Cities Are Therefore A Part Of The Problem, As They Heavily Contribute To Climate And Biodiversity Crises
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Urban green, social and sustainability (GSS) bonds allow impact-oriented investors direct financing of projects that address the most pressing challenges of our times and develop strategic local or regional resilience. These use-of-proceeds instruments assure an investor is directly supporting sustainable economic activities. Sustainability linked bonds (SLBs) are another possibility for environmentally and socially conscious investors and can be considered an indirect financing.
Critical space for environmental and social change
Today, urban areas cover only around 3% of the Earth’s land surface, but they emit more than 60% of greenhouse gas emissions (GHG) and consume 78% of the world’s energy.2 By 2050, the world’s urban population is forecast to rise from 55% to 70%.3 The overall growth of the population could add another 2.5 billion people to urban areas, with close to 90% of this increase taking place in Asia and Africa. In 2020, the world generated 2.24 billion tons of solid waste, equal to a footprint of 0.79 kilograms per person per day. By 2050, annual waste generation is expected to increase 73% from 2020 levels (up to 3.88 billion tons).4 Over half of that is and will be created in urban areas.
Cities are therefore a part of the problem, as they heavily contribute to climate and biodiversity crises, but are also a critical part of the solution. Urban areas are ideal places to achieve a swift and large-scale change, due to their human, social, economic, technological and political capital. Seasoned environmental, social and governance (ESG) investors are aware of this opportunity and use their capital and expertise to expedite progress in this realm.
Cities and regions on GSS bonds market overview
We have analyzed the data on urban bonds, defined as bonds that the local authorities issue in accordance with Bloomberg’s BCLASS Classification Scheme. Therefore, we define urban bonds as those “Local Authorities (Class 2),” issue which entails debt that local authorities issue directly as well as entities that are 50% or more owned by one or more local authorities. In the US market, taxable municipal bonds, including Build America Bonds (BABs), fall into this category. Entities less than 50% owned by a local authority are classified within the appropriate corporate bucket.
Due to their unique nature, US municipal bonds are excluded from further analysis within this article, although it is important to point out that there are more than 17,200 of GSS bonds in the US municipal market alone, which greatly supersedes the number of issuances on all other markets combined.
Since 2013, 287 unique local authorities issuers have issued 1155 green, social and sustainability bonds.Recent years saw a steep rise in urban GSS debt (Exhibit 1). Increasing pressure from public and civic sectors to reduce carbon emissions and the COVID-19 pandemic have caused this increase. In the context of the Russia-Ukraine war, which has led to devastating social and economic consequences, we expect this trend to continue. Additionally, there is a need to accelerate energy transition toward dispersed, renewable sources stabilized by the energy storage infrastructure. And, this transition is projected to lead to a new wave of sustainable development—beneficial for both the environment and societies.
The past nine years of data show that local authorities in Germany so far have issued the most urban GSS bonds. Second in line are Chinese local authorities, slightly ahead of Sweden. Meanwhile, Spain leads in issuances of sustainability bonds, from which the use of proceeds goes toward the mix of environmental and social projects. Entities issuing GSS bonds are mostly regional and local governments, with strong representation of industrial entities (that are 50% or more owned by one or more local authorities).
Entities in the “industrial other” category are companies that have cross-sector economic activity, combining specializations across different industrial segments (for example, “transportation & logistics” with “railroad”).
Source: The sustainable bond market of cities and regions | Franklin Templeton
