Through our work on green and social bonds, we shed light on the practices, policies, programs and investments needed to address our changing climate and society’s inequities and injustices. Below are some of the questions we often hear from clients.
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Green, Social & Sustainability Bonds
What are green and social bonds?
Green and social bonds are any type of debt used to finance or refinance qualifying projects that have an environmental or social benefit, respectively. There are well-established internationally accepted standards for what constitutes “green” and “social” in many sectors. Labeled green and social bonds should meet criteria established in the International Capital Market’s Association (ICMA’s) Green Bond Principles and Social Bond Principles.
What can green bonds be used for?
Bonds that finance activities in the following sectors may be eligible for green bonds designation:
- Water Infrastructure
- Renewable Energy
- Low Carbon Buildings
- Energy Efficiency
- Pollution Prevention and Control
- Agriculture and Forestry
- Climate Change Adaptation or Mitigation
- Green Products and Technologies
Why do public agencies choose green, social or sustainability bonds?
Public agencies have many motivations for using green, social or sustainability bonds.
- Bring more investors to the table. Labeled bonds attract investors who are focused on ESG attributes.
- Communicate goals and directives related to sustainability or social equity and explain how these are advanced with bond-financed activities.
- Increase transparency and accountability to the public, investors, and ratings agencies about the important work your organization is doing.
- Green and social bonds are in high demand, are often over-subscribed, and may trade better in the secondary market.
How are green, social and sustainability bonds different than traditional bonds?
Green, social and sustainability bonds are no different than traditional bonds in terms of their structure and sale, but labeled bonds may only be used for eligible activities. They offer additional elements of transparency and often include an external review which attests to the environmental and/or social benefits of the funded activities, and conformance with the ICMA’s Principles or CBI’s Climate Bonds Standard.
What is a sustainability bond?
A sustainability bond exclusively finances or refinances activities that provide both environmental and social benefits. The ICMA’s Sustainability Bond Guidelines outline the criteria and intention for the sustainability bond label.
What can social bonds be used for?
The focus of a social bond should be on providing a benefit to a target population. Eligible activities in these sectors often qualify:
- Affordable Housing
- Food Security
- Essential Services
Isn’t every municipal bond green or social?
No. It is a common misperception that “everything in the muni space is green or social.” While it is true that municipal bonds are generally focused on the provision of public goods, not every muni bond meets the ICMA standards. Bonds often have mixed uses of proceeds. Not all activities are green. Investors, wary of “greenwashing” or “impact washing,” look for a qualified external review to confirm alignment and help them meet investment mandates and compliance requirements.
What types of financing can be labeled as green, social or sustainability bonds?
- Use of Proceeds Bonds
- Use of Proceeds Revenue Bonds
- Project Bonds
- Securitized Bonds
- Other Debt Instruments
- Refunding Bonds
- Bond Anticipation Notes
- Private Placements
- Environmental or Social Impact Bonds
- Sovereign Debt
- Bonds Sukuk
Second Party Opinion vs. Verifier’s Report
An independent, external review on green, social or sustainability bonds or loans is called a Second Party Opinion. It explains how the bond meets the ICMA’s Green Bond Principles or Social Bond Principles.
For Certified Climate Bonds, the external review is called a Verifier’s Report. It explains how the bond meets CBI’s Climate Bonds Standard. Not every green bond can qualify as a Climate Bond. There are numeric targets to be assessed, and CBI does not yet have criteria for every sector.
How it works
1. Contact Kestrel to evaluate your bond.
We will review the planned activities and recommend the most appropriate Green, Social, Sustainability or Climate Bond designation.
2. We gather key information.
Our skilled analysts work with issuers and finance teams to confirm our understandings. Our goal is to minimize your effort and to be as efficient as possible with everyone’s time.
3. Kestrel performs an external review.
We prepare a Second Party Opinion for inclusion in the offering documents, and facilitate an efficient review by key members of the deal team. For Climate Bonds, we will serve as a liaison with CBI.
How an External Review Increases Transparency
The purpose of an external review is to clearly identify and sometimes quantify the green or social benefits of the bond-financed activities, in order to give investors a higher degree of confidence that these benefits are in fact real. The external review also confirms that the bond conforms with internationally accepted standards. “Greenwashing” or “social washing” occurs when environmental or social benefits are claimed inappropriately.
Investors who use ESG or impact strategies have an obligation to ensure that bonds placed in an impact fund truly will have impact, and that the claimed ESG benefits are real. The increased transparency that comes with our Second Party Opinion helps meet this need. Kestrel’s analysis of the environmental and/or social benefits to be achieved with your bonds gives investors greater understanding and confidence in the environmental or social attributes of the deal.
With our deep background in consulting to state and local governments, and diverse experience with infrastructure and capital projects, the Kestrel team adds value on every transaction. As bespoke US municipal bond specialists, we know how to gather publicly available data to make the process of issuing green or social bonds as efficient as possible. We are accustomed to addressing the unique needs of cities, counties, state governments, associations, JPAs, finance authorities and conduit issuers.
Certified Climate Bonds
How does the Climate Bonds verification process work?
There are two stages of Climate Bonds verification:
Pre-issuance: Kestrel analysts conduct an external review in accordance with CBI standards. Our work is presented in a Verifier’s Report which is reviewed by the client for accuracy. Kestrel acts as the liaison with CBI staff to facilitate Certification of the bonds by the Climate Bonds Standard Board.
Post-issuance: Kestrel will verify the use of proceeds and prepare the first annual report, within 24 months of issuance. We often work with the issuer to establish an efficient and replicable reporting process. For US municipal bonds, CBI typically accepts the standard continuing disclosures on EMMA as meeting the ongoing reporting requirements.
Benefits of using labeled bonds with an external review
What are the benefits of using labeled bonds with an external review?
- Diversify your investor base. Labeled bonds appeal to one of the fastest growing groups of investors, known as “impact investors,” who seek out opportunities with a positive social or environmental benefit. Green and social bonds are in especially high demand with this group.
- Issuing taxable bonds? International investors need the external review to meet EU compliance mandates.
- Improved investor engagement. Through the extra transparency that comes with green and social bonds, issuers have a unique opportunity to engage with bondholders, potential investors, and other market participants by communicating the positive impacts expected and achieved through the bond-financed activities.
- Pricing advantage. Green bonds often have a tighter spread in pricing, are in very high demand, and tend to hold their value in the secondary market.
- Enhanced reputation and transparency. By demonstrating leadership in sustainability and raising awareness about their environmental and social programs, organizations can improve and strengthen their ESG transparency.
Benefits of using green and social bonds can also be seen within the organization, as the process can facilitate alignment of internal social and/or environmental directives. As part of evaluating how a bond aligns with the entity’s mission or purpose, there can be renewed focus within the organization on expanding positive impacts.
Demand for green, social, and sustainability bonds with independent, external reviews is increasing and in some cases has resulted in a pricing premium. The Climate Bonds Initiative 2020 Green Bond Pricing Report describes tighter spreads and more oversubscription on green bonds versus non-green counterparts.
Case Study: Oberlin College
In July 2021, Oberlin College issued two series of bonds to finance a new geothermal energy system. The College was able to demonstrate (1) a clear pricing differential on a Certified Climate Bond versus a nongreen bond from the same issuer, and (2) a pricing differential on a Kestrel verified Climate Bond versus a self-certified green bond from a different issuer. Both deals were led by Tier 1 firms, with similar account coverage. After reviewing Oberlin’s non-green bond and the self-certified bond from another issuer, the anchor investor chose to only submit an order for Oberlin’s Certified Climate Bond, citing demonstrated ESG credentials verified in an external review. The anchor investor placed an order for the entire transaction and maintained the order despite a 5 basis point repricing.
Case Study: City of Boston, Massachusetts
In December 2020, the City of Boston, Massachusetts, issued a series of General Obligation Bonds (Aaa Moody’s and AAA Standard and Poor’s), which demonstrated the widest green bond pricing benefit—or “greenium”—in the US Municipal Market to date. The City’s $121,660,000 General Obligation Bonds, 2020 Series A and $23,885,000 General Obligation Bonds, 2020 Series B (Green Bonds) priced on the same day and maintained comparable structures. The Series B (Green Bonds) with an external review from Kestrel Verifiers, had a 3 basis point pricing benefit over the non-green tranche.
Case Study: San Francisco Public Utility Commission
In September 2020, the San Francisco Public Utility Commission issued several series of Water Revenue Bonds (Aa2 Moody’s and AA- Standard and Poor’s). SFPUC issued their $150,895,000 2020 Sub-Series A Bonds (Green Bonds) and their $85,335,000 Sub-Series 2020 C Bonds (no green designation) on the same day. The Sub-Series A (Green Bonds) achieved a 1 basis point benefit over the Sub-Series C Bonds. In the past, SFPUC has implied 5 to 7 basis points in pricing benefits from issuing Green Bonds. The 2020 Sub-Series A and C provide the market with a clear comparison to recognize the green pricing benefit.
What reporting is required?
We encourage issuers to report meaningful metrics and make information very easy for investors to find, understanding that every sector and type of debt instrument is unique. With municipal bonds, some sectors such as healthcare or affordable housing, are already required to report on the bond-financed activities, so it is just a matter of making that information easier for investors to find.
With municipal bonds, the standard continuing disclosures and material events notices may satisfy the minimum reporting requirements in some cases. Corporate bonds should plan for a simple annual report on green or social bonds, until all proceeds are spent.
The full benefit of a green or social bond may not be realized unless an issuer plans to tell investors what was achieved. Certain impact or ESG-focus investors consider the availability of impact information in making their decisions to buy.
Per the ICMA Principles:
“Issuers should make, and keep, readily available up to date information on the use of proceeds to be renewed annually until full allocation, and on a timely basis in the case of material developments. This annual report should include a list of the projects to which Social [Green, or Sustainability] Bond proceeds have been allocated, as well as a brief description of the projects and the amounts allocated, and their expected impact.”
What reporting is required for Certified Climate Bonds?
For bonds certified by the Climate Bonds Standard Board, the Verifier must submit one report on the use of proceeds within 24 months of issuance. This is a “Post-Issuance Report.”
After that, issuers must report on the bonds annually, until they mature, in accordance with current Climate Bonds Standard requirements. These reports are referred to as “Update Reports.”
Kestrel will work with Climate Bond issuers to determine a suitable approach to reporting.
Standard-setting entities such as ICMA and CBI emphasize the need for transparent reporting, as outlined in the ICMA’s Harmonized Framework for Impact Reporting.
What is impact reporting?
Impact reporting typically quantifies, numerically, the environmental or social impact of activities funded with labeled bonds. Impact reporting can be helpful to investors and stakeholders who want to measure the positive outcomes achieved through investments. In some cases, impact reporting can be very simple: energy savings since the building retrofit, or demographics of the student body in a new school; annual production of renewable wind energy or acre-feet of recycled water produced at a new advanced treatment plant. Kestrel can help you identify meaningful metrics that are easy to report.
Who’s choosing Kestrel?
Kestrel has worked with state and local governments, non-profits and corporate entities in a wide variety of sectors across the US and Europe, including: biofuel and bioenergy producers, material recovery facility developers, and renewable energy generation facilities. We are the market leaders for external reviews in US Public Finance.
Can social bonds be used for COVID-19 response?
Social bonds finance projects that directly aim to address or mitigate a specific social issue and/or seek to achieve positive social outcomes for target populations. Affordable housing, healthcare and education are sectors that often align well with social bonds.
The global COVID-19 outbreak is a social issue that threatens the well-being of the world’s population and your response can qualify for social bond designation.
Many issuers are considering COVID-19 Response Bonds. These can be verified for conformance with the Social Bond Principles, as per the ICMA updated guidance in June 2020. We understand the urgency that municipal issuers face with COVID-19 Response, and we are here to help.
Internationally Accepted Standards
The International Capital Market Association (ICMA)
Standards and Definitions
- Green Bond Principles: Proceeds will finance or refinance, in part or in full, new and/or existing eligible Green Projects
- Social Bond Principles: Proceeds will finance or refinance in part or in full new and/or existing eligible Social Projects
- Sustainability Bond Guidelines: Proceeds will finance or refinance a combination of both Green and Social Projects.
- Use of Proceeds
- Process for Project Evaluation and Selection
- Management of Proceeds
Recommended by the ICMA
Title of Report
”Second Party Opinion”
Expected annually until full allocation of proceeds
Climate Bonds Initiative (CBI)
Standards and Definitions
- Proceeds will finance projects that contribute to a low carbon and climate resilient economy, consistent with the 2 degrees Celsius warming limit established in the Paris Agreement.
In addition to meeting the ICMA core components, projects and assets will conform with the overarching Climate Bonds Standard and detailed, science-based eligibility criteria for relevant sectors.
Approved “3rd Party Verifier” Required
Title of Report
Required – Verifier must submit within 24 months of sale
Kestrel Pre-Qualified Bonds
What are pre-qualified green, social and sustainability bonds?
In partnership with Ipreo by IHS Markit, Kestrel Verifiers offers underwriters the opportunity to add ICMA-aligned Green Bond, Social Bond, and Sustainability Bond designations to eligible US municipal bonds on the day of sale.
These bonds have the potential to be designated as green, social or sustainability bonds with the addition of Kestrel’s Second Party Opinion.
How does this work?
- Kestrel identifies eligible bonds prior to sale date
- We obtain the issuer’s consent to add the green, social or sustainability bond label, and we notify underwriters that this is available.
- Kestrel’s pre-qualified green, social or sustainability bonds are indicated on the Ipreo Parity and Buyside platforms
- Underwriters may market the deal as “Green Bonds,” “Social Bonds” or “Sustainability Bonds” on pre-sale wires or marketing correspondence.
- After the sale, we provide language for the final Official Statement, payment instructions, and our “Second Party Opinion” which describes in detail how the bond meets requirements for the green, social or sustainability bond designation.
Competitive underwriters should contact Melissa Winkler for more information.
Things to know if your bond is pre-qualified:
Kestrel will provide standard language for the Official Statement describing the bond designation. Kestrel’s “Second Party Opinion” should be an Appendix. We suggest you add the words “Green Bonds,” “Social Bonds” or “Sustainability Bonds” as appropriate to the bond name on the cover of the Official Statement, along with the appropriate ICMA logo, and the Kestrel logo.
If your bond counsel requires changes to Kestrel’s language for the OS, that is not usually a problem, please call us to discuss.
The normal continuing disclosures that issuers already post on EMMA are usually sufficient to meet the minimum threshold for reporting on green/social/sustainability bonds. Additional transparency about the uses of municipal bond proceeds is often found in annual budgets, Capital Improvement Plans, school construction bond websites and other public sources. We note these sources in our review of the bonds.