Gothenburg: a pioneer in green city bonds

01 February 2015

by Richard Forster

Richard Forster talked to Magnus Borelius, Head of Group Treasury in the City of Gothenburg, about its green bond programme and the challenges for cities in raising such finance

What would you say are the key differences in terms of a city undertaking a green bond issue as opposed to a typical Eurobond?

The main issues are the need to report on the impact of the issue and how the proceeds will be used. This is done via the website and annual report. In addition, a key difference is that the environmental department must participate in the investor relation meetings and roadshow. We have to discuss potential projects with the city’s environmental department and also meet with the city-owned companies. A final difference is that if necessary we have to update the second opinion on the city’s environmental programme.

Do you see the pooling together of different types of green assets for green city bonds (e.g. Gothenburg issued for transport, water and energy in one issuance) a barrier to the growth of a green city bonds market as it can make robust green certification more difficult? Did it make the process of verifying the green credentials of the bonds more difficult for Gothenburg?

No, we don’t see pooling as a barrier. In Gothenburg, we see both pooling and specific projects as the future for green bonds. The City of Gothenburg has 12 environmental objectives to help us create a good living environment and sustainable development for
the city. The objectives are aimed at solving our environmental challenges now to avoid leaving them to future generations. Environmental targets are monitored annually in the environmental report and we are now working to incorporate this with the green bond impact reporting.

Is the pooling of different types of assets necessary for a city like Gothenburg to get the green bond size to the necessary scale? (i.e. in the case of there being a not large enough water project flow to issue a green water-focused bond)?

It makes it easier but it is not necessary. In the future, when we know the market better and we know the investors better then it will be possible to issue bonds for a single project.


 

Gothenburg’s green bond programme

September 2013: Gothenburg issues first Nordic green city bond for SEK500 million (US$69 million).

June 2014: The city returns to the green bond market raising SEK1.8 billion (US$264 million).

Eligible Projects: These are defined on the city website as a selected pool of projects funded, in whole or in part, by the City of Gothenburg that promote the transition to low-carbon and climate resilient growth as determined by the City of Gothenburg.

Example projects finance by green bonds

1. Lackarebäck water plant and purification filter: this will be the biggest water purification filtering plant in Scandinavia set to open in 2015. Cost: SEK700 million.

2. GoBiGas: large scale biogas plant with the aim of delivering transport fuel to 100,000 vehicles by 2020 at the latest. 3. Electric vehicles for municipal staff: the goal of 100 EVs by 2015 was achieved by December 2013. 


 

 

GoBiGas is a biogas plant funded by the issue of green bonds by Gothenburg
GoBiGas is a biogas plant funded by the issue of green bonds by Gothenburg

What is the potential for issuance of green city bonds with a different structure than ringfenced, general obligation bonds? For example, revenue- based bonds with returns linked to specific projects for Gothenburg specifically and cities in general?

We have always tried to keep it quite simple in the Treasury department as plain vanilla as is possible. I am sure as the market develops we will get to see other types of bonds as well. I think that when you start this kind of portfolio you need to keep it simple in the beginning so you have control of procedures and how green investors work as it minimises the risks of failure.

What is the pipeline for future green bond issuance? Is the SEK2 billion green bond programme still the overall aim?

We will try to have at least one green bond annually. The total volume for ‘green’ or ‘sustainable’ investments is much larger than SEK2 billion [US$275 million] and we see a lot of projects in the future, which can be funded this way. If the maturity profile for the city is right, we will try to switch from ordinary bonds to green bonds as much as possible. Our biggest challenge right now is to find the right quantitative and qualitative performance indicators. This is something we are discussing with the investors: what kind of reporting do they want? Do they want the same metrics for the whole city or different measures for different projects? That is one reason we are not issuing at a higher pace. This is by far the most tricky part.

In this issue of Cities Today, we have been looking at the move by some cities to produce sustainability reports. Could you see a role for such reports linking in with green bond investments?

Yes definitely. If you could use the sustainability report to fulfill the reporting for the green bonds, it would work very well.

 


Cities Today would like to thank Sean Kidney and Beate Sonerud at the Climate Bonds Initiative for their assistance with this article

 

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