Chapter 7: Green Municipal Bonds

Devashree Saha
Devashree Saha is an associate fellow at the Brookings Institution Metropolitan Policy Program.
Skye d'Almedia
Skye d'Almedia manages the Financing Sustainable Cities Initiative at C40 Cities Climate Leadership Group, a joint initiative of the Citi Foundation and WRI Ross Center.


The rapid growth of the market for green bonds—the proceeds of which are used to finance projects that will improve the environment—has sparked interest among stakeholders worldwide. Municipalities, cities, and state-owned utility companies have begun to emerge as strategic issuers of green bonds in the United States, Europe, and South Africa. The growth in green bonds comes amid greater awareness of climate change and expanding investor appetite for environmentally friendly investment products. Green municipal bonds are an important area for future growth as cities and other sub-national entities look to low-cost and long-term sources of capital to finance climate mitigation and adaptation infrastructure requirements.

This chapter explains what green municipal bonds are, describes the growth and composition of the green municipal bond market, examines the benefits of issuing green bonds, details the challenges facing the green municipal bond market, lays out how to issue a green bond, and assesses the key considerations for green municipal bond issuers, especially in emerging economies.

What are green municipal bonds?

A green municipal bond is a fixed-income financial instrument for raising capital through the debt capital market. As with any other bond, the bond issuer raises a fixed amount of capital from investors over an established period of time (the “maturity”), repays the capital (the “principal”) when the bond matures, and pays an agreed-upon amount of interest (“coupons”) during that time.

The key difference between a green bond and a regular bond is that the former is explicitly labelled as “green” by the issuer, and a commitment is made to use the proceeds of the green bond to exclusively finance or re-finance projects with an environmental benefit. Eligible projects include, but are not limited to, renewable energy, energy efficiency, sustainable waste management, sustainable land use, biodiversity conservation, clean transportation, clean water, and various climate adaptation projects (see Figure A).

Green bond proceeds have been used for a variety of green projects (2015 green bond proceeds)
Figure A

Except for the above-mentioned difference, green municipal bonds are similar to regular bonds and to date have been largely identical in structure, risk, and return to regular bonds.

There is also the need to differentiate labelled green bonds from the unlabelled green bond market. Unlabelled green bonds are those that are not explicitly marketed and branded as green but nonetheless help finance projects that provide environ-mental benefits. The labelled green bond market is valued at US$118 billion and is small relative to the larger universe of bonds financing climate-aligned assets that do not carry a green label, which is valued at US$576 billion (see Figure B).1

Green bonds can be categorized into four types (see Table 1). The majority of green bonds issued are green general obligation bonds backed by the issuer’s entire balance sheet. The other types are green revenue bonds, green project bonds, and green securitized bonds.

Labelled green bonds account for 17 per cent of climate-aligned bond universe
Figure B
Types of green municipal bonds

What is the growth trend and composition of the green municipal bond market?

While still a developing market, green municipal bond issuance has grown rapidly since 2013. According to the Climate Bonds Initiative, the global green bond market reached an all-time high of US$41.8 billion in 2015, with new offerings in France, Sweden, Germany, China, and India (see Figure C). While this represented a 13 per cent increase from the US$36.6 billion sold in 2014, it was a much slower increase than the roughly 220 percent growth from 2013 to 2014. Over USD$28 billion have been issued up to the end of May 2016.2 Of last year’s US$41.8 billion of green bond issues, over US$5 billion came from regional governments or municipalities, making this the third-largest category of issuer after development banks and corporations.3 According to Bloomberg, U.S. state and local governments have issued US$7.5 billion of green-labelled bonds since 2010, with a record issuance of US$3.8 billion in 2015—a 55 per cent increase over 2014 (see Figure D).4

The global green bond market continues to grow
Figure C
Issuance of green municipal bonds in the United States has soared
Figure D

The bulk of green municipal bond issuance continues to be in the United States and Europe. The first green municipal bond was issued in the United States by the State of Massachusetts in June 2013. Proceeds from the sale were earmarked to finance the state’s Accelerated Energy Program, which aims to reduce energy consumption by 20 to 25 per cent at over 700 sites across the state.5 The District of Columbia Water and Sewer Authority (DC Water) has been another active participant in the green bond market over the past few years. DC Water first entered the market in July 2014 with a US$350 million taxable fixed-rate green bond with a 100-year final maturity—making it the first U.S. municipal water/wastewater utility to issue a century bond and the first U.S. green bond issuance to include an independent second-party opinion.6 Since then, a number of other U.S. states and municipalities including Indiana, Iowa, and Chicago have issued green water bonds.

European cities and municipalities have also been issuing green bonds. After Ile-de-France and Gothenburg entered the market in 2012 and 2013, respectively, Europe has seen a steady growth in green municipal bonds, with repeat issuances and new entrants.7

Emerging markets are also expected to play an important role in issuing green municipal bonds. June 2014 saw the first emerging market green municipal bond, when Johannesburg issued a US$136 million green bond (see Case Study 1). India and China are also witnessing rapid growth in the green bond market. In India, the first corporate green bond emerged from Yes Bank in February 2015 to finance renewable energy projects, followed by the Export Import Bank of India issuing a larger US$500 million green bond to finance trans-port and renewable energy projects. China plans to grow a large, regulated green bond market. In April 2015, China’s central bank announced ambitious proposals that cover the development of green definitions, an evaluation system for allocation of funds and environmental impacts of green bonds, tax incentives, preferential risk weighting in bank capital requirements, and fast track issuance of green bonds.8

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While green municipal bonds account for a very small share of the broader $3.7 trillion bond market, this market is expected to grow as issuers look to diversify their buyer base and appeal to the expanding investor class using environmental, social, and governance criteria to screen their investments (“ESG investors”). Investor demand for sustainable debt is a key factor driving the growth of the green bond market. Mission driven, institutional investors are increasingly seeking to combine financial and environmental goals into their deci-sion-making and, in the process, embracing green bonds. In December 2014, an investor statement to support the green bond market was signed by asset owners and fund managers with a combined US$2.62 trillion in assets under management.9 There are other indicators too of the strong investor appetite for green bonds, as evidenced in a high level of over-subscription. For instance, Massachusetts’s first US$100 million green bond was over-subscribed by 30 per cent and its second green bond issuance by 185 per cent.10

Growing global awareness of climate change risks and desire to invest in environmentally friendly projects and assets will further fuel the development of this burgeoning segment of the fixed-income market. The growing need for energy efficient and clean technologies globally, especially in emerging economies, will help drive issuance going forward.

What are the benefits of issuing a green bond?

Most cities have a pipeline of projects they are seeking to finance in the areas of water, waste, transit, land use, and energy. Green bonds offer municipal governments the opportunity to raise large-scale capital to invest in sustainable infrastructure and services in these sectors in accordance with the Green Bond Principles—voluntary guidelines developed by a group of banks in early 2014 that recommend transparency, integrity, and disclosure in the development of the green bond market. The instrument is relatively straightforward for cities with experience issuing bonds and can offer additional benefits relative to regular municipal bonds.11 Green bonds are useful for:

  • Growing  or  diversifying  the  investor  base. By issuing a green bond, municipalities have attracted investors who do not typically buy municipal bonds, including environmental, social, and governance (ESG) investors and institutional investors. For example, ESG investors purchased US$100 million of the US$350 million green bond issuance by DC Water in 2014, and the chief financial officer of DC Water stated this would not have occurred with a regular, non-green bond.12 Investors who have signed up to ESG investment principles under the United Nations Principles for Responsible Investment are estimated to manage US$45 trillion in assets, and green bonds can help cities attract this investor class.13
  • Generating greater cross-agency collaboration. The process of structuring and issuing a green bond can also promote cross-agency cooperation within a city by bringing together departments responsible for finance, sustainability, infrastructure, and planning. Cities like Johannesburg have reported this as a key benefit, helping to break down information silos and promoting greater teamwork across different areas of government.
  • Publicly promoting a commitment to sustain-able development. Green bonds can also help cities send a strong, public signal regarding their commitment to sustainable development, with green bond issuances commonly reported in online and print media. Johannesburg received international sustainability awards and considerable positive media coverage for its 2014 green bond issuance (see Case Study 1). Some municipal issuers have also generated aware-ness and engagement among their citizens by making the green bonds available for purchase by retail investors. For example, retail investors purchased an unprecedented US$260 million of the US$350 million Commonwealth of Massachusetts green bond in September 2014.14
  • Leveraging demand to achieve better bond terms. The demand for green bonds currently outstrips supply, and green bond issuances are regularly oversubscribed. The issuer can try to leverage this demand to seek more favourable terms. Some issuers have achieved a better price (cheaper debt) through green bonds, though most green bonds have a similar price to their “non-green” equivalents. There is also anecdotal evidence to suggest that green bond investors may be willing to accept a longer term to maturity (i.e., a later principal repayment date). A good example of this is the $350 million 100-year bond issued by DC Water in 2014 to fund construction of a stormwater and sewage tunnel to a treatment plant to reduce sewage overflows to waterways. DC Water was also able to increase the size of the issuance and the price, reducing the interest payable by 15 basis points (or 0.15 per cent).15

What are the challenges facing the green municipal bond market?

The remarkable growth of the green bond market—including green municipal bonds—has not come without a number of challenges, many of which are still to be resolved. The future growth of the green bond market hinges on many factors. This includes policy and regulatory frameworks that create demand for green projects, as well as future market conditions, such as interest rate development and the credit cycle.16 These conditions will vary across jurisdictions and geographies.

Key challenges facing this market include:

  • Lack of commonly accepted green standards. The absence of clear and widely accepted guidelines around what is green has given rise to concerns about a risk of “greenwashing,” where bond proceeds are allocated to projects and assets that have little or dubious environ-mental value.17 The lack of commonly accepted standards means investors and governments can incur significant transaction costs in evaluating the environmental credentials of labelled green bonds. In addition, there is also a wide range of technology and infrastructure whose green credentials are in doubt, such as nuclear power, natural gas extraction and generation, and biofuels.

    For the green bond market to grow, a more standardized approach to defining what is “green” is necessary. Investors must be able to discern what they are buying, compare products, and ensure that products meet their financial and environmental investment goals and mandates.

    In response to this challenge, a significant amount of market-led effort has gone into shaping and cultivating green standards and definitions, as well as promoting external review of the environmental credentials of a green bond issuance. External review has yet to become common practice, with about half of the green bonds issued in 2015 and the first six months of 2016 obtaining second opinions (see Figure E).
Only half of labelled green bonds have obtained independent review (2015–June 2016)
Figure E

Currently, the main tools in the market to address the issue of definitions and standards for green bonds are the Green Bond Principles and the Climate Bonds Standard and Certification Scheme. Municipal green bond issuers can provide greater confidence to investors on the green credentials of their bonds by adhering to the Green Bond Principles, meeting relevant Climate Bond Standards, seeking independent verification, acquiring a green bond rating, or undergoing formal certification of the planned issuance. These options are discussed in more detail later in this chapter.

  • Reporting of the “use of proceeds.” For the green bond market to have long-term credibility, investors and other stakeholders need to know that the projects funded have delivered the intended environmental benefits. Shortcomings in the disclosure of information about the use of proceeds can be, to some extent, alleviated by the guidelines set out in the Green Bond Principles. However, these are voluntary guidelines and do not currently spell out requirements for the type and nature of reporting. More detailed guidance on reporting has been developed by leading international financial institutions and is discussed later in this chapter.

    While green bonds have so far been successful with voluntary reporting mechanisms, as the market grows, transparency in the reporting of the “use of proceeds” will become a key issue
  • Limited bankable green projects and robust project pipelines. Another challenge facing green bond issuance is a lack of bankable green projects, especially in emerging markets, that can be financed through the bond market.18 The development of a robust pipeline of green projects has been hampered by lack of prioritization of green projects by governments, around which private sector sponsors and investors could then be mobilized. Investors, for their part, are less likely to devote resources to develop capacities required to invest in this space if they perceive that there is a limited number of investable green projects. This creates a vicious cycle because with limited investor capabilities, governments also become less certain that they will be investors ready to provide capital for the green projects they are developing.

    Many cities have projects that could be eligible for green bonds that they have previously funded through vanilla bonds, including mass transit and water projects. New projects will also emerge through the Compact of Mayors, Habitat III, and other international and domestic initiatives where cities are making significant climate change and sustainable development commitments, which will help to grow the pipeline of projects eligible for green bonds. Additionally, project preparation support is increasing through initiatives like the C40 Cities Finance Facility to develop a pipeline of green, bankable projects.
  • Small-scale projects and lack of aggregation mechanisms. A significant challenge in scaling up the green bond market is the lack of aggregation mechanisms such as asset-backed securities and covered bonds.19 Without suitable aggregation mechanisms, the typical small-scale green projects can find it difficult to tap into the bond market. In developed bond markets, investors generally look for issuance sizes of US$200 million and above, preferably US$1 billion deals, while in emerging markets smaller sizes of US$100 million are acceptable. Most renewable energy and energy efficiency projects are much smaller than this.

    Currently barriers exist that prevent governments and private market actors from using aggregation mechanisms at scale. The development of securitization and covered bond markets for any asset requires the creation of a sufficient pipeline of underlying assets and standardization of the underlying asset. In emerging economies, the challenge is further complicated by the fact that legal frameworks have to be created to enable asset-backed securities and covered bonds as financial instruments.

    New aggregators are expected to emerge if there are suitable market or government incentives. For example, aggregators may enter the market to act as an intermediary between projects and bond investors to aggregate, manage, and underwrite renewable energy or energy efficiency projects in the presence of high energy prices where there are favorable project payback periods.20
  • Low credit ratings for potential green bond issuers and green projects, especially in emerging economies.21 In addition to aggregation challenges, green bonds are often not as competitive on risk–return as other similar projects in more established sectors such as oil and gas. For the green bond market to take off, the risk–return of green bonds must be as attractive to institutional investors as non-green bonds. However, the green bond market is still in early stages of development, with unknown risks associated with new technologies, which make green projects potentially higher risk from the  investor  perspective.  Furthermore,  even though green general obligation bonds—where the risk–return of the bond is independent of the risk associated with the green project and the credit risk is based on the full balance sheet of the issuer—make up the majority of the market to date, it can be challenging to achieve a sufficiently high credit rating for green municipal bond issuers in emerging markets. The World Bank and others are working with municipal governments to help improve their creditworthiness, but more support is needed to scale up these efforts.
  • Underdeveloped bond markets in emerging economies. Weak and underdeveloped bond markets in emerging economies can slow the pace of green bond growth. Except for select larger emerging economies such as China, India, and Malaysia, the bond market in the remain-ing developing countries is often very small, with access limited to a small range of participants. These capacity constraints of the local bond market can determine how far and fast the green bond market can grow in emerging economies.

    However, the development of the general bond market and the green bond market can happen in parallel and can even be mutually reinforcing. Emerging economies can identify their green infrastructure needs early on as key regulations guiding the development of their bond market are put into place. At the same time, green infrastructure players can form a part of the issuer base, growing the overall bond market. In short, the development of green bonds can allow emerging economies to hit two birds with one stone—facilitate investment in climate-friendly projects and enable the growth of a robust domestic debt capital market.

In short, for all the benefits provided by green bonds in financing low carbon and climate resilient projects, the market is not without its own risks and challenges. All of these challenges need to be addressed if the market is to build credibility and continue its rapid growth.

Shanghai, China

How is a green municipal bond issued?

As the green municipal bond market grows, it is important that issuers understand the process of issuing green bonds before entering into a transaction. Generally speaking, issuing a green municipal bond involves five phases:22

  • Identifying qualifying green projects and assets. Municipalities, city governments, and states should first define the kind of green projects they seek to support with green bonds, while clearly stipulating that the proceeds from the green bond sale would be earmarked for green projects or assets.

    Similar to the process of re-financing, proceeds of a green bond can be applied to existing assets, such as public transportation assets. For instance, a municipality can issue a green municipal bond to refinance an existing metro rail line project and use the funds to repay or increase the existing financing for the rail line. Proceeds can also be allocated to upcoming capital investment, though investors generally prefer that the funds are used within a reasonable period in order to achieve green impact in a timely manner.

    The identification of qualifying projects and assets will entail close cooperation among different municipal agencies, such as the finance, transport, energy, or environmental departments. Establishing effective coordination among all stakeholders early on will save time and eliminate unnecessary confusion down the road.

    Guidance about qualifying projects and assets can be obtained from the Green Bond Principles, which set out broad green asset categories, and the Climate Bond Standards Scheme, which sets out more specific standards for what qualifies within these asset categories. It is important to note that these are all currently voluntary. It is, therefore, recommended that green municipal bond issuers apply the most rigorous and transparent approach they can to the selection of green criteria within the guidance and standards to promote environmental integrity of the green bond issuance and generate investor confidence.
  • Arranging independent review. Issuers of green municipal bonds should use independent review to further increase investor confidence in funded projects. Ultimately green investors want to make sure that their investment is being used to support genuinely green projects. Independent reviewers look at the green credibility of the proposed green municipal bond investments and the processes established for tracking funds and for reporting. Independent reviewers can also help identify green projects and assets, and help set up a green bond framework for the issuer.

    Independent reviews are funded by the issuer and are not a requirement. The cost depends on the firm conducting the review, the type of review undertaken, the complexity of the issuance, and other factors, but generally ranges from US$10,000 to US$50,000. The firms CICERO, Vigeo Rating, and DNV GL have under-taken the majority of independent reviews for green bonds to date.

    Different independent review options are avail-able that vary in terms of their rigor and level of assurance. Issuers can engage a consultant with climate expertise to undertake second-party consultation on eligible green projects and choose whether to make the results of the consultation public. A more rigorous approach involves engaging an expert consultant or auditor to verify the criteria and processes in place for tracking proceeds, evaluating environ-mental outcomes, and preparing reports. The latter approach is generally conducted in line with professional standards such as the Inter-national Standard on Assurance Engagements 3000 (ISAE 3000) to ensure the integrity and independence of the review.23

    Issuers can go even further to verify and certify their bond against a set of climate bond standards available for solar, wind, geothermal, low carbon transport, and low carbon building projects and assets. The Climate Bond Standards Advisory Board oversees a certification system and verification process for potential municipal issuers.
  • Setting up tracking and reporting. It is critically important that issuers of green municipal bonds always maintain full disclosure on the allocation of proceeds. A few key rules should be kept in mind: (1) Since the proceeds from green municipal bonds must be used only for specified projects, there should be systems in place to segregate green municipal bond proceeds and keep track of their use; (2) monitoring procedures must be set up to make sure proceeds are not placed in non-green investments throughout the life of the green bond; and (3) the nominal value of the pool of assets or projects must stay equal to or greater than the amount of the bond. Municipal issuers should be tracking all this and also be able to show how they are tracking; transparency is essential.

    In this regard, green bond issuers should design monitoring and evaluation processes in advance, and implement key performance indicators and data collection systems to monitor environmental outcomes of projects over time. Issuers may also benefit from quantifying the environmental and social value created by their bonds in financial terms using one of the emerging quantification methodologies, such as KPMG True Value.24
  • Issuing the green bond. As with any conventional bond, issuers of green municipal bonds will follow the usual steps. They should first seek required issuance approval from regulators. Second, working with an investment bank or advisor, they should structure the bond. Any sort of structure, from vanilla bonds to asset-backed securities, can be used as long as proceeds are allocated to green projects or assets. Finally, they should market and price the green municipal bond. It should be noted that creditworthiness is judged the same as for other bonds. Issuers should expect to get credit rated in the usual manner. Currently 82 per cent of the labelled green bond market is investment grade (see Figure F).25
Investment grade green bond issuance dominates
Figure F
  • Reporting regularly. To maintain the status of a green municipal bond, the issuer would need to provide confirmation to investors at least once a year that the funds are being used for qualifying green projects. The confirmation can take the form of either a public letter from the municipal auditor or a letter signed by an authorized officer of the municipal or city government. Confirmation should also include a brief report that sets out the current use of the green municipal bond proceeds as well as highlights the environmental impact to investors, shareholders, and other stakeholders.

    Leading international financial institutions have created guidance for green bond issuers under the initiative “Working towards a harmonized framework for green bond impact reporting.”26 The initiative developed a set of principles and recommendations for the reporting of green bond use of proceeds, and offered an example template for project-by-project reporting. The focus of this guidance is renewable energy and energy efficiency, but the principles could be broadly applied to other projects until the scope of the guidance has been expanded to other sectors.

    Reports should be made publicly available, such as on the issuer’s website, in the interest of maximum accountability and transparency.

Subsequent green municipal bond issuance will become even simpler. Repeat green municipal bond issuers can use the same framework for identifying green projects and assets, the same independent reviewer, and the same processes for management of proceeds and reporting.

What are key considerations for green municipal bond issuers, especially in emerging economies?

To begin with, issuers of green municipal bonds need to determine, based on potential benefits and drawbacks of issuing green bonds, whether they should label a bond as green. There is a wider market of bonds that also has environmental benefits but is not specifically labelled as green. As such, state and municipal issuers should figure out whether a green bond is the most appropriate financing tool to raise capital. As discussed earlier, the benefits of green bonds can be significant. Green bonds can give issuers access to a wider range of investors, especially those focused on environmental, social, and governance performance, than regular bonds or other asset classes. Over time, increased demand can drive favourable terms and a better price for the issuer, compared with a regular bond from the same issuer. For instance, Massachusetts issued both a green bond and a regular corporate bond in 2013 that were priced identically. Yet the green bond was 30 per cent oversubscribed while the regular bond was undersubscribed. Despite these benefits, there are challenges associated with green bonds that issuers should be aware of. As compared with a regular bond, there could be additional costs associated with tracking, monitoring, and reporting processes as well as up-front investment to define the bond’s green criteria. In addition, issuers risk subjecting themselves to criticisms and accusations of greenwashing if they do not meet their green objectives.

Issuers of green municipal bonds should follow the most rigorous standards in defining what makes the bond green. As discussed earlier, there are several voluntary, evolving standards and sources of guidance on green bonds that issuers can follow, such as the Green Bond Principles and the Climate Bonds Standard. In addition, public sector and various market actors in emerging economies can develop country-specific definitions and standards. China has made considerable progress in creating country-specific green bond guidelines. At the end of 2015, the People’s Bank of China released its Green Financial Bond Guidelines—making China the first country in the world to create official rules for the issuance of green bonds.27 In January 2016, India’s capital markets regulator—the Securities and Exchange Board of India—finalized its official green bond requirements after going through a public consultation process late last year.28 While country-specific frameworks can be beneficial in meeting the environmental priorities of the country in question, it should be recognized that too much country-specific focus can lead to fragmented markets and increase transaction costs for global investors.

Finally, issuers of green municipal bonds in emerging economies should also invest in capacity building for investors.29 Currently the majority of proven investor demand is in developed countries, while the institutional investor base is weak in emerging markets. It is therefore critical that public sector entities engage in capacity building to facilitate private investment in green bonds. To that end, the public sector can provide educational materials, workshops, and support market-led initiatives for green bond investor engagement and training. Facilitating investor demand can also encourage more green bond issuance into the market.


The growth in green bonds and green municipal bonds has coincided with a greater awareness of climate change and expanding investor appetite for environmentally friendly investment products. The pace of growth of these bonds is likely only to rise, as they provide both public and private sector organizations with an important source of funding for projects that can bring significant benefits to environment and society. Over the next few years, guidance and requirements over the use, management, and reporting of proceeds and project performance are likely to be streamlined and tightened, which will lead to standardization, lower transaction costs and better prices for issuers, greater investor interest, and the issuance of more green bonds.

Case study
Green bonds in Johannesburg

Green bond snapshot

Issuer: City of Johannesburg
First green bond? Yes
Issue date: June 2014
Maturity: 10 years
Size: US$143 million
Annual coupon: 10.18 per cent (payable semi-annually)
Credit rating: A1(za)/AA-(za)
Bond type: General obligation bond
Investors: Domestic
Use of proceeds: Renewables, energy efficiency, electricity grid extensions, fuel switching, low-carbon transport, waste management, and water conservation
Reporting: Annual
Independent second opinion provider: None
Lead managers: Standard Bank Group and Basis Points Capital

Johannesburg was the first city in the C40 Cities Climate Leadership Group and the first city from an emerging economy to issue a green bond. The US$143 million bond was issued in June 2014 with an AA- rating.30 The bond was priced at 185 basis points above the R2023 government bond, was 1.5 times oversubscribed, and is a 10-year bond. Johannesburg had previously issued a total of seven general obligation bonds, and this eighth bond issuance was the first to be labelled green, as it was specifically for funding green projects. The coupon rate of 10.18 percent was 60 basis points lower than the preceding “non-green” issuance in March 2011, reducing the cost of finance for Johannesburg.31

Use of proceeds

Johannesburg issued its green bond to help fund infrastructure and services to support goals set out under its Growth and Development Strategy. The Sustainable Services pillar of its strategy promotes “a resilient, liveable, sustainable urban environment that is underpinned by infrastructure supportive of a low-carbon economy.” This includes goals to reduce the city’s carbon footprint, provide equitable and affordable access to basic services, create a safe and walkable city with access to eco-friendly transport and sustainable services, maintain healthy ecosystems, and improve resiliency to successfully adapt to challenging conditions. The city’s intention is to strive towards minimal resource reliance and increased preservation of natural resources.

The bond also supports Johannesburg’s Energy and Climate Change Strategy and Action Plan, with part of the proceeds to be used for mitigation and adaptation projects.

According to the first annual investor report, over 50 projects are benefitting from the green bond proceeds. Project categories and examples of projects to be funded by the bond are set out in the table below.32

Unique features and lessons learned                 

Adapting IFC and World Bank selection criteria

The City of Johannesburg followed the Green Bond Principles and identified projects with elements related to renewable energy, water conservation, energy efficiency, climate change; and waste and wastewater management within the water, power, transport, and waste sectors. To select eligible projects, the city defined criteria based on the IFC Performance Standards on Environmental and Social Sustainability and the World Bank criteria related to climate change mitigation and adaptation projects.

Establishing a framework for performance reporting

Environmental Resources Management (ERM) assisted the City of Johannesburg with establish-ing a green bond reporting framework to monitor and annually report performance to the investment stakeholders. The environmental indicators used for reporting are monitoring indicators based on inter-national reporting practices. Impact reporting will include details regarding the progress of projects against environmental-related metrics and, where specific indicators cannot be measured directly for certain projects, the numbers will be estimated.

When asked what advice Johannesburg would give to other cities based on their experience issuing their first green bond, the city offered the following:

  • Quantify carbon emission reductions for each project upfront.
  • Have a green project implementation strategy.
  • Transparency and communication breeds confidence—sell the credit and talk to investors.
  • The quality of leadership and management of an issuer goes a long way towards providing confidence and comfort—cities need to know their problems, have a plan to deal with them, and show some progress.
  • Keep the market abreast of developments in the municipality. This could also be facilitated by a good long-term strategy and planning.


Investor base diversification: New types of investors who have not previously purchased Johannes-burg’s regular bonds invested in this green bond issuance. This includes those with environmental, social, and governance investment criteria. Issuing a green bond therefore helped Johannesburg by diversifying the city’s investor base and growing the potential market for future issuances.

Access to finance: The city had a pipeline of planned projects that could not be undertaken due to insufficient capital. The green bond issuance enabled the city to finance these projects, which are expected to deliver considerable benefits to its citizens in terms of waste and water management, reduced traffic congestion, better air quality, and lower energy costs in low-income areas.

Promoting cross-agency collaboration: The process of preparing a green bond for issuance required Johannesburg to engage multiple city government agencies to work together to identify suitable projects to be funded by the proceeds. Johannesburg identified this as one of the key benefits of its first green bond, creating new and productive connections between the finance team and the environment team that had not existed previously.

Putting Johannesburg on the map as a sustainable city leader: The issuance generated considerable positive domestic and international media coverage highlighting the city as a leader in promoting sustainable development. The Mayor of Johannesburg was honored in Paris in December 2015 during COP21, receiving the C40 Cities Climate Leadership Award for the green bond issuance.

  • 30. City of Johannesburg, Green Bond Roadshow (Johannesburg, 2014).
  • 31. Johannesburg Executive Mayor Councillor Mpho Parks Tau, “Speech at the Listing of the First Ever Listed Green Bond in South Africa,” 9 June 2014. Available from….
  • 32. ERM on behalf of the City of Johannesburg Metropolitan Municipality, Green Bonds Investor Report (Johannesburg, ERM, 2015).

Case study
Green bonds in Paris

Green bond snapshot

Issuer: City of Paris
First green bond? Yes
Issue date: November 2015
Maturity: 15.5 years
Size: US$321.5 million (€300 million)
Annual coupon: 1.75 per cent
Credit rating: AA
Bond type: General obligation bond Investors: 51 per cent insurers and pension funds, 49 per cent asset managers. 83 per cent domestic investors, 9 per cent Benelux, 3 per cent Switzerland, and 3 per cent Nordics.
Use of proceeds: Renewables, low-carbon transport, energy efficiency, and climate adaptation Reporting: Annual Independent second opinion provider: Vigeo Lead managers: Credit Agricole CIB, HSBC, and Societe Generale

The City of Paris issued its inaugural green bond in November 2015, raising US$321.5 million (€300 million) to be used exclusively for climate mitigation and adaptation projects. The bond aligns with the Green Bond Principles and will be used to fund green projects for the entire 15.5-year life of the bond. Where projects are completed before the maturity date of the bond, the bond proceeds will be reallocated to other green projects.33

The general obligation green bond was highly rated at AA and had an order book exceeding €450 million (1.5 times oversubscribed). Over 80 per cent of the issuance was purchased by domestic investors, with over half purchased by pension funds or insurers and the remainder bought by asset managers. The City of Paris is an experienced bond issuer, and the bond’s coupon of 1.75 per cent is comparable to those of “non-green” bonds with similar maturity dates that were privately placed by the city in September 2015.34

Use of proceeds

Paris determined that projects must correspond to one of the categories in the table below to be eligible for funding from the bond proceeds. These categories align with broader climate policies of the city, including the “Europe Energy and Climate Plan” and the Paris “Climate & Energy Plan 3x25 for 2050.”

Unique features

Projects must meet environment, social and governance (ESG) criteria

The project selection process also involves evaluation against ESG criteria consistent with the city’s Sustainability Policy. To be eligible, the projects must meet 12 sustainability criteria relating to biodiversity, air and water quality, environmental management, waste management, social cohesion, improved living conditions, local sustainable development, human rights, and business ethics.

Independent opinion to provide investor confidence

Some green bond issuers have sought second-party verification to provide investors with confidence that the green bond will meet minimum standards for environmental sustainability. The City of Paris is one of the few municipal issuers to have undertaken this verification process.

Vigeo was commissioned by the city to provide its opinion on the sustainable credentials of the green bond, and its analysis confirmed that the bond was in line with the Green Bond Principles.

In forming its opinion, Vigeo analysed:

  • the sustainability credentials of the city;
  • the framework for selecting projects to be funded by the bond; and
  • the framework in place to report the use of proceeds.

Comprehensive reporting framework

The City of Paris has committed to detailed reporting on the use of proceeds, providing a high level of transparency to investors on the progress and impact of the projects supported by the green bond proceeds. Its annual reports will include detailed project-level information on the environmental and ESG performance of each project supported by the bond. It will also report the estimated environmental impacts at the project and aggregate bond level, including the reduction of greenhouse gas emissions, energy savings, and extension of green areas.


Diversifying their investor base: The green bond attracted domestic and international investors, with international institutional investors from Benelux, Switzerland, and the Nordics collectively purchasing close to one-fifth of the issuance.

Promoting Paris’ commitment to tackle climate change: Paris hosted the COP21 climate negotiations in December 2015 and issued its green bond in the preceding month, sending a strong signal about the city’s climate leadership.

Funding adaptation and resilience: The bond includes dedicated funding for the city to increase its climate change resilience by reducing urban heat island effects. This enables the city to access finance to increase green areas in the city by aggregating them with other climate mitigation projects to be funded through the bond.