Chiang made a high profile declaration this week in which he rejected President Trump's regressive policies on climate change and said California would sign the Green Bond Pledge and develop a market for its municipalities. (See GlobalCapital report)
In the past three years US munis and universities were one of the most active groups issuing debut green bonds, with $10bn issued in 2017, but this year the pace has slowed. A big reason is this year’s US tax reform, which stopped munis refinancing bonds early.
But there is still, of course, many billions of muni bond issuance. If counties and cities felt they could get big advantages by making their debt green, they would be doing so, despite the refinancing clampdown.
Kurt Forsgren, managing director in S&P global’s US public finance and sustainable finance teams, said the perception among munis was that they would not gain a funding advantage by issuing green bonds. “Getting data to demonstrate it is very difficult — there are so many technical factors going into the pricing of muni bonds,” he said. “The price transparency in the corporate world doesn’t necessarily transfer to munis. You can have labelled green and non-green bonds priced on the same day and have pricing differences unrelated to their labelling characteristics. We have observed that the subscription rate for bonds labelled green is higher, but it doesn’t always translate into a pricing benefit.”
This lack of a clear material advantage is an important gap in the arguments for green bonds put forward by the California Treasurer’s Office and the Milken Institute in a report this week.
The barriers to issuing green bonds are easy to analyse, and ways to lower those can be found, but the benefit of doing so remains unclear. Municipalities have good access to debt markets already.
Nevertheless, several factors could mean Chiang’s effort does bear fruit. US municipalities are rarely rolling in resources. But they are in better shape now than sometimes, so have some scope to take on debt to tackle the dire state of infrastructure, for 90% of which they are responsible. “States in particular have been deleveraging since the financial crisis,” said Forsgren.
California is a sterling example. Rated AA- with a stable outlook by S&P, it has put its house in order in the last seven years, aligning its revenues and costs, paying down debt and building up reserves. Still, its $61bn five year infrastructure plan looks big, set against a total 2019 budget of $190bn.
At present, California is seen as a well governed and well organised state. Others have not done nearly as much to assess their deferred maintenance needs and persuade taxpayers to address them. This is likely to be much harder than finding the right debt instrument to issue.
But if US munis can find the political will to tackle their infrastructure problems, they may well find green-labelled bonds an attractive instrument. Taxpayers, who will ultimately have to repay the debt, may be more willing to shoulder it if they feel they are tapping an exciting new capital market.
“Any labelling or marketing ploy that makes it a more broadly appealing investment for the people paying the bill and the people making the investment can provide some advantages,” said Forsgren.
Being able to attract extra investors, especially if your debt grows, can only help. “The more investors come out and say ‘we want to know whether this is green before we invest’, the more issuers are going to have to provide that information,” said Nicole Martin, senior director, green evaluations at S&P in Toronto. “Pension funds, banks and other investors are more and more asking for labels which will help them differentiate investments.”
In this context, California’s initiative could have an effect. Chiang appears determined to stimulate green bond issuance, and has published a report in which at least three forms of state subsidy to promote the market are put forward as possible policies.
Top of the list of actions is a Responsible Issuer programme that would provide comprehensive support and standardisation for muni issuers. The scope is California but the model could be copied. Forsgren said: “California is always at the front end of trends in the US, and they may be at the front end of this trend.”