In a report published earlier this week, CPI outlined the strategies developing country cities, which often have limited access to the capital needed to combat climate change, could deploy to utilise the green bond markets.
Many such cities are unable to issue bonds themselves because of laws in their country or their creditworthiness – the key constraint in their ability to issue bonds.
Johannesburg in South Africa is the only developing country city to have issued a green bond. Almost all – 94% – of other green finance flowing to developing country cities has come from development banks or other institutions.
Issuing more green bonds themselves would mean developing country cities could fund their own climate-related investments, such as low-carbon or climate resilient infrastructure to meet water, energy, housing and transportation needs.
The last three years has seen an “exponential” increase in the size of the market, CPI pointed out, with a 13-fold increase in the value of annual bonds raised, from $3.2bn in 2012 to $44bn in 2015. This is projected to reach $75bn by the end of this year.
More developing countries could tap into the green bond market directly by addressing their credit worthiness, such as structuring through over-collateralisation, guarantee instruments or securing a “cornerstone” buyer such as a development bank.
But CPI stressed that cities do not necessarily need to issue their own green bonds to access finance from the market.
For example, finance can be accessed by working with other organisations, such as city-affiliated or public agencies, utility companies, commercial banks or finance institutions.
CPI pointed out that developing a green bond market strategy can deliver more than just finance for a city. For example, linking green projects or loans to bonds can help support transparency and build internal administration procedures as part of efforts to improve financial management.
“Aligning city-based projects with green bond frameworks of issuers can ensure urban infrastructure follows national or international green performance requirements,” CPI continued.
“Both approaches [direct or indirect green bond market access] can increase the visibility of cities’ green finance infrastructure plans and policies among international and domestic investor communities, helping to make it easier to raise in the longer term.
“They can also make investment more attractive through improved reporting on green performance metrics.”
