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

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20 The process to issue a green bond is similar to issuing any other tax-exempt bond. The main difference is that green bonds involve additional voluntary nonfinancial disclosures discussed in the GBP, which were outlined in Figure 2-3. These processes are typically documented by the issuer in a green bond framework. Green bond frameworks provide an opportunity for an issuer to communicate its sustainability strategy and the processes it has implemented to manage green projects to potential investors. Helping investors understand how green projects fit into the issuer’s larger strategy is a valuable oppor- tunity to develop trust and confidence in bond issuances. Even with these additional disclosures, transit agencies—regardless of size—are well- positioned to issue green bonds. Transit finance departments, advisors, and underwriters have experience complying with the already rigorous administrative and legal requirements of municipal bond issuance. Typically, the extra effort required and cost incurred to issue a green bond is minimal relative to the effort and cost of issuing a traditional bond. This limited incre- mental cost combined with the limited risks of issuing a green bond over a traditional bond make green bond issuance particularly compelling for this sector. The following section provides an overview of the key tips for issuing green bonds that are outlined in Figure 6-1. The tips are based on input from the interviewees and published experi- ence found during the literature review. A compilation of resources that transit agencies may use as they are evaluating green bonds and developing green bond frameworks is provided in the appendix attached to this report. Decide Early to Issue a Green Bond The decision to issue a green bond should be made as early as possible—ideally the decision should be made, and a framework should be developed, before the bond issuance process begins. This level of preparation allows issuers to focus on the bond issuance instead of concurrently trying to develop their organization’s sustainability strategy. Before issuing the bond, a comprehensive list of the positive impacts of the project should be laid out and compared with the three sets of principles published by ICMA: the GBP, the Social Bond Principles, and the Sustainability Bond Principles. This is particularly impor- tant if there are some environmental impact concerns but there is significant societal benefit. Regardless of the type of bond, the decision to label a bond offering should be made as early as possible. C H A P T E R 6 Practical Tips for Using Green Bonds in Transit

Practical Tips for Using Green Bonds in Transit 21 Ensure Funded Projects and Assets Are Green Not all financed or refinanced projects and assets will be eligible for green bond financing. For example, projects that include substantial onsite parking facilities could be considered to be promoting individual auto transportation over mass transit and would be unlikely to qualify as green bonds. In addition, transit projects with a more indirect link to GHG reduction—such as those that involve cosmetic improvements to stations—would be unlikely to be considered green, although these upgrades may be critical to the long-term viability of the transit network. Recognizing projects that can demonstrate direct environmental benefit is important when it comes to meeting eligibility requirements. According to the GBP Guidance Handbook, “Green, social, or sustainability bonds must have 100 percent of proceeds dedicated towards green and social projects” (ICMA 2020c). As discussed in Chapter 3, accusations of greenwashing could be damaging to an issuing agency. One way to guard against this possibility is to involve staff that is knowledgeable of environmental and social best practices in as much of the issuance process as possible. These team members can also be instrumental in developing and implementing use of proceeds and project selection sections of the agency’s initial green bond framework. Develop a Green Bond Program If multiple bond offerings are planned, it may make sense for an agency to create a green bond program to take advantage of these efficiencies. Transit agencies that have a formal green bond program include New York Metropolitan Transportation Authority (MTA) and MBTA (see Chapter 7). CBI also offers a streamlined certification pro- cess for programs like these. Programmatic Certification involves the annual verification and certification of a pool of eligible assets rather than dealing with each green bond separately (CBI 2020d). Adhere to Your Green Bond Framework Green bond frameworks establish investors’ expectations. An effec- tive framework clearly establishes the processes for managing the dis- closures required for alignment with the GBP, the elements of which The appendix at the end of this report contains a list of resources that are potentially helpful for a transit agency issuing its first green bond. The appendix includes links to the relevant ICMA principles surrounding green, social, and sustainability bonds; CBI’s taxonomy for determining whether an initiative is green; several examples of green bond frameworks issued by transit agencies; and useful webinars for training staff on the core concepts of green bonds. Figure 6-1. Tips for agencies to consider when issuing green bonds.

22 Analysis of Green Bond Financing in the Public Transportation Industry were outlined in Figure 2-3 earlier. Despite the GBP being a voluntary framework, straying from the plan laid out in the framework can erode investor confidence and ultimately harm an organi- zation’s ability to issue green bonds. If deviating from the framework is unavoidable, the agency should be proactive in disclosing this to investors and hearing their concerns. A simple green bond framework template can be found at ICMA’s website. Transit agencies can also look to frameworks published by other transit agencies. • Example green bond frameworks: – Los Angeles County Metropolitan Transportation Authority (LA Metro 2017). – South Coast British Columbia Transportation Authority (TransLink 2018). – SNCF Réseau (French Railway 2016). – RZD (Russian Railways 2019). – Citi Green Bond Framework (Citi 2019). • An example sustainability bond framework: – Massachusetts Bay Transportation Authority (MBTA 2017b). Identify Internal and External Expertise Given that the underlying financial instrument in a green bond is identical to a traditional bond, agencies already have the appropriate financial processes for issuance in place. Tracking and reporting on allocation of proceeds as well as refinancing is common, if not required, espe- cially for tax-exempt offerings. Agencies can draw upon existing financial staff and infrastruc- ture to track and report on green bond allocations. It is helpful to get the agency’s sustainability team involved directly in the issuance as early as possible. Interview participants noted that agencies that have their finance teams engage directly with their sustainability teams generally seem to enjoy a smoother issuance process. Interviewees mentioned that technical experts, such as scientists and engineers, working collaboratively with the finance team ensured specificity of language and appropriate metrics. Participants believed that the technical perspective was also important at conferences and other investor gatherings, where investors often had specific technical concerns that were vital to their investment deci- sions. Interviewees also advocated for multidisciplinary participation in long-range financial planning documents, such as capital improvement plans, to ensure that included projects are scoped in such a way that they meet third-party verification criteria. Smaller transit agencies that may not have environmental or sustainability expertise on staff could get additional assistance from a consultant or knowledgeable advisor. Even with cross-departmental collaboration, selecting a lead bond underwriter and/or finan- cial advisor who has experience with issuing a green bond can be helpful. If the team generally lacks experience, it is especially important to have a knowledgeable advisor. External reviewers and verifiers are another source of available expertise. Although they must maintain independence (meaning they cannot provide consulting services and then review their own work), external reviewers can point to examples of best practices as well as common concerns. The CBI Certification program maintains a list of Approved Verifiers reviewed by the Climate Bonds Standard Board (CBI 2020b). Credit rating agencies are another good option for external reviewers that have their finger on the pulse of investors. Distributing some of the burden of a green bond issuance, particularly an initial issuance, is helpful in developing internal capacity and providing a better offering.

Practical Tips for Using Green Bonds in Transit 23 Draw on Lessons Learned from Other Agencies and Leverage Available Resources Green bonds have been issued by transit agencies since 2015. Chapter 7 presents three case studies of green bond programs in US transit agencies. Although these case studies focus on the efforts of large transit agencies, smaller agencies can still draw upon the lessons learned. Green municipal bond offerings in areas other than transit are also a valuable source of lessons learned. For example, municipalities and agencies of all sizes have issued green wastewater treatment, clean energy, and energy efficiency bonds. Examples of these offerings can be found in consolidated databases from ICMA and CBI. ICMA offers free access to a historic database with a list of offerings and resources. The database contains green and sustainability bonds listed by issuer, category (green or sustainability), and country (ICMA 2020a). Although the database goes back to 2016, it is voluntary—only entities that have requested to be featured are shown. Currently, there are no US transit agencies listed, but there are several other US municipal and state agency offerings. Agencies can also use existing environmental or sustainability resources for their green bond issuance. Environmental and sustainability goals and reports—such as a sustainability plan or annual GHG reporting—can be used to justify green bond financing and track impact. Some common reported measures include carbon intensity (e.g., GHG reductions per passenger), transit accessibility, transportation affordability, and level of service to lower-income patrons. Agencies can also draw upon their sustainability team members to assist with assessing project or asset eligibility. Additionally, CBI offers a more comprehensive and recently updated (within the last three months) listing of labeled green bond offerings (CBI 2020c). This database contains data on several attributes of green bonds, including amount issued, currency, issue date, maturity, and links to external review/verification reports where available. CBI also offers a free searchable database of all certified climate bonds. Both of these databases can be found in the appendix of this report. Information can be found on Low Carbon Land Transport climate bonds issued by agencies such as MTA, LA Metro, and BART. Other for-fee green bond databases include Bloomberg, Cbonds, Dealogic, and Environmental Finance (ICMA 2018). One of the most comprehensive sources of green, social, and sustainability bond guidance and tools is ICMA’s website. Not only did ICMA work groups develop the Green, Social, and Sustainability Bond Principles, they also provide links to several additional resources (ICMA 2020b). Further lessons learned are presented in the case studies in Chapter 7.