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2019 U.S. Municipal Green Bond & Resiliency Outlook: Will The Self-Labeled Market Rebound?

Highlights

- U.S. 2018 self-labeled green bond volume was far lower than the two prior years, but the number of issues saw a decline more in line with the municipal bond market generally, and the number of new issuers was consistent with 2016-2017.

- The U.S. self-labeled municipal green bond market is still heavily concentrated, with the top-ten issuers representing half of total volume in the last five years. In our view, consistent market growth will be contingent on the entry of new issuers across different sectors and geographic regions.

- We expect sustainable-labeled financing--including green bonds--to continue to grow as issuers incorporate broader sustainability considerations into their investment decisions.

- Green labels aside, we believe a large portion of the municipal market finances infrastructure with environmental benefits and is significantly larger than the self-labeled market.

- Though recognition of risks and costs involving climate change and disastrous weather-related events will continue to increase for many U.S. municipal issuers, we believe the high costs and lack of clear funding streams will constrain the number of issuances for adaptation projects in the near term.

Mar. 14 2019 — The U.S. municipal market for self-labeled green bonds bucked global trends in 2018 and declined for the first time since 2013, although this was in line with broader volume decreases in public financings reflecting tax law changes, which eliminated the ability of issuers to advance refund existing debt. For market participants concerned about "additionality" (i.e., labeling the refinancing of green assets also as "green" without a corresponding net increase in environmental benefits), the U.S. tax code change may be viewed positively.

If the U.S. self-labeled green market has reset at a new baseline like the broader municipal market, the big question is where does it go in 2019? S&P Global Ratings anticipates the use of self-labeled green bonds will grow in 2019 as more issuers look to credential eligible financing to meet policy objectives and tap into a broader investor base that focuses on sustainability. However, our outlook is less certain over the longer term, as other types of sustainable-labeled  financings may replace green-labeled financings as issuers incorporate broader sustainability considerations into their investment decisions. Uncertainty regarding the presence of a clear pricing advantage for issuers to sell labeled green bonds in the U.S. municipal market, and asset-level reporting requirements will also likely continue to limit further green issuance. The extent to which investors will look beyond labels and to a project's measurable environmental or resiliency benefits--in a segment of the fixed-income market that almost inherently finances green infrastructure--remains to be seen.

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