving economic growth.