While major sustainable bond issuance from sovereigns such as the UK, France and Germany has tended to grab the headlines in Europe, local authority issuance has passed under the radar. To date, such issuance by Europe’s local authorities has been a tiny fraction of the sustainable bond market, which includes green, social, sustainability and sustainability-linked bonds, but their impact is slowly being recognised.
Local government authorities (municipals) were responsible for just 0.8% of total European sustainable bond issuance between the beginning of 2019 and the end of the first quarter this year, raising $7.4bn, according to analysis conducted by Capital Monitor based on data sourced from sister brand Global Data.
Sweden had the largest number of issuers over the time period, with eight, followed by Germany with three. They were joined by Switzerland, Russia, France, Iceland, Spain, Norway and Finland.
Backing green buildings
By far the biggest use of proceeds has been investments in green buildings. Of the 11 sustainable bond issuers for which post-issuance allocation data was available, eight put more than half the proceeds into green buildings.
Switzerland’s canton of Basel-Stadt has invested its proceeds fully in building and renovating public buildings, including a care home, school and university building, to improve energy efficiency with low-emission materials. Clean transport was also relatively popular, but far less capital was allocated to it. The government has so far raised SFr200m of green bonds and, to date, spent SFr183m on green buildings.
This contrasts with sovereign issuers. Capital Monitor’s analysis of sovereign bond issuers found that advanced economy issuers are mainly putting their proceeds toward clean transport.
Two municipal sustainable bond issuers included social categories in their use of proceeds. Germany's North Rhine-Westphalia and the Spanish region of Galicia put most of their social allocation toward access to essential services. For North Rhine-Westphalia, this meant improving access to education; for Galicia, it was directed mainly to healthcare, including Covid-19 vaccines and a new hospital.
Big impact from transport and renewables
European municipal issuers are generally good at providing a high quality of post-issue reporting for allocation and impact. The canton of Basel-Stadt, for example, estimates that its building improvements have saved 0.6t of CO2 equivalent (CO2e) emissions per year and million Swiss francs invested. For green buildings, impact usually involves comparing the energy usage of a building to one built to local regulations.
It is common for green buildings to not be the most impactful per dollar invested, despite receiving the largest proportion of financing from bond proceeds. For example, Gothenburg in Sweden estimated its renewables investments yielded a reduction of 53t of CO2e per million Swedish krona. Its green buildings investments achieved a reduction of 0.1t of CO2e per million Swedish krona.
Kommunalbanken, a funding agency responsible for financing Norway’s local authorities, had similar findings, reporting 0.6t of CO2e avoided per million Norwegian krone for its green buildings and 57.8t of CO2e avoided per million Norwegian krone for its renewable energy projects.
Kommunalbanken is a good working example; it provides local authorities with green loans at a ten basis point discount to regular loans, which are funded by green bonds it itself raises. As such, local authorities do not have to publish their own frameworks, with Kommunalbanken ensuring consistency with the International Capital Market Association Green Bond Principles.
A similar financing strategy is used by Finland’s MuniFin, which provides financial services to the country's public sector. The Nordics are ahead after a group of local government issuers teamed up to publish a 'Position Paper on Green Bonds Impact Reporting', a guide to impact reporting specifically aimed at Nordic municipal issuers.
Greening it up
Clean transport is another high-impact area. Of the projects funded by sustainable bonds in 2021 by Iceland’s Reykjavik, 87% went to green buildings. However, the city achieved 94% of its carbon reduction impact from clean transportation. Reykjavik wants to increase the share of cyclists in the city and used its proceeds to build 19km of cycling and walking paths.
Sweden’s Stockholm also found its clean transport investments to be more impactful than green buildings. Its clean transport investments have so far reduced emissions by 6t of CO2e per million Swedish krona compared to 2t of CO2e per million Swedish krona for green buildings. Stockholm has allocated the largest slice of any issuer to clean transport.
It should be noted that CO2e avoided is not the only measure of impact. The State of Baden-Württemberg in Germany reported a variety of indicators for its different investment categories including the amount of renewable energy storage capacity and the number of hectares of organic vineries it subsidised. It was also the only issuer to provide a robustness score with each. An impact measurement was more robust if it was sourced from primary data, and less robust the more secondary data and modelling were used to estimate it.
This article originally appeared on Capital Monitor.
