1 Nikolai J. Sklaroff,
Capital Finance Director
November 28, 2023
GREEN BONDS
Agenda
• What are Green and Labeled Bonds?
• SFPUC Green Bond Program
• Why Do We Issue Green Bonds?
• Green Bond Market
• Green Bond Certification Options
• What is Next for our Green Bond Program?
2 What Are Green Bonds?
Label applied to
bonds
used to fund
projects that have
positive environmental
an/or climate benefits
Other labels “Social”,
“
Sustainable” and
“Sustainability-Linked”
(ESSSB)
Standard bonds with a bonus
“
green” feature
Source: Climate Bonds Initiative
3 Evolution of Green Bonds
• Recent phenomenon – f irst green bonds issued in 2007 (European Investment Bank and World Bank)
• First corporate green bonds in 2013 and first municipal gr
een bonds also in 2013
• International Capital Market Association
(IC
MA) published Green Bond Principles in 2014
(updated 2021), providing voluntary process guidelines
for issuing Green Bonds
• Green, Social, Sustainable, and Sustainability –Li
nked
Bonds (GSSSG) will be $900-$1 billion globally
according to S&P Global Ratings, with $4 billion issued to date.
• U.S. Public Finance only 3-4%
of this global market
Source: https://www.spglobal.com/esg/insights/featured/special-editorial/global- sustainable-bonds-2023-issuance-to-exceed-900-billion (S&P Global Ratings) 4 SFPUC’s First Labeled Bonds
• First SFPUC Green Bonds for
$30.
2 million of project funds
for the Power Enterprise
• Proceeds funded (i) Hetch
H
etchy Project hydroelectric
generation facilities; (2) Other
renewable energy projects
such as biomass, biowaste,
solar and wind
• Self-c
ertified. Retained
Sustainalytics in early 2016 to
review reallocation of green
bonds proceeds
5 SSIP & WSIP Programmatic Certification
6 • Sewer System Improvement
Program (SSIP) and Water System
Improvement Program (WSIP)
each received Climate Bonds
Initiative (CBI) Programmatic
Certification.
• CBI: international, investor-focused
non-profit organization – highest
standard for certification.
• Programmatic CBI Certification
o Develop ICMA Green Bond Principles
o Meet the Water Infrastructure Criteria
under the Climate Bonds Standard
o Receive third-party verification by a
CBI approved verifier (Sustainalytics)
SFPUC and Green Bonds
• First G reen Bonds self -certified in 2015
• Retained independent verifier, Sustainalytics (now part of M
orningstar), and sold more than $4.4 billion in certified green bonds using Climate Bonds Standard verification
• Projects increased water storage, application of green i
nfrastructure to manage stormwater and upgrades to
renewable energy generation.
7 Recognized Leadership in Green Bonds
• 2015: Our 1st Green
B
onds for Power
• 2017: R ecognized by the
Climate Bonds Initiative
as the first issuer
worldwide to sell bonds
under its water criteria
• 2019 & 2021:
U.
S. Municipal Green
Bond of the Year by
Environmental Finance
8 • 2020: First US Municipality
to list Green Bonds on an
exchange in Europe (the
London Stock Exchange)
• 2021: Green bond
programs of the City of San
Francisco and SFPUC
recognized as a global
leader in the C40 report
Cities100
• 2023: Record Issuance of
SFPUC green bonds
Leadership in Green Bonds
9 • The SFPUC ranked third among the top 10 Green
Bond issuers in U.S. public finance from 2013-
2022*. In 2023, the SFPUC issued $1,183 million in
Climate Bonds Standard certified green bonds.
*Source: U.S. Municipal Sustainable Bond Issuance Outlook 2023: Momentum To Continue (spglobal.com) Record Green Bond Issuance
(CY 2023)
10 Water Wastewater Power Total
$2,367M $1,953M $106M $4,426M
SFPUC Green Bond Issuance by Enterprise
SFPUC Green Bond Issuance by Calendar Year
$0
$500
$1,000
$1,500
$2,000
$2,500
2001 2002 2003 2006 2009 2010 2011 2012 2013 2015 2016 2017 2018 2019 2020 2021 2022 2023 $ millions
Water (Green) Water (Non-Green) Wastewater (Green) Wastewater (Non-Green) Power (Green) Power (Non-Green) Linkage to Our Core Mission
Green Bonds Orders
(Wastewater 2023A)
• Priority Orders for Green Bonds granted to ESG Institutions, who w
ere defined as an institutional investor with stated investment targets focused on environmental and social impact.
• Demand for Green Bonds exceeded demand for non-Green Bonds, i
ncluding from several prominent Green Bond investors.
• Strong demand for bonds contributed to favorable pricing for entire i
ssuance.
12 *Subscriptions calculated based on total Retail and Institutional orders divided by amount allocated within each maturity.
Comparison is between same year maturities with 5% coupons. Source: Ipreo
Green Bond Annual Reports Contents
• Introduction
• Enterprise Green Bond
I
mpact Report
• Green Bond Proceeds
• Project Environmental Impacts
A
ligned with United Nations
Sustainable Development Goals
(UN SDGs)
• Case Study
• Appendix:
• State, City, and SFPUC
R
egulations, Policies and
Programs
• SFPUC Green Bond Program
• SFPUC Climate and Social
I
nclusion Impacts Aligned to the
UN SDGs
• Green Bond Verification Report
(
provided by third party verifier
Sustainalytics)
Green Bond Market
• S&P Global Ratings: Total U.S. municipal sustainable
bond i
ssuance could reach at least $54 billion.*
14 Source: U.S. Municipal Sustainable Bond Issuance Outlook 2023: Momentum To Continue (spglobal.com) • Continued robust growth:
ex
pect market share to
increase for a fifth
consecutive year, likely
ranging from 12% to 17%
of total municipal bond
issuance
• The IRA may boost
GSSSB issuance, but
objections to ESG factors
from policymakers,
issuers, and investors may
hinder growth.
Green Bond Benefits …
15 Benefits:
• Articulate the values of our organization
• Expand investor base
• Potential interest rate benefits in the future
• Demonstrates alignment to climate risks and
environmental benefits
• Demonstrates commitment to environmental initiatives
• Earmark funds for climate projects
• Ease of explaining climate initiatives to constituents • Fostering growth of the green bond market
.. And Green Bond Challenges
Challenges:
• Regulatory responsibility
• Cost (time and money)
• Measuring of net metrics
• Need to embrace new processes
• Aligning reporting
• Assuring green commitments are maintained
• Conflation of green bonds with ESG politics
• Lack of central reporting
• Shifting from actions taken to impact of actions taken 16 Challenges of Political Backlash
17 “
” “
“
“
“
“
“
”
”
”
”
”
”
-Financial Services Committee, July 2023
-Financial Services Committee, July 2023
-Financial Services Committee, June 2023
-Financial Services Committee, February 2023
-Bond Buyer, April 2023
-Bond Buyer, June 2023
Green Bond Verification
18 Green Bond
Climate Bonds Initiative (CBI)
Certification with Third Party
Verification By Approved CBI
Verifier
CBI Hydropower Criteria
Mitigation Criteria (GHG
emissions)
Climate Adaptation
Resilience Criteria (ESG
Analysis) ICMA Green Bond Principles
Second Party Opinion by
Third-Party Verifier
ICMA Green Bond Principles
Self Certification
No Label
Green Bond Verification Framework Additional Requirements External Verification
The International Capital Market
Association (ICMA)
Climate Bonds Initiative (CBI)
Standards and Definitions • Green Bond Principles:
Proceeds will finance or
refinance, in part or in full, new
and/or existing eligible Green
Projects
Proceeds will finance projects that
contribute to a low carbon and
climate resilient economy,
consistent with the 2 degrees
Celsius warming limit established in
the Paris Agreement.
Core Components 1. Use of Proceeds
2. Process for Project Evaluation
and Selection
3. Management of Proceeds
4. Reporting
In addition to meeting the ICMA
core components, projects and
assets will conform with the
overarching Climate Bonds
Standard and detailed, science-
based eligibility criteria for relevant
sectors.
External Review Recommended by the ICMA Approved “3
rd Party Verifier”
Required
Title of Report “Second Party Opinion (SPO)” “Verifier’s Report” Post-Issuance Reporting Expected annually until full
allocation of proceeds
Required – Verifier must submit
within 24 months of sale
19 Source: Kestrel Verifier’s FAQs
Second Party Opinion (SPO) vs. Climate Bond Certification Certification Benefits and Challenges
20 Type of Certification Benefits Challenges
CBI Certification with
Third Party Verification
Highest standard for
green bond certification
Additional requirements to
meet CBI criteria can be
time-intensive and costly
Second Party
Opinion
Aligns with ICMA
recommended Green
Bond Principles
Requires development of
green bond framework
and third party verification
Self Certification No additional cost Speculation of
“greenwashing”; investor
preferences; regulatory
• Currently developing a Green Bond Program Request for Proposal (RFP) to reevaluate green bond certification
options in light of evolution of the green bond market
Summary
21 • SFPUC continued commitment
to leadership in Green Bonds
• Opportunity to refresh best
practices in light of significant
market changes since SFPUC’s
early adoption of green bonds
• External verification for all
enterprises
• Opportunity to reevaluate
paradigm and providers for
entire program