Urbanization And Its Products Are The Fundaments Of The Economy, Environmental Challenges, And Societal Life
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Urban GSS bonds in practice
To better understand what kind of impact on sustainability those investment opportunities have with GSS bonds, we will showcase four case studies: a green bond, a social bond, a sustainability bond and a sustainability-linked bond.
Case study 1: Gothenburg | Green Bond
The Swedish city of Gothenburg published the last iteration of its Green Bond Framework back in 2019.9 The city positions itself as a global sustainability hub and was recognized by numerous international organizations, including the World Wide Fund For Nature (WWF), the United Nations, and the Swedish Environmental Protection Agency. To deliver ambitious environmental goals, Gothenburg uses green bonds to raise necessary funds.
The city commits to spend the proceeds on projects encompassing:
• Renewable energy
• Green buildings
• Energy efficiency
• Clean transportation
• Waste management
• Water and wastewater management
• Sustainable land-use
• Environmental management
• Climate-change adaptations
Potential projects, among many others, include renovating public buildings and social housing to increase their energy efficiency, public transportation with no direct emissions (e.g., electric or hydrogen buses) and protection of freshwater sources. Gothenburg’s government acknowledges the negative impact of climate change, such as rising sea levels (material for coastal cities as Gothenburg), warmer temperatures and increasing precipitation. Understanding those risks, the city leverages its green bonds to finance needed interventions. Given that the city has been issuing green bonds since 2013, post-issuance impact reporting allows investors to review projects that were financed thanks to the green bonds. So far, the green projects include municipal utility company Göteborg Energi’s 5.5 GWh solar power plant Nya Solevi, and the energy-efficient Selma town hall, which serves the community as a library, and leisure and culture center.
Case study 2: Toronto | Social bond
Toronto, with its population of over 2.5 billion, shares a lot of environmental and social challenges common to large modern cities. To address these challenges, the city issued its 2020 its Social Debenture Framework to tap into debt markets. Via this framework, investors will access exposure to projects within four broad categories:
1. Social and affordable housing
2. Affordable basic infrastructure
3. Access to essential services
4. Socioeconomic advancement and empowerment
Under the first category, the use of proceeds of Toronto social bonds will be devoted to f ighting housing exclusion. Developing, renovating, and maintaining shelters for the most vulnerable as well as social and affordable housing projects across Toronto will help achieve his goal. Affordable basic infrastructure creates synergies with environmental goals by developing projects, which allow disadvantaged populations an access to sustainable solid and water waste management (including recycling), accessible public transportation (e.g., subway, buses, trams) and safe pedestrian infrastructure. Projects within the essential services category comprise healthcare facilities (including mental health programs) and educational services for children and youth, as well as vocational training for adults. Finally, socioeconomic advancement and empowerment is understood as projects in the area of employment, health
Case study 3: Nouvelle-Aquitaine | Sustainability bond
The French region of Nouvelle-Aquitaine issued a Green, Social and Sustainability Bond Framework to cover its environmental and social programs.13 Depending on conditions, this framework allows the region to issue green bonds to cover environmental projects, social bonds for social projects, and sustainability bonds for projects mixing former two uses-ofproceeds. Nouvelle-Aquitaine’s framework lists eligible projects, which are clearly linked to both Sustainable Development Goals and their internal Néo Terra energy and environmental development program. The green projects include construction of rail infrastructure and building renovation to improve their energy efficiency. Worth underlining are projects in the f ield of biodiversity and climate-change adaptations. The biodiversity projects will include sustainable forest management, development of protected areas, restoration of degraded ecosystems and incentives for organic farming. The climate adaptations focus on vulnerable coastal and mountainous areas. On the social side, the framework targets the development of essential public services, including education, health and social housing. Amid the COVID-19 pandemic and catastrophic weather phenomena, the framework allows the proceeds to be used also for emergency aid to small-and-medium enterprises.
Case study 4: Helsingborg | Sustainability-linked bond
Another approach that a municipality can take is to issue a sustainability-linked bond. Although the use of proceeds is not linked to specific green and/or social projects, this instrument requires setting sustainable performance targets (STPs). A failure to meet these predetermined targets will negatively affect the bonds’ coupon. A good example of such structure is 2021 Sustainability-Linked Bond Framework of Swedish city of Helsingborg. The city of Helsingborg pledges to be carbon net neutral by 2035. What is important to highlight is that this pledge encompasses the city as a geographical location—that is, emissions from sources both directly (e.g., public transportation) and indirectly (e.g., companies) that the local government controls. Failing to meet this obligation will result in a coupon step up or a one-time payment; therefore, beyond reputational damage, the city has a financial incentive to deliver carbon reduction results. Given the holistic nature of this care, education and social support to youth, new immigrants, low-income residents and other vulnerable groups. Programs across those four categories will lead to a positive social impact and contribute toward achieving UN Sustainable
Development Goal, for example:
• 1—No Poverty
• 3—Good Health and Well-being
• 4—Quality Education
• 6—Clean Water and Sanitation
• 8—Decent Work and Economic Growth
• 9—Industry, Innovation and Infrastructure
• 11—Sustainable Cities and Communities)
Outlook
Changing cities means changing the world and alleviating its most pressing problems. Exposure to GSS bonds at country level typically allows for financing of large-scale strategic infrastructure. Investing in urban GSS bonds allows proactive implementation of local or regional mitigation and adaptation measures, which often have a more tangible impact on people’s everyday lives. Local leaders and officials representing municipalities have a very good sense of what kind of projects should be prioritized and can be delivered within the given context. In the broader sense, GSS investments impact urban resilience by increasing the capacity of social, economic, environmental, and infrastructural capital.
We believe investors with an appetite for sustainable impact should focus their attention on the market of urban GSS bonds. Urbanization and its products—urban areas—are the fundaments of the economy, environmental challenges, and societal life. In our view, investors dedicated to a positive contribution toward the world’s progress should pay close attention to what is happening on the ground.
