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Sustainable Finance

2021 Sustainable Finance Outlook: Large Growth in Green, Social, Sustainable Labels as Municipal Market Embraces ESG

S&P Global Ratings expects U.S. municipal green-labeled debt to continue grabbing a larger share of the municipal market in 2021, estimating green-labeled issuance of about $18 billion, or 4.1% of total municipal issuance, as projected by S&P Global Ratings Research.

For the total sustainable debt market, we believe it is possible that issuance could surpass $30 billion for 2021, bringing cumulative issuances to more than $100 billion since the first municipal green bond was issued by the Commonwealth of Massachusetts in 2013. The extraordinary pace of growth in social and sustainability bonds, combined with the role of the pandemic in driving social bonds forward in 2020, adds complexity to the forecast.

Key Takeaways

  • S&P Global Ratings expects the municipal sustainable debt market to grow in 2021, building on momentum and substantial growth in social and sustainability labeled bonds. S&P Global Ratings estimates municipal green-labeled debt issuance of about $18 billion and total municipal sustainable debt issuance potentially surpassing $30 billion.

  • Green bonds for municipal issuers commonly fund projects intending to have a positive environmental impact. Primary sectors for municipal green bond issuances include water and wastewater management, green buildings, and public transit.

  • Low interest rates, increasing market embrace of ESG concepts, and the coronavirus pandemic drove robust sustainable debt issuance growth in the municipal markets during 2020.

  • More municipal market issuers are adding green, social, and sustainability labels to bonds, but concentration remains: The 10 largest sustainable debt issuers accounted for more than 50% of total issuances in 2020.

  • With an average par amount of $103.6 million in 2020, 2.8x the average U.S. municipal issuance, sustainable debt issuances are larger and more heavily focused on new money (75%) than the overall municipal market.

  • Investor appetite for use of proceeds verification is increasing, and 2020 was the first year that most sustainable debt issuances carried some form of external review.

Policy

U.S. Clean Power Standard Becomes Centerpiece Of Congressional Climate Efforts

Proposals to form a national clean electricity standard have become a central focus of climate change legislation in the new Congress as U.S. President Joe Biden pushes for a carbon-free power sector.

The concept has support from Democrats and Republicans, with nearly 40 U.S. states already adopting renewable or clean energy goals or standards, according to S&P Global Market Intelligence data. But lawmakers backing a clean electricity standard, or CES, still need to resolve differences over when the U.S. power sector would need to decarbonize, among other issues.

Key Takeaways

  • House Democrats' 2035 CES proposal came from the Energy and Commerce Committee, which will play a key role in shaping climate legislation from the lower chamber. But committee leaders may have to balance their bill against other CES proposals to broaden political support.

  • A clean electricity standard "should be the center of an infrastructure plan that we look forward to working on after we get through the [COVID-19] recovery package," U.S. Sen. Tina Smith, D-Minn., who is preparing to reintroduce CES legislation, said during a recent event on pathways for enacting a CES.

  • Some utilities could decarbonize before 2050, but a nationwide goal of zero emissions by 2035 "is pretty unrealistic," U.S. Rep. Kurt Schrader, D-Ore., said during a March 2 webinar hosted by the Bipartisan Policy Center. "We're willing to work with folks, but we want to be realistic."

  • "I think that we can do [the clean energy transition] and move forward, but we're not going to eliminate," Sen. Joe Manchin, D-W.Va., who chairs the Senate Energy and Natural Resources Committee, said March 10 at a policy forum hosted by the American Council on Renewable Energy. "You can't just say we're going to eliminate using all fossil and coal's going to be out, oil's going to be out, everything else, gas is going to be out of it."

Decarbonization

States Looking to Decarbonize May Need to Weigh Their Gas's Origin – Study

As U.S. states look to decarbonize, where they get their natural gas may be an important part of their emissions profiles, according to a recent study.

Calculating the upstream greenhouse gas intensity of each state's gas supplies, researchers at Georgia Tech's School of Civil and Environmental Engineering found that gas consumed in 2018 in the Lower 48 had methane emissions profiles that ranged from 0.9% to 3.6% of the total gas withdrawn that supplied states' consumption.

Oil Giant Saudi Arabia Aims to Build The Zero-Carbon City of the Future

In an isolated patch on the Red Sea coast, Saudi Arabia has unveiled a grand vision of a futuristic zero-carbon community called Neom, fueled by hydrogen, a showpiece for Crown Prince Mohammed bin Salman in his efforts to diversify the economy of the world's top oil exporter.

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Massachusetts Governor Signs Climate Change Legislation Calling for Net-Zero Emissions

Massachusetts is the latest state to sign a net-zero emissions into law after Governor Charlie Baker signed a comprehensive climate change legislation March 26, calling for the state to achieve net-zero by 2050.

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Electrification

EEI Plans Push for Policies to Support Transmission, Clean Energy Transition

With Democrats in control of the White House and Congress, Edison Electric Institute, the trade group representing investor-owned electric utilities, plans to advocate for policies that support the industry's transition to cleaner energy and recognize the vital importance of infrastructure investment.

"As always, our North Star is serving our customers and we will continue to center our efforts on three main pillars: maintaining the steady and strong transition to clean energy; modernizing the energy grid to make it more dynamic, more resilient and more secure; and developing the innovative solutions our customers expect and deserve," EEI President Thomas Kuhn said during a Feb. 10 virtual presentation.

Kuhn and other EEI leaders noted that the electric industry is "the most capital-intensive industry in America," racking up nearly $140 billion in capital expenses in 2020. Nearly 50% of these investments were focused on transmission and distribution.

"The transmission system is key to integrating more renewables and more clean energy into the energy grid affordably and reliably," Kuhn added in the annual Wall Street briefing.

EEI leaders largely applauded the Biden administration's climate and energy policy goals, which include a $2 trillion clean energy and green infrastructure plan.

"To achieve our clean energy goals in the fastest and most cost-efficient manner while also protecting and helping to facilitate the development of this critical infrastructure, there are critical areas that the administration can focus on to make progress," said Philip Moeller, executive vice president of the business operations group and regulatory affairs at EEI. "First, we need to take a more holistic view of transmission system needs and we need to work to improve policies and processes to evaluate and promote the development of cost-effective interregional, multiregional or cross-connection transmission facilities."

San Jose, Calif., adopts citywide building gas ban

San Jose, Calif., will ban natural gas use in most new construction, becoming the largest U.S. municipality to adopt a citywide building electrification requirement to combat climate change.

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New York to Weigh All-Electric Buildings Mandate in Climate Law Implementation

An advisory panel responsible for developing policies and proposals to cut building greenhouse gas emissions presented a preliminary set of draft proposals Feb. 4. They included developing an all-electric construction code and prohibiting New Yorkers from replacing appliances and building systems with fossil fuel equipment.

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Denver Sets Targets for All-Electric Construction in New Homes and Buildings

Denver will take steps to ensure new homes and buildings are all-electric in the coming years, marking the Mile High City's planned transition away from natural gas heating. City and county climate officials announced the policy in a blueprint for achieving net-zero energy status in Denver's new building stock, relased on Jan. 26.

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Natural Gas Challenges

Overhaul of Building Energy Code Deals Setback to Gas Ban Backers

The council responsible for developing model building codes overhauled its process for setting minimum energy efficiency requirements, blocking a pathway that local governments have used to secure decarbonization measures like building electrification and electric vehicle charging.

The move drew swift criticism from environmentalists, some local governments and Democratic leaders, who called the move a sign of the influence of building developers and the gas industry within the council, the International Code Council Inc., or ICC. Groups like the National Association of Home Builders and Leading Builders of America viewed the overhaul as a means of preventing climate-focused groups and civil servants from compromising the council's mission of fostering safe, affordable building development.

State Laws Halting Municipal Gas Bans Unlikely to Stem Power Burn Declines in 2021

As state governments across the US continue to ban local restrictions on natural gas usage, higher prices and growing renewable power supply are still likely to weaken demand for the fuel this year.

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States Launch Anti-Ban Blitz as Electrification Efforts Grow

Heading into 2021, the movement to restrict gas use in new construction in Washington and Massachusetts towns and cities continued to evolve, while state lawmakers sought to prohibit local governments from pursuing the policy.

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Momentum Gathers to Prohibit All-Electric Building Requirements

Utah, Arkansas and Mississippi joined four other states in prohibiting local governments from restricting natural gas use in buildings as similar bills advanced in at least 14 more states and stalled in Colorado.

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Real Estate

Green Building Takes Hold: A New Era for the Real Estate Industry

In 2019, the global value of real estate was estimated to be US$217 trillion – roughly 2.7 times the GDP of the entire world. Global real estate consumes approximately 40% of world energy annually and accounts for more than 20% of greenhouse gas (GHG) emissions. This highlights the contribution the real estate industry can make to help achieve the Paris Agreement goal of limiting global warming to well below 2°C from pre-industrial levels.

Remote Working is Testing U.S. Office Landlords' Credit Quality

The COVID-19 pandemic has accelerated the adoption of remote working and S&P Global Ratings thinks tenants downsizing their footprint is a growing risk, pressuring demand for office real estate.

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