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In This List

U.S. Municipal Sustainable Debt And Resilience 2020 Outlook: Sprouting More Leaves

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Credit FAQ: S&P Global Ratings' Approach To U.S. State Credit Enhancement Programs

U.S. Municipal Sustainable Debt And Resilience 2020 Outlook: Sprouting More Leaves

The first municipal green bond in the U.S. was issued in 2013. Since that time, S&P Global Ratings has seen significant market growth, albeit with a setback in 2018. As the sustainable debt market expands, trends are emerging. Issuers and uses of proceeds are diversifying. New labels are appearing on official statements, including sustainable and social bonds. Resilience continues to make its way into headlines, and into budget proposals and capital plans as a design principle, but the municipal market for adaptation bonds remains largely undeveloped.

While labeled debt remains a small share of the overall municipal bond market, we believe that several factors will continue to propel this market segment forward and advance the conversation around sustainability-related risks and disclosures. These factors include the labeled bond market's momentum of rising issuance, increasing adoption of external verification of a financing's environmental or social benefits, and increasing investor focus on environmental, social, and governance (ESG) risks.

A Note On The Sample

Our sample includes those bonds registered as green bonds by the Climate Bonds Initiative, municipal bonds that received Green Evaluations by S&P Global Ratings, and other self-labeled bonds identified by S&P Global Ratings based on our review of offering statements

State Of The U.S. Municipal Green Market

In last year's outlook, we asked, "Will the self-labeled market rebound?" Based on our review of 2019 issuance, the answer is a resounding "yes." The year 2019 saw strong growth in both the number of issues and par amount issued. We identified 99 individual green bond issues, almost double the total in 2018 and 33% higher than the previous one-year record (66 in 2017). Total issuance also saw an all-time high, at $10.1 billion, $152 million more than in 2017. These numbers would have been even higher, except the New York State Housing Finance Authority (NYSHFA) switched during the year from issuing green-labeled bonds to sustainability-labeled bonds (more about sustainability bonds below). By the end of the year, NYHFA had issued $540 million in Climate Bond Certified sustainability bonds that are not included in this total.

Chart 1


Further, green-labeled bonds continue to represent a larger share of the total municipal market, climbing to 2.4% of total issuance in 2019. Based on the growth in green bonds as a share of the municipal market, and given S&P Global Ratings' projection of $435 billion in total municipal market issuance in 2020, we project green municipal issuance of $11.4 billion to $14.0 billion in 2020, with a most likely amount of $13.2 billion. This most likely estimate represents 3.0% of the total municipal market, twice the market share we saw in 2018. We note that the market share will likely be highly vulnerable to changes in overall market size, and the potential for additional issuers to transition away from the green bond label and to other types of sustainable debt.

Chart 2


One dynamic in the green municipal market we noted last year was the intense concentration in a handful of mega-issuers, and that has not changed. The top ten issuers still represent over 50% of cumulative issuance and represented an even larger share (65%) of 2019 issuance. These mega-issuers tend to represent transit authorities with multibillion-dollar capital plans and finance authorities (mostly state revolving funds for water and wastewater, but also in other sectors). The New York Metropolitan Transportation Authority (MTA) continued to dominate the market, selling $1.3 billion in green bonds in 2019. MTA kicked off 2020 by selling $924.8 million in January.

Table 1

Top Ten Green Bond Issuers In U.S. Public Finance (2013-2019)
Issuer Par (Mil. $) Number of issues % of par

New York MTA

6,563 17 16.9

San Francisco Public Utilities

2,068 9 5.3

Indiana Finance Authority

1,991 17 5.1

California Infrastructure and Economic Development Bank

1,666 5 4.3
Massachusetts Water Authority 1,652 7 4.3

Central Puget Sound Transit Authority

1,343 4 3.5

San Francisco Bay Area Rapid Transit District

1,294 11 3.3

New York State Housing Finance Agency

1,126 12 2.9

Iowa Finance Authority

1,090 5 2.8

Greater Orlando Aviation Authority

1,087 1 2.8
Other 1,036 236 48.8

That said, the heavy hitters of 2019 only represented 20% of the green bond issues sold. Looking more closely, the largest number of issues was in the $10 million to $50 million range, followed by the $100 million to $500 million range. All told, average par was just over $100 million in 2019, similar to 2018.

Chart 3


One of the main reasons we believe the market will continue to grow is that the issuer pool and use of proceeds have continued to expand. The U.S. green municipal market in 2019 was by far the most diverse we have seen so far in terms of issuers, geography, and use of proceeds. Almost 70 unique issuers from over 30 states sold green municipal bonds in 2019, 41 of them for the first time by our count. In addition to states previously represented in this market, we also saw green municipal sales from issuers in Alaska, Arkansas, Georgia, Maine, Mississippi, New Mexico, and Wisconsin. This brings the total number of states represented in the municipal green market to 40.

Chart 4


The use of proceeds also continued to diversify. Bonds for water and wastewater infrastructure investment represented over 50% of issuance in 2015 and 2016, but were only 37% of the market in 2019. Continuing a trend we noted last year, green buildings continued to increase their share of the market. Multiple airports have issued bonds for energy-efficient and sustainable expansions in recent years, which is a significant portion of these dollars; housing agencies have also issued a large number of green and sustainable bonds to make energy-efficient improvements to their housing stock. The transit sector had another strong year in 2019, with the Los Angeles County Metropolitan Transportation Authority (LACMTA) and the Bay Area Rapid Transit (BART) borrowing over $1.1 billion combined through green bonds, alongside New York's MTA.

Chart 5


Chart 6


In terms of the number of issues, water continues to dominate. Water and wastewater utilities of all sizes have been regular users of green bonds as they have invested in aging infrastructure and worked to meet regulatory requirements. State revolving funds (SRFs)--which are capitalized by the Federal government and the individual states to provide low-cost financing for utilities–-are also frequent and significant issuers of green bonds. To date, SRFs from nine states have issued green bonds, and several of them now do so on an annual basis.

The Additionality Question: Are Green Bonds Funding New Projects?

One question hanging over the green bond market is whether the proceeds result in more environmentally beneficial outcomes than the baseline. In other words, does the growth in the green and other labeled bond markets suggest improving ESG conditions for issuers and the populations they serve? Within the data, the prevalence of refunding issues, the share of green bonds issued without external verification, and the focus on mitigation versus adaptation projects suggest these questions warrant further investigation.

Later in this commentary, we look further into disclosure and external verification, as well as resilience and adaptation bonds. For 2019, we examined the percentage of green bond issuance used for new money, versus refunding outstanding debt. We observe that it was higher than that for the municipal market as a whole: 76% of the proceeds of green-labeled municipal issuance went to funding new projects, as opposed to 62% of total municipal issuance. Seventy-two percent of green-labeled issues had at least half their proceeds go to new money (in cases where a single series was used for refunding as well as new money, we categorized it based on the majority of proceeds).

While refundings for green bonds were smaller than for the market as a whole in 2019, we suggest that the labeling of refunding bonds indicates that municipal issuers have been using bond proceeds to invest in sustainability-related projects for many years, before the emergence of the labeled green bond market.

Chart 7


Chart 8


We will continue to monitor the use of proceeds. Given that the amount of total municipal refunding bonds declined from over $100 billion in 2012-2017 to $59 billion in 2018 following the elimination of the tax exemption on advance refunding bonds, whether and how green bonds are used for refunding and their tax treatment will also affect the future size of the market.

Other Impact Labels: Sustainability Bonds, Social Bonds, And Beyond

As noted in our recent report, "The Sustainable Debt Market Is Set To Continue Expanding, With Renewed Green Bond Growth Leading The Way" (published Feb. 13, 2020 on RatingsDirect), green bonds remain the dominant sustainable debt instrument. However, other sustainable debt instruments, including social bonds, sustainability bonds, and sustainability-linked loans and bonds, are emerging, and the U.S. municipal market is no exception.

Table 2

Sustainability Bond Issuers In U.S. Public Finance (2019)
Issuer Par (Mil. $) Number of issues % of Par

New York City Housing Development Corp.

1,681 16 61
New York State Housing Finance Agency 757 9 27

Massachusetts Housing Finance Agency

108 3 4

Rhode Island Housing and Mortgage Finance Corp.

74 3 3

Chester County Industrial Development Authority, PA

51 1 2

Low Income Investment Fund

25 1 1
Total 2,772 35

In contrast to the green bond market, where water, transportation, and now green buildings prevail, the focus of the sustainable and social bond markets tends more toward social-policy sectors, namely housing. Housing agencies in New York, Massachusetts, and Rhode Island issued approximately 95% of municipal sustainability-labeled bonds in 2019.

Table 3

Social Bond Issuers In U.S. Public Finance (2019)
Issuer Par (Mil. $) Number of issues % of Par

California Health Facilities Financing Authority

500 1 81

City and County of San Francisco

72 1 12

California Municipal Finance Authority

49 1 8
Total 621 3

Like the early years of green bonds, this market is still small and very concentrated, but the entrance of new issuers (like NYSHFA, which transitioned from issuing green bonds to sustainability bonds in 2019) could spur significant growth in the coming years. As with the green bond market, growth will depend on the continued expansion of the issuer pool, use of proceeds, and market acceptance by investors.

Another global trend we are watching is the rise of sustainable performance-linked loans and bonds. The most notable case of performance-linked debt in the municipal market was DC Water's 2016B Environmental Impact Bond, which was privately placed. In the case of DC Water, the bond established a form of risk sharing associated with a new, less-established technology: If DC Water's investment yielded environmental benefits greater than projections, DC Water would make an additional payment to investors, whereas underperformance would result in a risk share payment to the utility.

In contrast, much of the sustainability-linked debt we see globally provides a financial benefit to the issuer in cases where certain ESG metrics are achieved. Whether a risk-share or financial-incentive approach will catch on in the municipal market remains to be seen.

External Verification Is On The Rise--Will Additional Disclosure Follow?

In recent years, we noted an increasing trend of municipal green bonds receiving some form of external verification. After a slight retreat in 2018, 2019 was the first year where the majority of municipal green issues carried external verification. Among sustainability bonds, 23% were Climate Bond Certified. None of the municipal bonds had external verification for alignment with the Social Bond Principles or Sustainability Bond Guidelines.

Chart 9


Also noteworthy was that issuers sought verification of green bonds of all sizes. In prior years, we noted a distinctive bias: The larger the series, the more likely it was to carry external verification. However, 2019 was significantly different, as the majority of issues in four out of five size categories received verification.

Chart 10


Chart 11


The trend of issuers obtaining external verification may reflect attempts to address increasing concern about greenwashing. Alternatively, a desire to stand out in the green bond market as it expands could be a driving factor. It could also reflect new options for verification: We count seven different external verifiers used for municipal bonds issued in 2019, compared to five in 2018, four in 2017, and three in 2016. Either way, municipal issuers are becoming more familiar with the information and disclosure needed to obtain verification, and not just the largest and most sophisticated issuers.

Market concern about additional ESG disclosure has grown significantly in recent years. That said, what such disclosures will include, and standards with regard to reporting key performance indicators, have yet to be determined. Nevertheless, increasing green, sustainable, and social bond issuance--with the extra attention it draws and additional information associated with external verification--may help municipal issuers think about and prepare for additional disclosure in the future.

Will Rising Discussion Of Resilience And Adaptation Spur Growth In This Nascent Niche Of The Green Bond Market?

The growing recognition by local governments of the importance of hardening their assets against the physical risks posed by changing climate conditions has led some issuers to debt finance adaptation projects. We observed in 2018 the potential for the adaptation market to be a significant piece of the broader green and sustainability labeled market. The data from 2019, however, illustrate the largely undeveloped nature of the U.S. municipal adaptation finance market.

Chart 12


For 2019, we identified only four issuances by three unique issuers of labeled bonds with substantial adaptation purposes. The par amount for these issuances in 2019 was just $99.7 million, compared to $694.5 million in 2018. In 2018, one issuer, the San Francisco Public Utilities Commission, carried this segment of the market, issuing $408.2 million in bonds, nearly 60% of all bonds we flagged that year as having a substantial adaptation component. Given the small size of this nascent market, we expect it will remain highly concentrated by issuer and highly variable in total size from year to year.

Chart 13


Why Does Adaptation Remain A Small Part Of The Labeled Bond Market?

Projects and financings that include resilience as a sub- component may not have adaptation to climate change as a primary purpose. Bonds like these are likely not reflected in our analysis of the market for new issuance with substantial adaptation purposes. For example, many green building projects include design features to limit the effects of increasingly extreme temperatures. But, in these cases, the building projects were going to be pursued anyway, and the "green" designation is primarily due to climate change mitigation considerations like energy efficiency and waste reduction.

Resilience can make its way into capital plans and project design as an add-on or complementary feature to a mitigation project. A green building designer may include window tints or special shades that lessen the effects of extreme heat, whereas adaptation projects are generally clear in their primary purpose of protecting assets from damage or destruction from environmental threats. Some communities require new construction to be resilient to 100-year flood levels or higher; other entities, like utilities, have adopted their own policies establishing such requirements for critical infrastructure.

We also exclude bonds issued to finance seismic resilience, as our aim in assessing this particular market is to gauge the extent to which municipal governments are investing in projects to harden their assets to the effects of climate change.

Recent Proposals To Increase Investment In Adaptation And Resilience

As we've seen in prior years, resilience and the importance of adaptive infrastructure investments continue to make their way into the planning documents of local governments. In this section, we highlight just a few prominent examples.

In California, Governor Gavin Newsom's fiscal 2021 budget proposal includes a $12.5 billion "Climate Budget," and $4.75 billion for a "climate resilience bond." The state would add the proposed bond to the November 2020 ballot, asking voters to authorize the state's investment in reducing physical climate risk through adaptation projects that address near-term climate risks like foods, drought, and wildfire, as well as long-term climate risks like sea-level rise and extreme heat. Proposed investments include resilience projects like protection for safe drinking water, and adaptation projects like installment of flood protection infrastructure, including wetland restoration, and stormwater system improvements. In a state where wildfires burned over 1.8 million acres in 2018, amounting to property losses of over $15 billion, the incentive to invest in resilience is clear.

Chart 14


As part of its Airport Shoreline Protection Project, San Francisco International Airport (SFO) is considering issuing bonds to finance a nearly $600 million seawall that would surround its entire 10-mile perimeter to protect against tidal flooding, storm surge, and sea-level rise. Climate change models vary, but generally predict sea-level rise of multiple feet for the Bay Area by the end of this century. The airport's runway currently sits approximately 10 feet above sea level. SFO was the seventh-busiest airport in the U.S. by passengers in 2018.

In early 2020, New Jersey Governor Philip Murphy announced plans to enact an executive order that will require new regulations be put in place by January 2022 to require builders to consider the evolving effects of climate change into their plans to win government approval for projects. The order would effectively require developers to incorporate resilience into their plans, which is likely to be of particular importance in a state that has the fifth-highest property value exposed to hurricane damage in the U.S., according to the National Oceanic and Atmospheric Association (NOAA).

Though Well-Suited For Adaptation Finance, Persistent Challenges Will Impede Rapid Market Segment Growth

At first glance, U.S. municipal governments would seem to be among the best-suited candidates to generate growth in resilience and adaptation finance. Given the fixed locations of service areas and tax bases, and their limited ability to diversify their revenues, municipal governments have a strong incentive to make investments to protect their physical assets and the people who depend on them. The brief examples cited in the prior section evidence the suitability and appeal for local governments to invest in this space. However, the costs of large-scale resilience initiatives and adaptation projects will remain an impediment to propeling this market forward.

In addition to the high cost of adaptive infrastructure, we've previously examined some of the primary challenges impeding local governments from making more substantial investments in adaptation. These challenges include the limited financial resources of many local governments; the abundance of near-term challenges with their own funding demands; and the uncertainty regarding the timing, location, and specific nature of many climate change-related environmental threats.

Another obstacle to significant growth in the adaptation finance market relates to a key tenet of municipal bond financing: Those who benefit from a public asset will pay for it, somewhat in proportion to the amount of benefit they accrue from it. Even with a long amortization period of, say, 50 years, it is uncertain whether the benefits of an adaptation investment will accrue within that period. The benefits could only be realized in 100 years or more, depending on exogenous factors over which the government has no control, such as weather patterns, the pace of global warming, and the localized effects of climate change. (For more on our view of adaptation finance globally, including opportunities and challenges to overall market growth, see our commentary "Sink Or Swim: The Importance Of Adaptation Projects Rises With Climate Risks," published Dec. 3, 2019, on RatingsDirect.)

Trends To Watch In Municipal Adaptation Finance

In 2020 and beyond, we expect to observe resilience increasingly making its way into general capital programs as a key, or even a required component of project design. We expect that large-scale adaptation projects will remain relatively rare, given the financial, logistical, and political challenges of investing. However, the embrace of planning concepts like "flexible adaptation pathways" by large issuers like the Los Angeles County Metropolitan Transportation Authority (Metro) will likely lead to greater investment in resilience, including through issuance of bonds with a substantial adaptation purpose.

Another, less welcome trend to watch for involves rising costs for some government entities that have not, or are not able to invest in adaptation projects. As seen in recent years with wildfires in California, flooding in the Midwest, and hurricanes on the Gulf Coast and Eastern Seaboard, some municipal governments will face significant damages from severe weather events in the coming years. The Federal government has historically borne a significant share of the recovery costs. But as billion-dollar disasters become more common, it may become increasingly apparent that the benefits of investing to mitigate disaster risks will outweigh the costs.

Will the present focus on mitigation-related investment prove prudent, or will rising physical risks from a changing climate tip the scales in favor of adaptation? The answer to this particular question will likely remain unclear for many years. It may be that only with hindsight will we know if current adaptation investments are sufficient, or whether more must be done to overcome the challenges currently impeding larger scale adoption.

This report does not constitute a rating action.

Primary Credit Analysts:Erin Boeke Burke, New York + 1 (212) 438 1515;
Andrew Bredeson, Centennial + 1 (303) 721 4825;
Secondary Contact:Kurt E Forsgren, Boston (1) 617-530-8308;
Research Contributor:Sunita Nair, CRISIL Global Analytical Center, an S&P Global Ratings affiliate, Mumbai

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