Global Climate action and sustainable development, Finance

Case study: Green municipal bonds in Massachusetts, USA


This case study is taken from LGIU’s report ‘Exploring Economic and Enterprise Opportunities from Climate Action’, which utilises international case study work to explore the economic opportunities of local climate action to draw out lessons for local adaptation and mitigation efforts. Download the report here (free): Exploring Economic and Enterprise Opportunities from Climate Action

Municipal bonds are a financing tool potentially well suited to address infrastructure investment gaps for local government, having been used by cities in the US to fund large scale, capital-intensive projects since the 1900s. While use of municipal or ‘muni’ bonds to raise funding for local capital spending has been successful across parts of the USA, it remains less common in Europe, where the tradition to borrow from central government or national/specialised banks persists. 

That being said, in recent years of recovery following the 2008 financial crisis European countries have been experimenting with the model. In 2017, Aberdeen City Council in Scotland issued a municipal bond to raise £370 million to fund its infrastructural capital investment projects out to beyond the year 2050. The Council secured a ‘high grade investment’ bracket Aa2 credit rating by Moody’s, although this was not without challenge: they had to submit highly detailed financial information including debt profiles, strategic plans, information on Scottish local government, and meet legal and regulatory requirements. 

However, when looking for best practice, the USA remains an experienced frontrunner in the issuance of green muni bonds – essentially identical to normal muni bonds except for being labelled as green by their issuer, and earmarked for green investments. Part of the US’ success in can be attributed to municipal bonds’ tax-free status as granted by federal government. The table below, sourced from the Green City Bonds Coalition, outlines types of green municipal bonds with examples mostly at state level. For this case study, we will look at Massachusetts.

Source: Green City Bonds Coalition (2015): Green Muni Bonds Playbook.

Project outline 

The Commonwealth of Massachusetts successfully completed its first green bond issuance in 2013, to the amount of $100 million. The proceeds were earmarked for projects such as clean drinking water, state building efficiency, river revitalization, and habitat restoration. After the success of the 2013 issuance, Massachusetts set out to pursue a larger program in 2014180. 

Massachusetts found the issuing of green bonds to be relatively simple, although completing the groundwork properly was important. While some companies find the tracking and reporting from use of proceeds for green bonds to be cumbersome, as a public institution Massachusetts were already tracking these for all expenses as part of due diligence. The only additional burden was preparing reports for investors, which were created in-house. Their reports track spending on the various projects without the need for metrics on the exact “green impact” of the projects themselves.

The Commonwealth of Massachusetts was issuing both regular and green bonds at the same time, but found issuing green bonds easier; they were able to tell investors a more persuasive story about the projects it would fund. Additionally, local retail investors who had not previously considered municipal bonds were attracted to the green angle. The result was that the sale was 3x oversubscribed and so sold at lower yields than the market’s AAA yield curve. The bonds received an unprecedented amount from retail investors, who reported that, as residents, they appreciated the knowledge of how specific projects would benefit the community. 

Bond details 

Issue date: September 2014 

Size: $350 million 

Maturity: 5 to 17 years 

Yield: 2.45 percent 

Rating: AA+ Fitch / Aa1 Moody’s / AA+ S&P 

Benefits of this type of local or regional government intervention 

The issuance of green bonds by local governments allows large amounts of capital investment to be raised to fund green infrastructure projects, without the need to rely on loans from central banks or the government. A maturity date set far enough into the future also supports long term planning. As an added bonus, the green nature of these municipal bonds provides extra benefits compared to regular municipal bonds, as the popularity of green projects among local and national/foreign investors can lead to lower yields, making borrowing cheap.