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

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24 Many transit agencies have begun to review the costs and benefits of green bonds and how they might fit into their current financing structure. This chapter aims to highlight some of the agencies who have paved the way for transit green bonds, providing market expertise and lessons learned along the way. While the case studies presented in this chapter highlight the work of large transit agencies, green bonds are also achievable for municipalities and smaller agencies. The following lessons learned, experiences, and market responses are still applicable to the green bond issuance process for smaller entities. Massachusetts Bay Transportation Authority In 2017, MBTA issued the US’s first tax-exempt sustainability bond. The $99 million self-designated sustainability bond issuance funded more than 100 social and environmental projects (MBTA 2019). To justify the sustainability label, MBTA established clear processes and expectations for selecting eligible sustainability projects as documented in MBTA’s Sustainability Bond Frame- work. The framework incorporated guidance from ICMA’s Sustainability Bond Guidelines, which identify standards for determining project eligibility; for tracking bond proceeds; and for reporting on project impact and advice from external stakeholders, including investor groups, the academic community, and peer issuers. Before issuance, MBTA formed an internal Sustainability Com- mittee made up of internal stakeholders, directors, and managers to lead the drafting of the Sustainability Bond Framework (Sustainable Investing 2020). Representatives from capital planning, treasury, safety, environmental, and accessibility departments served on the committee. These individuals were selected from an internal survey asking who had capacity, interest, and a knowledge base to help. MBTA’s final decision to issue a sustainability bond was based on significant internal discussion, as well as consultation with external stakeholders. The objective of this external outreach was to fully understand the economic and reputational risks associated with the transaction. The speci- fied environmental and social spending priorities for the agency included reducing GHG emissions through improvements in rider capacity, preventing pollution, reducing noise, increasing equity, promoting safety, and improving accessibility. The framework also set up a clear project selection process for the sustainability bond. To select projects, the internal Sustainability Committee nominated projects from MBTA’s capital program that C H A P T E R 7 Case Studies Type of Green Bond: sustainability bond (self-labeled) Issue Date: 2017 Issuance Amount: $99 million Funding Type: project bond

Case Studies 25 Source: Massachusetts Bay Transportation Authority. Figure 7-1. Accessibility improvements at MBTA facilities. specifically met at least one of the social or environmental spending priorities stated in the framework (MBTA 2019). The sustainability proceeds funded projects ranging in size from around $100,000 to $9.8 million. The majority of projects fell into the priorities of climate resiliency, rider capacity, pollution prevention, and accessibility (see Figure 7-1). Projects in these categories included construction of a redesigned seawall to protect an essential bus facility from worsening storms, prevent scour and erosion, and minimize runoff; installation of a new fare collection system to make payment easier and improve accessibility to more riders; and procurement of compressed natural gas and diesel-electric hybrid buses to replace older diesel buses (MBTA 2019). MBTA publishes an annual Sustainability Bond Progress Report which documents performance. This transit sustainability bond received a favorable response from the market. MBTA reported that more banks participated in the sustainability bond offering than the current tradi- tional bond offering. In fact, six of the eight banks that participated in both offerings submitted more aggressive bids on the sustainability bond. In the end, MBTA’s borrowing cost was lower for the sustainability bond than the traditional bond. This increased demand translated into a lifetime interest savings of approximately $2.60 per $1,000 issued (MBTA 2019). With such a favorable market response, MBTA’s 2017 sustainability bond was recognized as The Bond Buyer’s 2017 Northeast Regional Deal of the Year, and it was a finalist for the National Deal of the Year. MBTA even issued an additional $271 million in sustainability bond anticipation notes in 2017 and plans to continue issuing sustainability bonds in the future (MBTA 2019). New York Metropolitan Transportation Authority MTA issued its first in a series of certified climate bonds in February 2016 for $782 million. Since then, MTA has issued 12 more certified climate bonds, ranging in size from $200 million to $2.17 billion, as part of their ongoing green bond program (CBI 2020c). Greatest Challenge • Determining which projects are eligible for a sustainable bond. Solution • Developed an internal framework to determine project eligibility for a sustainable bond and organized a committee of stakeholders—familiar with each project— to help with the assessment. Greatest Success • Finalist in The Bond Buyer’s National Deal of the Year, attracting attention from additional investors. Lessons Learned • Established that social and environmental benefits inherent in many transit projects could be leveraged for issuing sustainability bonds. • Established that there is a demand from investors for sustainability bonds. • Helped MBTA consider new ways to measure sustainability benefits from funded projects.

26 Analysis of Green Bond Financing in the Public Transportation Industry MTA understood the inherent climate benefits that public trans- portation provides by shifting transportation demand away from private vehicles. The agency also knew that this benefit is not always realized in the market and that offering a green bond was a way of raising this awareness. The decision to do so was made at a very high level in the agency. The Chief Financial Officer recommended the issuance of green bonds, and the Board of Directors was consulted before proceeding. Usually, climate bond certification applies to bonds for specific climate-related projects that are identified and tracked for each bond issuance. MTA found that its size and complex financial processes, including pooled funding for projects, made tracking bond proceeds to specific projects difficult. As a result, MTA had to take a slightly different approach to green bond issuance and certification. MTA and CBI agreed that the inherent benefit of MTA’s transit and commuter systems was consistent with reducing GHG emissions to levels specified by the Paris Agreement (MTA 2019). CBI agreed to certify a portion of the pooled bonds up to the percentage of MTA’s capital pro- gram that is annually verified as eligible under CBI’s Low Carbon Land Transport sector criteria. This Programmatic Certification has allowed MTA to access a relatively large amount of funding for a pool of climate-related projects at a lower level of cost and effort than initially anticipated. As a result, MTA issues at least one bond a year to fund the transit and commuter systems portion of its capital programs. Proceeds from bond sales have been allocated to capital invest- ments in MTA’s electrified rail assets, such as expansion of existing railways, procurement of subway cars, and construction of new stations. Proceeds also went to improvements supporting infrastructure, including line structures, maintenance yards, signals, and communications. In 2017 and 2018, Environmental Finance recognized MTA’s offering as the Municipal Green Bond of the Year (Environmental Finance 2020). MTA’s Director of Finance, Patrick McCoy, explained the benefits MTA has seen as a result of these certified climate bonds. He says the green label helps “attract additional investors that may not otherwise be interested.” These investors represent a “growing base of interested bond- holders looking to invest in green and sustainable projects.” While these investors do not directly translate to a pricing benefit, it does facilitate “a more efficient ultimate price to the MTA and translates to our paying lower interest for the cost of its life” (Debtwire 2017). Los Angeles County Metropolitan Transportation Authority LA Metro has a sustainability vision to “be the leader in maximizing sustainability efforts and its benefits to LA County’s people, finances, and environment” (LA Metro 2020). To realize that vision, Metro established goals in key sustainability areas. Metro has issued two certified climate bonds to finance projects to support its sustainability and climate goals. The first was issued in 2017 for $471 million, and the second followed in 2019 for $419 million (CBI 2020b). Both bonds funded climate-related projects associated with the development and construction of electrified light and heavy rail trans- portation systems (see Figures 7-2 and 7-3). Type of Green Bond: Certified Climate Bonds Program Issue Dates: 2016–2020 Total Program Amount: $11.3 billion Funding Type: pooled funding Greatest Challenge • How to reconcile MTA’s process of pooling bonds for projects rather than issuing individual bonds with the requirements for certified climate bonds. Solution • Programmatic Certification by CBI for the portion of the pooled bonds used for qualifying projects. Greatest Success • Recognition by Environ- mental Finance as the 2018 Municipal Green Bond of the Year. Lessons Learned • CBI-certified bonds gener- ated greater demand for MTA’s offerings. • Establishing a program- matic approach resulted in lower transaction costs than initially anticipated. Type of Green Bond: Certified Climate Bonds Program Issue Dates: 2017 & 2019 Issuance Amounts: $471 million & $419 million Funding Type: project bond

Case Studies 27 To facilitate the bond issuance and verification process, Metro developed a framework in conformance with CBI requirements and existing sustainability and climate change commit- ments. To ensure alignment with LA County and Metro’s commitments, the framework incor- porated language from the agency’s Sustainability Implementation Plan and Environmental Policy, as well as the Los Angeles Countywide Sustainability Planning Policy. The agency’s Sustainability Implementation Plan identifies actions to address key issues such as climate adap- tation and resiliency, livable neighborhoods and equity, and economic and workforce devel- opment. The agency’s Environmental Policy includes commitments to mitigating potential negative impacts on the environment related to its operations. The Countywide Planning Policy defines outcomes and establishes measurements related to developing a Sustainable Regional Transportation System. Metro’s Treasury Department collaborated with the Environmental Compliance & Sustain- ability Department (ECSD) to leverage internal expertise and review projects in the capital pro- gram to identify those projects that met CBI’s climate criteria and complied with city, county, state, and FTA sustainability objectives (LA Metro 2017). Source: LA Metro (2018). Figure 7-2. Purple Line extension, Section 2 groundbreaking. Source: LA Metro (2019). Figure 7-3. Crenshaw/LAX Line restoration work.

28 Analysis of Green Bond Financing in the Public Transportation Industry To become CBI certified, Metro had both bonds verified to ensure that they met the require- ments of the Climate Bonds Standard for Low Carbon Land Transport. Pre- and Post-issuance verifications were conducted by an approved verifier (CBI 2020b). During the verification, Metro brought together representatives from across the organization to help the verifier better understand the relevant projects and to build internal understanding of the green bond process within Metro. After reviewing provided information such as the Preliminary Official State- ment, project eligibility, and available reporting, the verifier issued an independent verification report and statement/opinion (First Environment 2017; First Environment 2019). The 2017 certified climate bond funded approximately 20 projects focused on the develop- ment and improvement of Metro’s electrified rail. The projects ranged in size from around $700,000 to $245 million and included activities such as line extensions, station refurbishments, installation of ADA ramps, and electric light rail vehicle procurement (LA Metro 2017). To date, the 2019 bond has been used to fund four projects that address connectivity, track and system refurbishing, and facilities improvements. Aligning Metro’s bond framework with its overarching sustainability policies has helped the agency make progress toward its environmental and climate goals, including the objective of reducing GHG emissions by 79 percent below 2017 levels by 2030 (LA Metro 2017). Metro also took advantage of its existing sustainability reporting by using its annual Energy & Resource Report to demonstrate the projects’ positive impacts to stakeholders. As a result of these processes for transparency and integration, Metro was recognized as The Bond Buyer’s ESG/Green Deal of the Year 2019 (The Bond Buyer 2019). Greatest Challenge • Deciding whether and how to issue green bonds. Solution • Exchanged ideas and opinions between Treasury and ECSD. This dialog resulted in the initial decision to move forward with a green bond and to facilitate development of the green bond framework. Greatest Success • Being recognized by The Bond Buyer as ESG/ Green Bond Deal of the Year 2019. Lessons Learned • Issuing climate bonds helped build upon the agency’s sustainability culture. • Use of cross-departmental staff was key in the bonds’ success.