Analysis of Green Bond Financing in the Public Transportation Industry (2021)

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2021 T R A N S I T C O O P E R A T I V E R E S E A R C H P R O G R A M TCRP RESEARCH REPORT 222 Research sponsored by the Federal Transit Administration in cooperation with the Transit Development Corporation Subject Areas Public Transportation • Economics • Finance Analysis of Green Bond Financing in the Public Transportation Industry Damon Fordham Cadmus Group Boulder, CO James Schroll Farrah Andersen Cadmus Group Arlington, VA Griffin Flannery Cadmus Group Boston, MA Laura James Cadmus Group Portland, OR a n d Phil Ludvigsen First EnvironmEnt Butler, NJ Sean Flannery rEd Brow, LLC Scituate, MA

TCRP RESEARCH REPORT 222 Project J-11 ISSN 2572-3782 ISBN 978-0-309-67368-6 © 2021 National Academy of Sciences. All rights reserved. COPYRIGHT INFORMATION Authors herein are responsible for the authenticity of their materials and for obtaining written permissions from publishers or persons who own the copyright to any previously published or copyrighted material used herein. Cooperative Research Programs (CRP) grants permission to reproduce material in this publication for classroom and not-for-profit purposes. Permission is given with the understanding that none of the material will be used to imply TRB, AASHTO, FAA, FHWA, FTA, GHSA, NHTSA, or TDC endorsement of a particular product, method, or practice. It is expected that those reproducing the material in this document for educational and not-for-profit uses will give appropriate acknowledgment of the source of any reprinted or reproduced material. For other uses of the material, request permission from CRP. NOTICE The research report was reviewed by the technical panel and accepted for publication according to procedures established and overseen by the Transportation Research Board and approved by the National Academies of Sciences, Engineering, and Medicine. The opinions and conclusions expressed or implied in this report are those of the researchers who performed the research and are not necessarily those of the Transportation Research Board; the National Academies of Sciences, Engineering, and Medicine; or the program sponsors. The Transportation Research Board; the National Academies of Sciences, Engineering, and Medicine; and the sponsors of the Transit Cooperative Research Program do not endorse products or manufacturers. Trade or manufacturers’ names appear herein solely because they are considered essential to the object of the report. TRANSIT COOPERATIVE RESEARCH PROGRAM The nation’s growth and the need to meet mobility, environmental, and energy objectives place demands on public transit systems. Cur- rent systems, some of which are old and in need of upgrading, must expand service area, increase service frequency, and improve efficiency to serve these demands. Research is necessary to solve operating prob- lems, adapt appropriate new technologies from other industries, and introduce innovations into the transit industry. The Transit Coopera- tive Research Program (TCRP) serves as one of the principal means by which the transit industry can develop innovative near-term solutions to meet demands placed on it. The need for TCRP was originally identified in TRB Special Report 213—Research for Public Transit: New Directions, published in 1987 and based on a study sponsored by the Urban Mass Transportation Administration—now the Federal Transit Administration (FTA). A report by the American Public Transportation Association (APTA), Transportation 2000, also recognized the need for local, problem- solving research. TCRP, modeled after the successful National Coop- erative Highway Research Program (NCHRP), undertakes research and other technical activities in response to the needs of transit ser- vice providers. The scope of TCRP includes various transit research fields including planning, service configuration, equipment, facilities, operations, human resources, maintenance, policy, and administrative practices. TCRP was established under FTA sponsorship in July 1992. Proposed by the U.S. Department of Transportation, TCRP was authorized as part of the Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA). On May 13, 1992, a memorandum agreement outlining TCRP operating procedures was executed by the three cooperating organi- zations: FTA; the National Academies of Sciences, Engineering, and Medicine, acting through the Transportation Research Board (TRB); and the Transit Development Corporation, Inc. (TDC), a nonprofit educational and research organization established by APTA. TDC is responsible for forming the independent governing board, designated as the TCRP Oversight and Project Selection (TOPS) Commission. Research problem statements for TCRP are solicited periodically but may be submitted to TRB by anyone at any time. It is the responsibility of the TOPS Commission to formulate the research program by identi- fying the highest priority projects. As part of the evaluation, the TOPS Commission defines funding levels and expected products. Once selected, each project is assigned to an expert panel appointed by TRB. The panels prepare project statements (requests for propos- als), select contractors, and provide technical guidance and counsel throughout the life of the project. The process for developing research problem statements and selecting research agencies has been used by TRB in managing cooperative research programs since 1962. As in other TRB activities, TCRP project panels serve voluntarily without compensation. Because research cannot have the desired effect if products fail to reach the intended audience, special emphasis is placed on disseminat- ing TCRP results to the intended users of the research: transit agen- cies, service providers, and suppliers. TRB provides a series of research reports, syntheses of transit practice, and other supporting material developed by TCRP research. APTA will arrange for workshops, train- ing aids, field visits, and other activities to ensure that results are imple- mented by urban and rural transit industry practitioners. TCRP provides a forum where transit agencies can cooperatively address common operational problems. TCRP results support and complement other ongoing transit research and training programs. Published research reports of the TRANSIT COOPERATIVE RESEARCH PROGRAM are available from Transportation Research Board Business Office 500 Fifth Street, NW Washington, DC 20001 and can be ordered through the Internet by going to https://www.nationalacademies.org and then searching for TRB Printed in the United States of America

The National Academy of Sciences was established in 1863 by an Act of Congress, signed by President Lincoln, as a private, non- governmental institution to advise the nation on issues related to science and technology. Members are elected by their peers for outstanding contributions to research. Dr. Marcia McNutt is president. The National Academy of Engineering was established in 1964 under the charter of the National Academy of Sciences to bring the practices of engineering to advising the nation. Members are elected by their peers for extraordinary contributions to engineering. Dr. John L. Anderson is president. The National Academy of Medicine (formerly the Institute of Medicine) was established in 1970 under the charter of the National Academy of Sciences to advise the nation on medical and health issues. Members are elected by their peers for distinguished contributions to medicine and health. Dr. Victor J. Dzau is president. The three Academies work together as the National Academies of Sciences, Engineering, and Medicine to provide independent, objective analysis and advice to the nation and conduct other activities to solve complex problems and inform public policy decisions. The National Academies also encourage education and research, recognize outstanding contributions to knowledge, and increase public understanding in matters of science, engineering, and medicine. Learn more about the National Academies of Sciences, Engineering, and Medicine at www.nationalacademies.org. The Transportation Research Board is one of seven major programs of the National Academies of Sciences, Engineering, and Medicine. The mission of the Transportation Research Board is to provide leadership in transportation improvements and innovation through trusted, timely, impartial, and evidence-based information exchange, research, and advice regarding all modes of transportation. The Board’s varied activities annually engage about 8,000 engineers, scientists, and other transportation researchers and practitioners from the public and private sectors and academia, all of whom contribute their expertise in the public interest. The program is supported by state transportation departments, federal agencies including the component administrations of the U.S. Department of Transportation, and other organizations and individuals interested in the development of transportation. Learn more about the Transportation Research Board at www.TRB.org.

C O O P E R A T I V E R E S E A R C H P R O G R A M S CRP STAFF FOR TCRP RESEARCH REPORT 222 Christopher J. Hedges, Director, Cooperative Research Programs Lori L. Sundstrom, Deputy Director, Cooperative Research Programs Gwen Chisholm Smith, Manager, Transit Cooperative Research Program Emily Griswold, Program Coordinator Eileen P. Delaney, Director of Publications Natalie Barnes, Associate Director of Publications Lisa Whittington, Editor TCRP PROJECT J-11/TASK 38 PANEL Field of Special Projects Sharon Greene, InfraStrategies LLC, Irvine, CA (Chair) Bismark Agbelie, Catholic University of America, Washington, DC Colton Brown, Pennsylvania Department of Transportation, Harrisburg Sarah Buckle, TransLink, New Westminster, BC Thomas C. Cornillie, Independent Consultant, Alameda, CA Projjal K. Dutta, New York State Metropolitan Transportation Authority, New York Baruch S. Feigenbaum, Reason Foundation, Washington, DC Cris B. Liban, Los Angeles County Metropolitan Transportation Authority, Los Angeles, CA Nathan M. Macek, WSP, Washington, DC Jennifer Mayer, King County Metro Transit, Seattle, WA Andrew C. Mendelson, RBC Capital Markets, New York, NY Catherine H. Reddick, Mercator Advisors, LLC, Philadelphia, PA Humberto A. Tasaico, North Carolina Department of Transportation, Raleigh Peter Mazurek, FTA Liaison Edwina Smallwood, FTA Liaison Matthew Dickens, APTA Liaison

TCRP Research Report 222: Analysis of Green Bond Financing in the Public Transpor- tation Industry provides public transit agencies with an introduction to green bonds and how they can be used to advance the sustainability goals of those agencies. The report uses case studies to provide public transit agencies with the context and knowledge needed to understand the complexity of green bond issuance. The target audiences are public transit systems of all sizes and their stakeholders, including policymakers, transit board members, elected officials, and public transit agency managers and financial officers who are seeking new opportunities to finance public transportation. The report will also be useful to finan- cial and legal advisors, as well as individual investors. The issuance of green bonds could be an important tool for transit systems. In times of financial uncertainties, green bonds can provide an extra source of revenue. Events in the year 2020, including a pandemic and racial and equity concerns, have altered many aspects of everyday life, including public transportation. This report recognizes that public transit agencies are struggling and that they have lost revenue. With a green bond issuance, a transit agency can generate positive environmental impacts, attract investors for transit projects, and generate financial benefits. The objective of this research was to provide the public transportation industry with an examination of green bonds, including an analysis of the different frameworks, defini- tions, benefits, risks, and costs. The report identifies potential roles and benefits of green bonds in advancing sustainability goals of public transit agencies, describes the value and costs of green bonds when compared to traditional bonds or other financing mechanisms, and identifies and contrasts alternatives to green bonds to advance sustainability goals. TCRP Project J-11/Task 38, “Analysis of Green Bond Financing in the Public Transpor- tation Industry,” presents information and lessons learned from previous issuances of green bonds. The report is organized into eight chapters; the initial chapters introduce green bonds and provide an overview of the green bond market and transit green bonds. Subsequent chapters explain the costs and risks of green bonds versus traditional bond financing, the benefits of green bonds, how green bonds advance sustainability goals of public transit agencies, and alternatives to green bonds. Chapters 6 and 7 provide agencies interested in issuing green bonds with practical steps to follow, and they highlight case studies and lessons learned. The appendix at the end of this report provides several valuable resources that public transit agencies can utilize to expand their understanding of sustainable finance and make informed decisions on how best to incorporate the available resources into their strategies going forward. F O R E W O R D By Mariela Garcia-Colberg Staff Officer Transportation Research Board

ix Acronyms 1 Summary 3 Chapter 1 Introduction 3 Overview of the Green Bond Market and Transit Green Bonds 4 Goal of the Report 4 Research Methodology and Report Organization 7 Chapter 2 What Are Green Bonds? 7 Definitions 8 History 9 What Projects Typically Qualify for Green Bonds? 10 Green Bond Issuance 12 Chapter 3 Costs and Risks of Green Bonds vs. Traditional Bond Financing 12 Costs 12 Risks 14 Chapter 4 Benefits of Green Bonds and How Green Bonds Advance Sustainability Goals of Transit Agencies 14 Attracting a Broader Pool of Investors 15 Building a Reputation for Sustainability Among Relevant Stakeholders 15 Developing an Agency’s Sustainability Culture 17 Chapter 5 Alternatives to Green Bonds 17 When Should an Agency Not Issue a Green Bond? 17 Use of Proceeds Market 18 Taxable Green Bonds 18 Results-Based Financing 19 Green Loans 19 Transition Bonds 20 Chapter 6 Practical Tips for Using Green Bonds in Transit 20 Decide Early to Issue a Green Bond 21 Ensure Funded Projects and Assets Are Green 21 Develop a Green Bond Program 21 Adhere to Your Green Bond Framework 22 Identify Internal and External Expertise 23 Draw on Lessons Learned from Other Agencies and Leverage Available Resources C O N T E N T S

24 Chapter 7 Case Studies 24 Massachusetts Bay Transportation Authority 25 New York Metropolitan Transportation Authority 26 Los Angeles County Metropolitan Transportation Authority 29 Chapter 8 Conclusion 30 Bibliography 34 Appendix Green Bond Links and Resources for Transit Agencies

Name Definition ABS asset-backed securities BART Bay Area Rapid Transit (San Francisco Bay Area) CBI Climate Bonds Initiative ECSD Environmental Compliance & Sustainability Department EIB environmental impact bond ESG environmental, social, and governance GBP Green Bond Principles (International Capital Market Association) GHG greenhouse gas IATA International Air Transport Association ICMA International Capital Market Association LA Metro Los Angeles County Metropolitan Transportation Authority MBTA Massachusetts Bay Transportation Authority (Boston) MTA Metropolitan Transportation Authority (New York) S&P Standard & Poor’s Financial Services SDG Sustainable Development Goals (United Nations) A C R O N Y M S