Here’s how cities in developing countries can tap green bonds
Developing cities can finance climate-resilient infrastructure and renewable-energy projects by improving their creditworthiness or aligning investment goals with green bond performance targets, according to a recent report.
The strategy is detailed in Green Bonds for Cities: A Strategic Guide for City-level Policymakers in Developing Countries, published by the Climate Policy Initiative.
The bulk of funds (94 percent) that flow to emerging cities to finance environmentally friendly projects are in the form of green bonds issued by development finance institutions, the CPI researchers explain. That includes the World Bank, Asian Development Bank, European Investment Bank, German development bank KfW and others.
Access to innovative funds for urban improvement projects can help cities with burgeoning populations meet demand for water, energy, housing and transportation needs.
Many city leaders already are working to finance projects through green bonds, which had a total value of around USD 44 billion in 2015. That figure was projected to rise to USD 75 billion by the end of last year, the report notes.
While these bonds are growing in monetary value, the pool of organizations issuing them in developing nations also is diversifying and expanding. The result: new opportunities for funding from some unlikely partners, such as electric utilities, real estate companies, corporations and commercial banks.
Municipalities that lack creditworthiness still can take advantage of green bonds. The report recommends steps cities can take to demonstrate they are financially responsible:
- Reduce repayment risk: Increased reliance on tax collection or project revenue can bolster repayment efforts and reduce the potential for default.
- Credit guarantees: Securing these commitments from national or multilateral agencies lowers investor risk, given that backup funds are in place to cover any repayment shortfall.
- “Cornerstone” investors: Signing on a marquee financial backer such as a multilateral bank can add credibility to a city-issued bond, the authors say. Even so, it does not eliminate investor risk.
While nearly 300 cities have committed to developing climate mitigation and adaptation plans through the Compact of Mayors (now the Global Covenant of Mayors for Climate and Energy), they have limited access to the capital necessary to achieve the goal.
For cities in the Global South, the situation is particularly problematic, with less than a fifth able to tap local capital markets. Low creditworthiness makes it impossible for most developing cities to issue green bonds on their own.
Johannesburg is among the pioneers. It was the first municipality in South Africa to list a green bond on the Johannesburg Securities Exchange and the first member of the C40 Cities network to issue such a bond.
Emerging cities that are taking advantage of these bonds are using them to fund projects that range from mass transit to water distribution to energy-efficient heating systems. An estimated USD 2.3 billion in bonds is associated with climate and infrastructure projects in cities of the developing world, the authors note.
The report is part of the Green Bonds for Cities Project, which supports access to climate-related urban infrastructure financing by municipalities in developing nations. The project aims to ensure that participating cities have several urban improvement initiatives planned or underway.
Published in December, the study was funded by Climate-KIC, which describes itself as the European Union’s largest public-private partnership addressing climate change through innovation.
CPI helps cities and nations assess and respond to “climate risk” using resources they have already available. Learn more here.