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

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1 Green bonds have emerged in recent years as a compelling means of leveraging finance to advance global sustainability goals. For issuers, these instruments are designed to capture the value of initiatives that have positive environmental impacts. For fund managers, green bonds provide a means of identifying initiatives with the environmental impacts that their investors are increasingly demanding while offering a more attractive risk profile due to the active management of environmental, social, and governance issues. At the most basic level, green bonds are identical to traditional bonds with additional nonfinancial disclosures attached to satisfy the core components of the 2018 International Capital Market Association’s (ICMA’s) Green Bond Principles (GBP), namely: 1. Use of Proceeds 2. Process for Project Evaluation and Selection 3. Management of Proceeds 4. Reporting Though green bonds (as an instrument) are explicitly defined, there is less clarity sur- rounding what types of projects should qualify for the issuance of green bonds. Research for this report found that transit agencies are in a uniquely advantageous position for green bond issuance because most transit projects have an inherently positive impact on the environment (i.e., reducing carbon emissions by removing private vehicles from the road). This inherent alignment with sustainability goals, combined with widespread familiarity of public transportation as an asset class and the large size of typical transit bond issuances, make for a rather attractive investment opportunity. Costs for issuing a green bond are variable but tend to be relatively low given the typical size of a transit bond issuance. An agency’s first green bond issuance requires some additional one-time expenditures to lay forth an organization’s sustainability goals and strategy, as well as to develop or identify an existing green bond framework to organize its offering. After the initial cost of developing organizational capacity to issue green bonds, the practitioners interviewed for this research indicated that preparing the required disclosures to issue green bonds costs about $10,000 in staff time. Should an issuer elect to hire a third-party verifier (an external party that confirms the green benefits of a project), there will be initial costs associated with the verification process (Global Green Bond Partnership 2019). While research surrounding the existence of a “green premium”—an incremental price that buyers are willing to pay for a green bond over a traditional bond—is incon- clusive, there are several advantages to issuing a green bond (Ehlers & Packer 2017). First, because the green bond is identical to a traditional bond except for the nonfinancial disclosures required to satisfy the GBP core components, there is very little downside to S U M M A R Y Analysis of Green Bond Financing in the Public Transportation Industry

2 Analysis of Green Bond Financing in the Public Transportation Industry green bonds as compared to traditional bonds, aside from the costs mentioned previ- ously. A green bond theoretically attracts three types of investors: 1. Investors who are committed to supporting environmentally sound securities and therefore seek out green bonds. 2. Investors who believe that issuance of a green bond is indicative of strong management and good corporate governance which, in turn, mitigate risk. 3. Investors who place no incremental value in the “green” element of the bond but are inter- ested in the asset class. Traditional bonds would only attract the third of these groups, so green bonds should attract a broader pool of investors. Attracting additional investors does not automatically provide a financial advantage; however, broadening the pool of potential investors does increase the likelihood that a subset of those investors is willing to pay a higher price for the issue. Aside from the potential financial benefits, green bonds provide transit agencies with an opportunity to make a statement regarding their commitment to sustainability and a plat- form for driving toward their sustainability objectives. Issuing green bonds also allows issuers to develop a track record of commitment to sustainability, which could be an advantage as global financial markets realign to direct funding to projects with positive environmental impacts. The only downside unique to green bond issuance that consistently arose in this research is the risk of “greenwashing”—that is, marketing a project as green that does not actually contribute a positive environmental impact. Greenwashing can occur because an issuer has the option to self-label any project as green. However, if an organization issues a green bond that the market receives poorly (because it is not believed to provide a significant positive environmental impact), the credibility of the issuer can be damaged and their ability to effectively issue green bonds in the future can be negatively impacted. For transit agencies, an obvious example is a green bond issuance that provides funding for assets that burn fossil fuels, even if they are replacing older, less efficient internal combustion engines. This risk should be carefully considered by issuers when funding projects that burn fossil fuels. This report provides transit agencies and other stakeholders with information about green bonds and resources to develop green bond programs. The report covers key con- cepts, such as the main components of green bonds, elements that differentiate green bonds from traditional bonds, and costs and benefits of issuing green bonds instead of traditional bonds. The report also provides case studies that demonstrate how transit agencies have implemented green bond programs, along with an appendix of resources for potential green bond issuers.