State and local governments are turning to the capital markets to fund projects that address their biggest challenges, such as climate change adaptation, affordable housing and homelessness.
From the emerging climate crisis to the persistent need for affordable shelter, U.S. states and cities face increasingly diverse and difficult challenges. In response, municipalities are turning to Sustainability Bonds as a tool that can help finance innovative solutions to problems both new and old.
Our states and cities are simultaneously addressing substantial infrastructure and housing gaps as well as the many challenges presented by climate change.
Green, Social and Sustainability bonds make up a growing subset of the $4 trillion municipal bond market. According to Zachary Solomon, Executive Director in Morgan Stanley’s Public Finance Group, issuance has grown to more than $45 billion since the first municipal Green Bond in 2013, and appetite for the debt is increasing among all types of investors.
Sustainable investing is on the rise, with more than eight in 10 individual investors expressing interest in it, and climate change and community development among the most popular issues, according to the Morgan Stanley Institute for Sustainable Investing’s 2019 Sustainable Signals report. Municipal Green, Social and Sustainability Bonds provide retail investors one way to align their portfolios with their values by investing in sustainable infrastructure in their own communities.
Investors also typically benefit from municipal bonds being tax-exempt, which means buyers don’t pay taxes on the interest and income they earn. And, while individual investors have usually comprised the majority of buyers in the market, 2019 was a landmark year for getting institutional investors to dedicate capital to the asset class, Solomon says.
Last year, Morgan Stanley led 21 municipal Green, Social and Sustainability bond sales, offerings that contribute to the firm’s 2018 commitment to provide $250 billion in low-carbon financing by 2030. As part of this effort, Morgan Stanley helped the Battery Park City Authority (BPCA), San Francisco Bay Area Rapid Transit District (BART) and New York State Housing Finance Agency (NYSHFA) issue municipal Green and Sustainability Bonds to finance climate change resiliency efforts, low-carbon mass transportation options and energy-efficient, affordable and permanent supportive housing, respectively. Each of these offerings maps to the United Nations Sustainable Development Goals
“Our states and cities are simultaneously addressing substantial infrastructure and housing gaps as well as the many challenges presented by climate change and related extreme weather events,” Solomon says. “Sustainability Bonds offer an opportunity to fund the sustainable infrastructure projects necessary to confront all of these challenges—by connecting cities looking to develop the projects with the investors looking for both financial return and societal impact.”
Since Hurricane Sandy ravaged the East Coast in 2012, inflicting almost $70 billion in total losses, the Battery Park City Authority has moved to fund resiliency projects that protect Lower Manhattan from storm surge, flooding and rising sea levels. In July, the Authority worked with Morgan Stanley to raise $76 million for its first-ever Sustainability Bonds to fund the initial phase.
The San Francisco Bay Area Rapid Transit District targeted both adaptive and preventive measures in its $643 million Green Bond transaction underwritten by Morgan Stanley. The offering funded improvements to BART’s low-carbon mass transportation networks in the Bay Area and hardening measures against earthquakes. The securities are also Certified Climate Bonds, because they align with the goals of the Paris Climate Agreement, to limit the increase in global average temperature to well below 2 degrees Celsius above pre-industrial levels.
In addition to climate change challenges, cities across the country also continue to face an affordable housing crisis for low-to-moderate income households. The problem is particularly severe for the lowest income households that are at or below the poverty guideline, or 30% of their area median income. The U.S. has a shortage of seven million rental homes that are affordable and available to extremely low-income renters, according to the National Low Income Housing Coalition.1
The environmental and social designations for our lead-managed bond issuances provide desired attributes for clients, and it’s a template we’ve used to promote affordable housing.
To help address the problem on a statewide level, the New York State Housing Finance Agency issued $444 million of Sustainability Bonds in December, its largest financing to date. The proceeds of the bonds, underwritten by Morgan Stanley, will finance 17 affordable multifamily rental housing developments that will include 2,230 affordable housing units. All of the developments will incorporate energy efficiency standards, with 13 receiving certification from the Climate Bond Initiative under the U.S. Environmental Protection Agency’s ENERGYSTAR Low Carbon Buildings criteria.
“New York State has been keenly focused on increasing affordable housing opportunities for vulnerable populations and 12 of these developments will include deeply subsidized permanent supportive housing units for formerly homeless, elderly and disabled people,” says Geoff Proulx, Managing Director and Head of Municipal Housing Finance at Morgan Stanley. “The environmental and social designations for our lead-managed bond issuances provide desired attributes for our issuer and investor clients, and it’s a template we’ve used throughout the country to promote affordable housing.”