Green Bond Trend Catches on in the Muni Market

(Bloomberg) -- Environmentally conscious investing may finally be gaining traction in a $3.8 trillion market that seems made for it.

U.S. state and local governments -- which finance public transit, water works and other projects with positive environmental impacts -- sold $1.9 billion of so-called green bonds during the third quarter, the most for the period on record, according to data compiled by Bloomberg. Another $440 million have been issued so far this month.

The niche has some obstacles to overcome: neither buyers nor sellers are yet reaping any monetary benefits, for one, because their yields differ little or at all from debt that’s not marketed as green.

But mutual funds and other money managers are fielding demand from investors who want to see their cash finance projects that benefit the environment. And local governments have become increasing comfortable with the disclosure investors want for bonds billed as green, such as posting updates on how the proceeds are flowing to designated works.

“Issuers are starting to hear the message loud and clear from the investor community that even if there are no immediate and quantifiable pricing benefits, there are other qualitative and reputational benefits to issuing a green bond,” said Ksenia Koban, a municipal-credit analyst at Payden & Rygel Investment Management in Los Angeles.

Sales still remain a sliver of the overall market and have slipped from the $10 billion peak hit in 2017, when issuers sold a record amount of debt for fear that Trump’s tax cut law would roll back the subsidies for a big chunk of bond deals. And some municipal governments see little reason to get a green certification if they don’t achieve a lower borrowing cost in return.

Philadelphia, which sells debt several times a year, hasn’t yet issued a green bond, said Treasurer Christian Dunbar. “I don’t know if the demand would be so strong that it will have an effect on our pricing,” he said by telephone.

But analysts and underwriters expect offerings to increase in the municipal-bond market, which as the traditional venue for raising funds for infrastructure makes it a natural fit. While the deals may not all end up being billed as green, more than half of the cities surveyed by Moody’s Investors Service said they plan to sell debt to fund projects easing the risks from their changing climate such as flooding.

With environmental issues becoming politicized nationally, it’s “difficult to envision a federal plan to fund sustainable projects,” said Glenn McGowan, director in municipal underwriting at RBC Capital Markets. “States and local governments will likely need to proceed in financing projects they deem appropriate in the absence of federal support, and the municipal market will play a key role in that process.”

--With assistance from Sowjana Sivaloganathan and Maria Elena Vizcaino.

To contact the reporter on this story: Romy Varghese in San Francisco at rvarghese8@bloomberg.net

To contact the editors responsible for this story: Elizabeth Campbell at ecampbell14@bloomberg.net, William Selway

©2019 Bloomberg L.P.