local governments’ approach towards green bond · prof. marzia morena and tommaso truppi for...
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POLITECNICO DI MILANO
School of Architecture Urban Planning Construction Engineering
Master of Science in Management of Built Environment
Local Governments’ Approach towards Green Bond
An Opportunity for Italian Municipalities to Finance Green Projects
in the Public Real Estate Sector
Master Thesis of:
Mahsa Bohlooli Zamani Matr. 876767
Silvia Dessì Matr. 877184
Advisor: Marzia Morena
Co-advisor: Tommaso Truppi
Co-advisor: Daniela Bosia - Politecnico di Torino
Academic Year 2018 - 2019
Climate change is not a theory it is a fact
Acknowledgements
First and foremost we would like to express our gratitude towards our advisor and co-advisor
Prof. Marzia Morena and Tommaso Truppi for their full support, expert guidance, understanding
and encouragement throughout our master program and thesis.
We are more than thankful to Dott. Nicolò Maconi in Assessorato al Bilancio e Demanio of Milan
municipality, for the incredible help he gave us in overcoming the obstacles during our survey and
best practice proposal in Milan. We also thank Dott.ssa Chiara Bonacini in Milan municipality for
her help in clarifying our doubts.
We would also like to thank our beloved parents and family whose constant support and
contribution is sincerely appreciated and gratefully acknowledged. The completion of this study
could not have been possible without them.
Last but not the least, we wish to thank all our amazing friends who endured this long process
with us and created lots of unforgettable memories during this journey.
Milano, 2019
Mahsa B.Z. and Silvia D.
Table of Contents
Abstract 1
Sommario 3
1. Introduction ........................................................................................................................................ 5
1.1. Description of problem 6
1.2. Methodology 7
2. Green Bond ....................................................................................................................................... 9
2.1. Bond Theory 9
2.2. Green Bond Theory 12
2.3. Green Bond Principles 15
2.4. Green Bond Typologies 21
2.5. Green Bond Advantages and Disadvantages 22
2.6. Evolution of the Green Bond Market 24
2.7. Green Bond in the Real Estate Sector 28
3. Governments Take Action for a Sustainable Future ............................................................. 41
3.1. The Role of Governments in the Green Bond Market 41
3.2. The Local Government Approach : Muni-Bond 45
3.3. The Local Government financial tools in Real Estate Sector 54
4. Local Green Bond Application: Case Studies ......................................................................... 57
4.1. France: Ile de France 58
4.2. Sweden: Gothenburg 63
4.3. Norway: Oslo 67
4.4. The Key Factors 69
5. Financial Tools of Municipalities in Italy .................................................................................. 72
5.1. Institutional Framework 73
5.2. The Available Financial Resources for Municipalities 74
5.3. The Municipal Obligation in Italy 77
5.4. Green Bond in Italy Up to Now 80
5.5. Opportunities and Limits for Local Green Bond 83
6. Empirical Analysis of Italian Perspective on Green Bond .................................................... 88
6.1. Survey Outline 88
6.2. Results 94
6.3. Outcome 100
7. Milan: Gearing up for the Green Bond Market ....................................................................... 102
7.1. Questionnaire and Interview with the Municipality 102
7.2. The Outlook of Comune di Milano for Green Bond 105
7.3. The Municipal Approach to Public Real Estate Sector 109
8. Proposals for Italian Municipalities in the Real Estate Sector ............................................ 115
8.1. Prioritizing Goals in Public Property Management 116
8.2. Milan as Potential Pioneer for a Greener Real Estate 122
8.3. A Blueprint for Smaller Municipalities 126
Conclusion ............................................................................................................................................... 132
Bibliography ............................................................................................................................................ 135
Sitography ................................................................................................................................................ 138
List of Figures
Figure 1. Green use of proceeds bond structure (CEDRO, 2016) 13
Figure 2. A diagram listing the 17 Sustainable development Goals (UN - United Nations) 14
Figure 3. A taxonomy provides “green definitions” for Climate Bond Standards and Certification
Scheme 18
Figure 4. Top 15 countries all around the world in green bond issuance in 2018 (CIB, 2019) 26
Figure 5. Use of proceeds based on project type highlights the important role of Energy and
Buildings (CIB, 2019) 26
Figure 6. Green property Bonds, two distinct types of real estate application, GSE (Government
Sponsored Enterprise) 28
Figure 7. Variety of property assets funded by green bonds in Europe from 2013 to 2017 (CIB,
2018) 29
Figure 8. Use of green proceeds in the real estate sector (CIB, 2018) 29
Figure 9. Green Bond Principles applied to real estate (GRESB. 2015) 31
Figure 10. The components of the Sustainable certifications 32
Figure 11. The categories of Sustainability certifications 33
Figure 12. Growth of the green bond market globally and main issuers until Q1 2018 (CBI, 2018)
42
Figure 13. Growth of the public sector in the green bond market and main issuers until Q4 2018
(CBI, 2018) 42
Figure 14. Green bond proceeds allocation by sector (CBI, 2018) 43
Figure 15. European government issuance in 2018, data is as of 31th March 2018 (CBI, 2018) 44
Figure 16. (a) Government-backed entities issuance coming from different sectors (b) earmarking
the government-backed green bond proceeds (CBI, 2018) 45
Figure 17. Municipal Green bond emission outline and actors 47
Figure 18. Municipal Green Bond emission in the world (CBI, 2017) 48
Figure 19. Local Government cumulative green bonds, 2012-2018 (CBI, 2018) 49
Figure 20. Municipal Green Bond emission in Europe till middle of 2016 (Croci et al, 2017) 51
Figure 21. Key figures of Ile de France (Paris Region, 2019) 58
Figure 22. History of green and sustainability bonds by the region (Region Ile de France, 2017) 60
Figure 23. 7 categories of the use of proceed in Ile de France green and sustainability bonds
(Region Ile de France, 2017) 61
Figure 24. Reading just built environmental projects from the point of view of UN SDGs
(Region Ile de France, 2017) 62
Figure 25. 73 committed cities to 2020 horizon, 8 cities between them have climate action plans
aligned with Paris agreement (C40, 2018) 64
Figure 26. 6 categories of the use of proceed in muni green bonds of Gothenburg (City of
Gothenburg, 2017) 66
Figure 27. 4 categories of the use of proceed in muni green bonds of Oslo (Based on the data
from Oslo Kommune) 69
Figure 28. Partnership Agreement 2014-2020 in Italy (European Network for rural development)
75
Figure 29. Municipal bond (Borsa Italiana, 2015) 78
Figure 30. Issued bonds by different entities (Croci et al., 2017) 78
Figure 31. Issued muni-bonds from 1998 to 2014 in Italy ( Pinna, 2014 ) 79
Figure 32. Green bond underwriter league table in 2018 (CBI, 2018) 106
Figure 33. Vigeo valuation scheme (Vigeo Eiris, 2018) 107
Figure 34. Milan annual list 2019, PTO 2019-2021 (Comune di Milano, 2019) 111
Figure 35. Milan annual list 2019, PTO 2019-2021, and relative green investments (Comune di
Milano, 2019) 112
Figure 36. Milan PTO 2019: investments on types of buildings (Comune di Milano, 2019) 113
Figure 37. Inputs and outputs of typical building and components (Liddell et al, 2018) 117
Figure 38. The percentage of construction (Liddell et al, 2018) 118
Figure 39. The percentage of energy consumption in the building sector in Europe (Eurima,
2014) 118
Figure 40. Diffusion of NZEB buildings in Italy (Energy efficiency Report, 2017) 120
Figure 41. The public buildings evaluation in Italy divided by owner (MEF, 2015) 121
Figure 42. SWOT analysis for our proposal 125
Figure 43. The structure of the hydro-bond emission by a consortium of water
companies (Viveracqua, 2014) 128
Figure 44. SWOT analysis for proposal of creating an agency for the pooled financing
mechanisms 130
List of Tables
Table 1. Summary of Italian Government Bonds (MEF, 2018) 11
Table 2. Examples of some external verifiers (ECB, 2018) 19
Table 3. Green Label Providers (ECB, 2018) 20
Table 4. Types of green bonds (CBI, 2018) 22
Table 5. Advantages and disadvantages of green bonds as cited by investors and issuers (OECD,
2015) 23
Table 6. European at the forefront of green bond issuance. * EIB is a supranational and is not
included in country figures (CIB, 2018) 27
Table 7. Four levels of LEED certification 33
Table 8. Different levels of BREEAM certification 34
Table 9. Different ratings of ITACA certification 35
Table 10. Different ratings of Green Star certification 36
Table 11. Eligible Green Project Criteria for Real Estate (GRESB, 2016) 38
Table 12. Primary indicators for Eligible Green Projects (GRESB, 2016) 39
Table 13. Comparison between three regional and municipal bonds in different countries 70
Table 14. Rating in comparison (World Economic Forum) 84
Table 15. Italian rating (Moody‟s, 2019) 85
Table 16. Italian loans to local entities 2017 - in million EUR for class of the entity and object of
the loan (MEF, 2017) 86
Table 17. Italian loans to local entities 2017 - percentage for object of the loan (MEF, 2017) 86
Table 18. Potential development of muni-bond in Italy (Croci et al, 2017) 87
Table 19. Chosen Italian municipalities for sending out the questionnaire 90
Table 20. Evaluation of the public buildings in Italy (MEF, 2015) 121
Acronyms
ABS Asset Backed Security
BOC Buono Ordinario Comunale
CBI Climate Bond Initiative
CBS Climate Bonds Standards
CDP Cassa Depositi e Prestiti
COP 15 Fifteenth session of the Conference of the Parties
CRE Commercial Real Estate
EIB/BEI European Investment Bank
ENEA Energy and Sustainable Economic Development
ESG Environmental, Social and Governance
GBCA Green Building Council of Australia
GBE Government-Backed Entity
GBP Green Bond Principles
GHG Greenhouse Gas
GRESB Global Real Estate Sustainability Benchmark
HLEG High-Level Expert Group
ICMA International Capital Market Association
IEA International Energy Agency
IFC International Finance Centre
IFEL Istituto per la Finanza e l‟Economia Locale
ISO International Organization for Standardization
LCR Liquidity Coverage Ratio
LGFA Local Government Funding Agency
MEF Ministry of Economy and Finance
MOC Municipality Owned Companies
NZEB Nearly Zero Energy Building
OECD Organization for Economic Cooperation and Development
PA Public Administration
PFM Pooled Financing Mechanism
PPP Public Private Partnership
ROI Return on Investment
SBP Social Bond Principles
SDG Sustainable Development Goal
SOE State-Owned Enterprises
TfL Transport of London
TIPS Treasury Inflation-Protected Securities
UNFCCC United Nations Framework Convention on Climate Change
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ABSTRACT
After the environmental debates were put into economical literature, an emerging sustainable
finance sector tries to control more social and environmental behaviour. The financial markets
and the real estate sector have been stated to play important roles in this attempt.
The Green Bonds are becoming a more and more attractive instrument for both private and
public sector that want to raise capital with the aim of financing projects, assets and activities that
can benefit the environment, the economy and the society as a whole.
Research within the real estate financing has identified a growing interest of sustainable financing
and green bonds in particular. The global green bond market is growing rapidly as twelve years
ago green bonds did not exist, but fast forward to 2019 and the value of green bonds stood at
over 167.3 billion US dollar outstanding (Climate Bonds, 2019).
Since the Stability Pact of 2012 (Law n. 243/2012), a series of actions were made to limit the
resources of the municipalities in making public investments. However, in the last years, starting
from the Stability law of 2016, that have introduced new and more flexible principles that can be
an incentive to switch the situation. Meanwhile, the green bonds are an innovative financial
instrument that can be used at the municipal level to find the funds for regeneration at a local
scale, with a positive outcome in terms of climate change. The purpose of this master thesis is to
examine the potential of green bonds and their future trends along with municipalities reasoning
behind issuing green bonds in different countries for financing their projects; such as the case of
the Ile de France that shows just in the last 5 years, Northern France has reached 2 billion Euro
through this financial channel. Consequently to this best practices analysis, the thesis will study the
possibility of using this instrument in Italy: the country has already been active in the field and it
was among the top 15 main issuers of 2018 between all the countries around the world, but the
issuers have always been in the private sector. The focus of this work is to study the possibility of
the Italian municipalities to use this method to finance their local projects, with a special attention
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to the real estate sector. Moreover, the thesis explores in what ways green bonds in the Italian real
estate market could be initiated and structured and subsequently governed to establish investor
reliance. To do so, the collection of qualitative data has been performed through a questionnaire
that was sent to the major Italian municipalities and semi-structured interviews, to understand if
they have already moved in this direction, if they know this possibility, how they perceive it and
for which sectors they would use it.
In the end, after the consequent reflections, the thesis will propose an application to the city of
Milan and will try to offer possible guidelines for a future use by other municipalities.
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SOMMARIO
A mano a mano che le questioni ambientali si sono fatte sempre più presenti all’interno dei
dibattiti economici e politici, si è visto emergere un settore della finanza sostenibile in continua
crescita, con l'obiettivo di favorire e creare un comportamento sempre più attento alla sfera
sociale e ambientale. I mercati finanziari e il settore immobiliare hanno avuto un ruolo importante
in questo tentativo, cercando nuove soluzioni che potessero essere in linea con gli obiettivi green
che si vanno a prospettare per il prossimo futuro. E’ in questo contesto che le obbligazioni verdi
diventano un meccanismo sempre più attraente per le organizzazioni del settore privato e
pubblico, al fine di raccogliere capitali per progetti e attività a beneficio dell'economia,
dell'ambiente e della società. Il mercato globale dei bond verdi sta crescendo rapidamente: dodici
anni fa, le obbligazioni verdi non esistevano neanche, adesso invece, alle porte del 2019, il valore
dei green bonds si attesta a oltre 167,3 miliardi di dollari nel mondo (Climate Bonds, 2019).
In Italia, dopo il Patto di Stabilità del 2012 (Legge 243/2012), sono state intraprese una serie di
azioni per limitare le risorse dei comuni per la realizzazione di investimenti pubblici. Tuttavia, negli
ultimi anni, a partire dalla Legge sulla Stabilità del 2016, si sono introdotti nuovi e più flessibili
principi che possono essere un incentivo per cambiare la situazione. Questa può quindi essere
l’occasione per i Comuni Italiani di usare questo nuovo e attuale strumento finanziario, per
favorire una rigenerazione su scala locale, con un risultato positivo in termini di clima e ambiente.
Lo scopo di questa tesi di laurea è esaminare il potenziale dei bond verdi e il loro trend futuro a
diverse scale, in particolar modo si fa attenzione ai casi esistenti di emissioni da parte di governi
locali, come nel caso spettacolare dell'Ile de France: solo negli ultimi 5 anni , la Francia
settentrionale ha raggiunto i 2 miliardi di Euro attraverso questo canale di finanziamento,
diventando un esempio di best practise.
Di conseguenza a questa analisi dei casi di successo, la tesi studierà la possibilità di utilizzare
questo strumento in Italia: il Paese si è attivato nel campo ed è stato tra i primi 15 principali
emittenti del 2018 tra tutti i paesi del mondo, ma gli emittenti sono sempre stati corporate.
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L'obiettivo di questo lavoro è studiare la possibilità dei Comuni di utilizzare questo metodo per
finanziare i loro progetti a scala locale, con un'attenzione particolare al settore immobiliare
pubblico. Per raggiungere tale obiettivo, si è provveduto a fare una raccolta dati sulla base di un
questionario, che è stato destinato ai maggiori Comuni Italiani, e delle interviste semi-strutturate,
per capire se i governi locali si siano già mossi in questa direzione, se conoscano questa possibilità,
come la percepiscano e per quali settori la utilizzerebbero. Dopo le conseguenti riflessioni, la tesi
proporrà un'applicazione alla città di Milano e cercherà di offrire possibili linee guida per un futuro
utilizzo da parte di altri comuni.
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1. Introduction
At COP15 held in Copenhagen during 2009 December, nations agreed on stabilising
greenhouse gas concentration in the atmosphere at a level that would prevent dangerous
anthropogenic interface with the climate system. After the environmental debate was put firmly
into economics literature, an emerging sustainable finance sector attempts to discipline the social
and environmental behaviour, in which the financial markets and also the real estate sector have
been stated to play particularly important roles.
Real estate companies have historically used traditional bank financing and the main financial
resources for the investments and operations. At the same time, the usage of bonds as a financial
solution has increased in Italy during the last years. The increasing bond volumes originate from
the banks and corporates speeds up the need and willingness for real estate sector to diversify
their funding sources.
At the same time, growing global awareness of climate change risks and desire to invest in
environmentally friendly projects and assets will further fuel the development of this burgeoning
segment of the fixed-income market such as green bond. Green bonds have the same financial
properties as regular bonds with the difference of using the proceed for sustainable investments.
The growing demand and attention to energy efficient and clean technologies in global scale,
especially in emerging economies, will help drive issuance going forward.
Italy is committed to two global climate agenda, the United Nations‟ Agenda for 2030 and the
Paris Agreement. The first one was adopted during the United Nations‟ summit in New York in
September 2015 and constitutes 17 global ambitions for sustainable development, of which
combating climate change is one. Later, the Paris Agreement was initially published in December
2015 and came into effect in November 2016 and is an agreement within the United Nations
6
Framework Convention on Climate Change (UNFCCC) between 174 parties including Italy along
with the whole EU. Coherently, the European Commission (2018) established a High-Level
Expert Group (HLEG) in late 2016, comprising of 20 senior experts mainly from the civil society,
the finance sector and academia. The task of HLEG is to advice the Commission and support the
development of a harmonised sustainable financial market within the Europe. In January 2018, the
HLEG release their final report “Financing a Sustainable European Economy”, forming the basis
for the Commission‟s action plan on sustainable finance published in March 2018, suggesting a
number of prioritized activities for the financial markets to contribute in reaching set climate
goals, including efforts that will make bolder the green bond market.
On the other hand, in the smaller scale cities and especially the world‟s greatest cities have a huge
impact and could take bold climate actions, leading the way towards a healthier and more
sustainable future. Deadline 2020 is a commitment from the world‟s leading cities, such as Milan,
Rome and Venice in Italy, to urgently pursue high ambition climate action in demonstrating how
we can deliver on the Paris Agreement. Fulfilling the objectives of Paris agreement will require all
cities to take transformational actions for improving building energy efficiency, reducing emissions
caused by transportation, at the same time increasing the supply of green energy and change
consumption patterns, while improving resilience of the cities during impacts of climate change.
(C40, 2019)
The Municipality of Milan acknowledges the role local authorities can play in climate change
mitigation and has committed to develop a local mitigation strategy. Hence, Milan has joined to
Cities for Climate Protection in 2007 and later Eurocities network initiative, Covenant of Mayors,
at the beginning of 2009. As a result, municipality of Milan developed and published a sustainable
energy and climate action plan in December 2009 (Comune di Milano, 2009). Since 2016, the
message was clear in Paris Agreement that the world‟s largest cities have to cut their emissions
steeply over the next decade and they have to raise capital to do so.
1.1. Description of problem
To comply with the objective of copping global warming at 2 oC, leader cities such as Milan
will develop and begin implementing a climate action plan before the end of 2020. Hence having
a bolder impact needs greater financing in municipal level. The first objective of this thesis was to
7
investigate what lies beneath of the decision on issuing green bonds and why some potential
issuers choose not to. Specifically, one of the sectors that have been highly prioritized for
implementing a greener approach in is the property sector. As the built environment are
responsible for one third of the global greenhouse gas emissions (UNEP, 2018). The aim of this
study is to explore in what ways green bonds in the Italian real estate market could be initiated
and structured and subsequently governed to establish investor reliance.
Therefore, the aim will be achieved by answering the following research questions; what is exactly
green bond market and can they be a way to create awareness and incentives for the government
and municipalities to take a more responsible approach? How common is issuing green bonds in
Italy and specifically between Italian municipalities? Is financing through green bonds more
beneficial than other financing forms? In particular, How can green bonds be beneficial for real
estate sector by creating incentives to increase the quality of buildings or build more sustainable
built environment?
1.2. Methodology
This thesis is built upon a literature review and a combination of quantitative and qualitative
approaches was used in the data analysis research. There are always a lot of advantage with
quantitative research as the data can be collected from many actors that in this study are different
Italian municipalities where the data was collected through a questionnaire sent out to 44 selected
Italian municipalities in different regions.. A mixed-method approach was employed to prepare
theoretical foundations for our hypothesis and research questions. The first part was useful to
understand the quasi new financial instrument known as green bond, starting from the bottom of
obligations themselves. Also, this study uses a qualitative case study approach to investigate the
international context, in which green bonds operate. The case studies enable in depth knowledge
of research topic. The international scenarios provide new insights into success of the green bond
market. The objective was to understand which actors take part in the market and in which way
they have impacts, with in-depth analysis of Italian issuers and actors.
However, such studies remain narrow in focus dealing only with Milan as a cosmopolitan city
going through the challenge of developing and maintaining a competitive edge. Moreover, a
qualitative study is conducted through a prolonged contact with the field that makes it more rich
8
and in more detail than quantitative data. Hence the final stage of the study comprised a semi-
structured interview with municipality of Milan in order to get a deeper knowledge about future
development of the municipal green bonds in Italy.
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2. Green Bond
The comprehensive definitions and deeper understanding of the research area will be achieved
by thorough theoretical framework. Therefore, this chapter will cover the framework needed to
start with the research questions. The first part explains the basics of bond theory as one of the
three main asset classes alongside the equities, or stock, and cash equivalents. Each of the asset
classes has similar characteristics, behaviour in the marketplace, cash flows streams and degree of
risk. Moreover, each class is ruled by the same regulations and laws. Deep diving on general bond
characteristics allows to be better equipped for further evaluations. This identified theoretical
framework enable better comprehension of the subsequent discussion regard to green bond
theory.
2.1. Bond Theory
The basic definition of bond is negotiable and saleable loan. Bonds can be traded in a market
which is called credit markets. It‟s a place where corporations and governments try to collect
money to fulfil their plans. There is another simple definition according to Black‟s Law Dictionary
(2018) “a bond is a contract by specialty to pay a certain sum of money; being a deed or instrument under seal, by
which the maker or obligor promises [...] to pay a designated sum of money to another. “
To fully understand Bond markets, it will be useful to know why they exist and the development
of them through history. The earliest use of loans was by the merchants to finance their trade in
the form of bills of credits. But during the Dark Ages legal codes sought to avoid the use of credit
and the lending was considered usury. Later in the fifteenth century, the demand for borrowing by
kings and popes had increased. This monarchs‟ needs gave birth to merchant banks. Although,
10
they were compensated by king‟s franchises and monopolies instead of interest, which can be
considered as venture capitalists nowadays in their role as financiers to emerging enterprises.
Finally, interest became an acceptable form of payment by the time Europe‟s Age of Discovery
began in the sixteenth century. As compensation for risking the loss of borrowed funds and the
possibility that the funds could be put to better use elsewhere. Although, Catholic countries
resisted the acceptance of interest till the early nineteenth century. The interesting part is large-
scale bond markets were based on patterns developed in Italian merchant towns like Venice and
later on the Dutch cities of Antwerp and Amsterdam, where popular governments were able to
pledge the resources of towns, provinces, or nations.. In eighteenth century the English improved
them by stating on each bond the amount of money, due date and if there were any special terms
that were part of the loan. Later, as a result of English Laws the bonds were generally issued to
pay for the wars in America, bonds became also part of American history from colonial times on
(Richelson, 2002).
Nowadays companies, municipalities, states and independent governments use bonds to raise
money for financing all their different projects and activities. They issue bonds directly instead of
borrowing money from banks or other entities and based on who issues the bond, they can be
divided into corporate bonds and government bonds. Therefore, a bond is a fixed-income
security sold by governments and corporations to raise money from investors today in exchange
for the promised future payment (Berk and DeMarzo, 2014).
To fully understand bonds, it helps to know the terminology of bonds. The owners of bonds are
called issuers, debt holders or creditors that borrow the funds for a certain time at fixed or
variable interest rate, called payment or coupon rate on an annual or semi-annual basis. There
are also no-coupon bond, which doesn‟t periodically pay any interest instead pays off at the end.
Moreover, issuers will return the loaned funds which is called also bond principal, face value or
par value at specified date or maturity date. Bonds are usually issued in blocks of 1000 Euro in
par value and trade on major exchanges. Indeed, they have a maturity of one year at least to more
than twenty years in the case of Treasury bonds. But the longer the bond maturity date the lower
liquidity. Hence, they have higher interest rate to cover adverse effects (Investopedia, 2018).
There are three main categories of bonds based on their issuer, Corporate bonds, Municipal bonds
and Treasury bonds (T-bond). Corporate bonds have always higher interest rate with respect to
government bonds as they are issued by entities such as firms, banks or any private sector.
Therefore, the payment ability of the company is the backing for the bond, which makes
corporate bonds more risky to invest with respect to government one. As a result, investors in
11
high-yield bonds or junk bonds obviously ask a higher rate of interest for going through higher
risk. At the same time, the corporate bonds can be a great source of capital for companies
alongside equity and bank loans. The second category is municipal bond, which is considered one
of the government bonds. These bonds can be issued by cities, regions and countries to increase
capital for big scale projects such as infrastructures, hospital, schools and any public buildings.
The interest earned from muni bond usually has some tax exemption based on the regulations in
different countries. The last one is Treasury bond that is called also T-Bond. It‟s one of four types
of debt issued to finance government spending activities, Treasury bills, Treasury notes, Treasury
bonds and Treasury Inflation-Protected Securities (TIPS). These securities vary by maturity and
coupon payments. T-Bonds are a marketable and fixed-interest government debt security with
longer maturity time that can range from 10 to 30 years. T-bonds usually make interest payments
semi-annually and they could have some tax exempt. They are known in the market as primarily
risk-free (Investopedia, 2018).
BOND MATURITY REMUNERATION MINIMUM
DENOMINATION TYPE OF
AUCTION TAX
RATE REDEMPTION
BOT 3/6/12 months, (or flexible between 1 and 12 months)
Discount at issuance € 1,000 Competitive yield
auction 12.50%
At par, single payment at
maturity
CTZ 24 months Discount at issuance € 1,000
Marginal auction with discretionary determination of price and quantity
issued
12.50% At par, single payment at
maturity
CCT 5 / 7 years Semi-annual floating
coupons, possible discount at issuance
€ 1,000
Marginal auction with discretionary determination of price and quantity
issued
12.50% At par, single payment at
maturity
BTP 3/5/7/10/15/30
years
Fixed sem i-annual coupons, possible
discount at issuance € 1,000
Marginal auction with discretionary determination of price and quantity
issued
12.50% At par, single payment at
maturity
BTP 5/10/15/30 years
Semi-annual real coupons, possible
discount at issuance and revaluation of
principal at maturity
€ 1,000
Marginal auction with discretionary determination of price and quantity
issued
12.50% Single payment
at maturity
Table 1. Summary of Italian Government Bonds (MEF, 2018)
12
As exhibited in Table 1 in Italy, the Ministry of Economy and Finance defines the regular issuance
of five categories of government bonds available for all different investors; Treasury Bill (BOT),
Zero Coupon Treasury Bond (CTZ), Treasury Certificate (CCT), Treasury Bond (BTP) and
Treasury Bond linked to Eurozone inflation (BTP€) that their characteristics highlighted in the
table.
The investors in any kind of bonds can trade them later at the stock exchange with different value
affected by the market. The market price of bonds depends on some factors such as the credit of
the issuers, maturity date and the coupon rate with respect to the general interest rate at the time
of issuing the bond. If the interest rate drops lower than the coupon rate, the bond becomes more
attractive and the value increase and vice versa. Inflation also affects the bond value. However,
larger amount of bond markets with respect to other financial instruments attracts mostly bigger
scale investors such as institutional pension funds or insurance companies. There are some main
reasons behind the decision of issuing bonds such as the fixed interest rate bonds secure the
financing costs even if the market rates increase. They can also have longer maturity time with
respect to traditional bank loans. Another great benefit is having the opportunity to have a larger
pool of investors and gaining diversification with respect to lending money from different banks
(Fabozzi, 2009).
2.2. Green Bond Theory
There is no structural difference between regular bonds and green bonds. Green bond is
almost new kind of bonds or fixed-income asset class for raising capital from investors for climate
change solutions. The idea was born to combat climate change and fulfill the need to shift to low-
carbon and climate-resilient investment since 2007. Green bonds are recognized as an interesting
market opportunity to reach more liquidity and a lower cost of capital for assets characterized by
renewable energy and especially solar (Joshi, 2012). The European Commission promotes green
band to lead the investments and projects align to Paris Agreement and the Agenda to counter
climate change. According to Paris Agreement, the main aim is to keep the global temperature rise
of this century below to 2 degrees Celsius and increase the ability of countries to tackle the
impacts of climate change. To reach this ambitious goal has been estimated appropriate financial
flows approximately 180 billion Euro investment per year will be needed till 2030 (Migliardi,
2018). The global green bond market is growing rapidly. By January 2019 the value of green bonds
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stood at over 147.71 billion Euro outstanding (Climate Bonds, 2019) despite it‟s fast growing
market, the investment will still need to increase more in the coming years.
Figure 1. Green use of proceeds bond structure (CEDRO, 2016)
As United Nations Secretary, Michael R. Bloomberg, believes “Financial markets can help solve the
climate challenge by meeting the growing demand for low-carbon projects around the world, from urban transit
infrastructure to renewable energy facilities. New financial tools like green bonds are helping drive more capital to
these projects, [...] clear standards and better market data will accelerate the use of green bands by making them an
even more attractive way to invest”. This statement also underlines the government's role and its policies
in affecting how private capital can be mobilised and shifted. The green bonds as a public
investment can be used in the emerging and developing countries to leverage private capital for
green investments (Lindenberg, 2014). Therefore, this thesis tries to describe the emergence of a
market for green bonds and examines how the status quo is in Italy.
Green bond in general is similar to other kind of bonds in the market but it is differentiated by its
label. Typically, the bond issuer raises capital from investors over the maturity time, repaying the
principal when the bond matures and paying coupons based on an agreed time table along the
way. The word “Green” shows a commitment to exclusively use them for financing new or
existing projects with environmental and social benefits. Moreover, green bonds bring a twofold
collaboration between issuers and investor, with the aim of increasing the financing of
investments defined as green (Kidney and Oliver, 2014).
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It may even be integrated within the concepts of ROI and risk during investment decision or as
part of the medium-long term development strategy in a business. In other words, it may use
sustainable growth which in general means creating value in an asset in medium-long run, taking
into account environmental, social and governance factors (ESG factors). Sustainable
Development Goals (SDGs) are part of resolution of the United Nations General Assembly in
2015, which is collection of 17 global goals exhibited in Figure 2.
Figure 2. A diagram listing the 17 Sustainable development Goals (UN - United Nations)
As guiding principles for both local and national governments in accomplishing the 2030 Agenda
of transforming our world by sustainable growth. The labelled bond market has expanded beyond
green bonds into more specific categories. Hence, Social and Sustainability bonds have been
around for a few years now, but they really came into their own in 2018, with SDG bonds also
emerging as issuers and investors started adopting policies and strategies linked to these 17
sustainable development goals. Therefore, in 2018 SDG frameworks distinguish between green
and social eligibility criteria and allows the issuer to classify a bond as Green, Social and
Sustainability depending on the use of proceeds. In this new framework green bonds particularly
finance projects with a clear environmental benefits, while social bonds provide funding for
projects that address social issues and seek to achieve positive social outcomes mainly for a target
population such as poor, vulnerable and unemployed. Sustainability bond was born as the
combination of green and social projects when it‟s necessary to finance a project with a mix of
environmental and social benefits (ECB, 2018).
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In International level sustainable finance is considered in the broader sense of the term to create a
financial scheme capable of mobilising capitals towards projects including the three ESG factors.
Environmental factor is the factor that leads to financial market developments and lots of new
initiatives at international levels for laying out harmonised standards across different nations. The
speed of green bond markets development depends on many variables. These variables could
include policy and regulatory factors, the market conditions and also the trends in financial sector.
There are lots of attempts to accelerate the process like International Organization for
Standardization is currently developing Green Bonds Standards ISO 14030 or a green taxonomy
has been provided by Climate Bonds Initiative and a standard for the certification of green bonds.
Moreover, the evolving green bond market faces a range of specific challenges and barriers to its
further evolution and growth. Some of these challenges could be for instance the underdeveloped
domestic bond markets, a lack of definition for standardised green projects and in general
commonly accepted green standards and definitions, a lack of sufficient bankable pipelines,
issuer‟s views on costs vs. benefits. Also in some cases a general scale mismatch between projects,
bonds and institutional investors were detected. Policy makers in different countries started to
focus attention on overcoming these barriers to grow a sustainable green bond market with
environmental integrity. It has led to growing consensus on what constitutes a green bond, and
progress has been made on standards and criteria for what constitutes a green project or activity.
Finally, the market with the help of the government-led efforts in standardisation and definition of
the green bond market have borne fruit by emerging of The Green Bond Principles. The
principles explained in detail in the next chapter.
2.3. Green Bond Principles
As already mentioned in previous section green bonds are differentiated from regular bonds by
their green label, which is entitled by the issuer or another entity. This label carries a commitment
to use the proceed of green bonds in funding projects that contribute to environmental
sustainability. It leads to define standards and criteria of a green project and activity in the better
way. Definitely this attempt have to be followed by the transparency of the process in which green
bonds are issued and how their proceeds are used and managed. Moreover, enhancing the data
collection and impact reports through guidelines are necessary to fulfil the green bonds‟ aim and
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to drive the provision of information needed for increasing capital allocation to green projects
based on ESG factors. In Europe the environmental factors are the one on which the market is
developing. A number of initiatives are underway at the level of international agencies, geared to
lay out harmonised standards across countries. For the time being, there is no standard definition
at the European level for Green or Social bonds. Finally, market and government-led efforts at
standardisation and definition in the green bond market have shaped the Green Bond Principles
(GBP), Social Bond Principles (SBP), and Climate Bond Standards (CBS). The underlying logic of
these principles and standards is to promote the transparency and traceability of the projects, so as
to fight so-called greenwashing, i.e. all green bond issues which do not respect the guiding
principles (Migliardi, 2018).
Both issuers and investors involved in the green bond market are exposed to different types of
risks, including the risk of greenwashing. It is defined as information asymmetry between
corporations and the public, or having limited and false information about the projects‟
environmental impact. As mentioned in World Wildlife Funds report in 2016, “ [...] Green bonds
must keep the green promise” and they mentioned several green bond issuances that have been highly
controversial among their stakeholders and not fulfilling their promises. Therefore, due to vague
regulations around green projects and green bonds there is always going to be doubts around
greenwashing.
As a result, GBP is a self-regulatory initiative designed in January 2014 to promote transparency,
disclosure and integrity in the market. It was established by a consortium of investment banks:
Bank of America Merrill Lynch, Citi, Crédit Agricole Corporate and Investment Bank, JPMorgan
Chase, BNP Paribas, Daiwa, Deutsche Bank, Goldman Sachs, HSBC, Mizuho Securities, Morgan
Stanley, Rabobank and SEB. This principle takes in consideration issuers, investors and any kind
of intermediaries and observers. GBP is administered by International Capital Market Association
(ICMA) as its secretary in charge of on-going monitoring and development of guidelines. This
association defines a green bond as any kind of bond instruments in which the issuance proceeds
will be used to finance or refinance in part or in full existing or completely new green projects.
The GBP are collaborative and consultative in nature based on the contributions of members,
observers and the wider community of stakeholders. GBP are updated every year to reflect the
growth and development of the global green bond market. Moreover, it should follows the four
core components of green bond principles (OECD, 2015).
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The four key components that have identified for enabling the creditable green bonds, comprise
Use of Proceeds, Process for Project Evaluation and Selection, Management of Proceeds
and Reporting.
It‟s clear that the use of proceeds is the main defining characteristic of green bonds. These
should be appropriately described in the legal documentation and all green projects‟ environmental
benefits shall be assessed and in the possible situation be quantified by the issuer. As a result, the
GBP identifies some eligible categories as Green projects to invest such as climate change
mitigation and/or adoption, environmentally sustainable management of living natural resources
and land use, natural resources conservation, biodiversity conservation, pollution prevention and
control, renewable energy, energy efficiency, clean transportation, sustainable water and
wastewater management, eco-efficient and circular economy adapted products.
The GBP doesn‟t take any position on which green technologies, standards, declaration and claims
are optimal for environmentally sustainable benefits. Hence, there are several national or
international initiatives to produce taxonomies to create mapping between them for maximizing
the flow of capital. For instance, Figure 3 specifies the green definitions for the CBS and
certification scheme. Investors need to be assured that the proceeds of the green bonds are being
allocated to appropriate qualifying projects. To be able secure this assurance, the majority of
issuers decide to benefit specialist service providers in second-party reviews and consultation,
third-party certification and audits. These different ways of assurance have been used on their own
or in combination.
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Figure 3. A taxonomy provides “green definitions” for Climate Bond Standards and Certification Scheme
Process for Project Evaluation and Selection emphasises on the issuer‟s communication of
their environmental sustainability objectives along with the process used to determine how their
projects will fulfil these objectives to the investors. Moreover, they should clearly communicate to
investor the related eligibility criteria, including or exclusion criteria to identify and control
potentially environmental and social risks according to the projects. The principles further
encourage issuers to use external reviews to reach the highest possible transparency, such as a
second opinion of the green bond framework.
The net proceeds amount of the green bond should be credited to a sub-account, moved to a sub-
portfolio or should be tracked in another suitable way according to management of proceeds
concern. The process should be well documented by the issuer and be periodically adjusted in
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order to link each issuance to the green investment activities. During the green bond‟s life till its
maturity, proceeds should continually be regulated to balance allocations to green projects. If the
issuer does not intend to use proceeds for eligible green projects, temporary placement should be
made known to the investors.
Reporting is one of the key components of high level transparency, therefore the issuer should
provide, review and keep available up to date information of their green projects and annually
disclose their framework together with use of proceeds and expected environmental impacts. The
GBP suggested the use of qualitative performance indicators and if it would be possible
quantitative performance measures. The annual review should also include a list of the green bond
financed projects, a brief description of these and to which amount they have been financed
(ICMA, 2018).
Moreover, in GBP is also recommended that the issuance appoint an external review provider to
confirm the bond alignment with these four core components. Some examples of external
verifiers are exhibited in following table;
Table 2. Examples of some external verifiers (ECB, 2018)
The GBP describes a variety of ways for issuers to obtain outside input to the formulation of their
green bond process such as second party reviews and consultation, audits and third-party
certifications. The external review can provide by consultants and/or institutions with expertise in
environmental sustainability. Independent external reviews are broadly grouped into different
types such as second party opinion, independent verification, certification or green bond scoring
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or rating. Voluntary guidelines for external reviewers also have been developed as a market based
initiative to provide transparency and information for all stakeholders involved in green bond. The
second party review gives an independent assurance that it is particularly important for the small
investor who want to be sure about the greenness of the investment and its framework, but
doesn‟t have the resources needed to undergo this type of investigation.
The development of standardised definitions and transparent procedures for assessment of the
green bonds can help investors and businesses or governments with aligned objectives find each
other through the green label. There are some well known green label providers that try to Define
better securities and designing the better market for having an efficient way of linking investors
and investments at the lowest cost. They are exhibited better in below table with their main
characteristics.
Organisation Product Main Characteristics
Climate Bond Initiative Certification ● Pre issuance with post issuance option ● Based on CBI standard and taxonomy ● Supported by accredited external verifiers
Moody‟s Green Bonds Assessment ● Focuses primarily on formal alignment with the GBP
● Post issuance which means it may be updated periodically following issuer‟s reports
Standard & Poor‟s Rating
Green Evaluations ● Assessment of environmental impact and/or climate resilience of green bonds and green finance products
● Incorporates the GBP
LuxFLAG Green Bond Label ● Pre and post issuance ● Reference to GBP, CBI taxonomy and UN SDGs ● Issuer to report every 2 years post issuance
CICERO Shades of Green ● Pre issuance methodology to assess how green a bond is from dark green to brown
● Published in the Green Bond Second Opinion by CICERO
Table 3. Green Label Providers (ECB, 2018)
Also, in 2015 the EIB improved level of information flow by defining a direct link between its
green bonds and the projects they finance besides upgrading its internal procedures, IT-
infrastructure and extensive due diligence. Later, the World Bank group, some municipal issuers,
such as Massachusetts, and others also report details on a project-by-project basis. More and more
governments have engaged in supporting the development of standards and definitions of
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different green bonds. For instance, in 2015 Switzerland became the first national government
member of the climate bond partners just to support these developments. China developed
country-specific green bond guidelines definitions to guide the market as part of broader green
financial reforms and the European Commission continues to monitor, asses and support these
developments under the EU capital markets Union (EC, 2015)
2.4. Green bond Typologies
The first green bond classification can be according to general features of bond. For instance,
green bonds like normal bonds can be divided in different typologies based on their issuers. As
they can be issued by corporations, banks, governments or municipalities.
They can either be secured or unsecured. If a bond is backed up by an asset such as properties or
equipment, it is called a secured bond. It means if the issuer fails to fulfil its obligation, the
investor has the right to claim the issuer‟s asset to get the money back. On the other hand,
unsecured bonds are only relied on the company‟s capability to payback and they are not backed
up by any specific asset. Although investors of unsecured bonds have the right to claim for their
money back if the company defaults. But they will get the money back if the company be able to
do it only after the ones with secured bonds got their money back. It‟s clear unsecured bonds are
considered riskier than secured ones, which leads investors asking a higher interest rate for
unsecured bonds. Each of these bond types offers different opportunities and challenges for the
investors. However, the issuer‟s liability has important role in defining interest rate. This is the
reason governmental bonds are unsecured and considered to be safe investment, in which you
always get your money back. In both cases, risks and returns are correlated (Kenny, 2018).
By considering different types and classification of general bonds that mentioned above along
specific green labelled bonds, two more categories of green bonds have emerged. The first
category is the green labelled bonds that are officially labelled and certified as green. The second
one is unlabelled green bonds, in which issuances linked to projects that produce environmental
and/or climate benefits. Climate bonds are a subcategory where the proceeds are linked to
projects that address climate change. Climate Bonds Initiative (CBI) has identified main types of
green bonds. For intense, the majority of the green bonds issued are as green use of proceeds
bonds. It can be also green project bond, asset linked bond, use of proceeds revenue bond and
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green securitised bonds (UNDP, 2018). In the Following table the different types of green bonds
that are related to their green labelled are explained besides some existing examples of different
types;
Table 4. Types of green bonds (CBI, 2018)
2.5. Green Bond Advantages and Disadvantages
The use of green bonds by a company brings benefits for its reputation, increasing the access
to capital. At the same time, the issuance of these bonds requires a new layer in the decision-
making process of the investment and the environmental one (Falsen and Johansson, 2015).
Although, green bonds have some additional cost as the issuers have to track, monitor and report
about the use of proceeds. But this initial cost could offset with other benefits such as highlight
their green assets or business and positive marketing story. These issues clearly underlined by
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KPMG International (2015) in which it explained the link between the challenges and risks
inherent the green bond market from the issuer‟s point of view. In particular the ones related to
the lack of defined and clear standards about the green use of the proceeds, the tracking,
management and reporting of these proceeds, and lack of certainty on the information reported.
Meanwhile, there are also the benefits and the risks from the investor‟s point of view. In the
following table there is a summary of them as cited by investors and issuers.
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Table 5. Advantages and disadvantages of green bonds as cited by investors and issuers (OECD, 2015)
2.6. Evolution of the Green Bond Market
The green bond market has appeared out of a variety of institutional actions and kicked off in
2007 with a 600 million Euro Climate Awareness Bond issued by the European Investment Bank.
Later, in 2008, a group of Swedish pension funds through Skandinaviska Enskila Banken (SEB)
looked for opportunities to support climate mitigation and/or adaption solutions. They wanted
liquid products with high quality at the same time lower risk from investor point of view. Indeed,
the wanted transparent information about how the investment would achieve positive impact.
They approached the World Bank and they worked together to design the green bonds with 300
million USD issuance. These green bonds issued by European Investment Bank and the World
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Bank received strong support from the market and interest from other investors and at the same
time climate policy makers. They raised awareness for the challenges of global warming and
relevant climate changes meanwhile highlighted the potential for institutional investors to support
green-project investments through liquid instruments without giving up financial returns of their
investments.
Later, the wider bond market started to emerge after the first 1 bn USD green bond sold within an
hour of issue by International Finance Center (IFC) on March 2013. In the same year there was a
turning point in the market as the first corporate green bond issued by a Swedish real estate
company, Vasakronan. The large corporates followed the new method of financing by issuing
their own corporate green bond such as SNCF, Apple, Engie, Berlin Hyp, ICBC and Crédit
Agricole Corporate and Investment Bank (CBI, 2015).
In the same year, Tesla Energy issued the first solar ABS that mentioned previously in Table 4.
Moreover, the following June 2013 the first green muni bond was issued by the state of
Massachusetts in the United States and the proceeds from the sale were earmarked to finance the
state‟s Accelerated Energy Program. European cities and municipalities have also joined the
market with the issuance by Ile de France (the Paris region) in 2012. Later in October 2013,
Gothenburg issued the first Green City bond. Municipalities, cities, and state-owned utility
companies became strategic issuers of green bonds in the United States, Europe, South Africa and
Asia. Green municipal bonds are an important area for future growth as cities and other sub-
national entities look to low-cost and long-term sources of capital to finance climate mitigation
and adaptation infrastructure requirements.
As of January 2019, the total cumulative green bonds issuance, counting all types of green bonds
including corporate along with sovereign, government and etc. amounted to 167.3 bn USD with
3% growth respect to 2017. The geography of the green bond market is expanding and
diversifying with respect to previous years. Green Bonds have been issued in 44 countries, of
which eight of them are new countries have joined in 2018 to the list of issuers; Iceland,
Indonesia, Lebanon, Namibia, Portugal, the Seychelles, Thailand and Uruguay.
26
Figure 4. Top 15 countries all around the world in green bond issuance in 2018 (CIB, 2019)
As it is exhibited in Figure 4 USA, China and France topped countries ranking once again,
accounting for 47% of global issuance in 2018. In more detail, US issuers contributed 34.1 bn
USD to the total, Chinese 30.9 bn USD and French 14.2 bn USD. It is also clear how European
issuers try to keep developed market issuance on a growth path and also Italy is among one of
them. Supranationals issued 12.7 bn USD, with the EIB and the World Bank contributing
significantly to that total. European issuance reached 66.6 bn USD that is 15% higher respect to
2017 volumes. Indeed issuance from the Asia-Pacific region recorded the highest level of increase
calculated 35% over 2017 to reach 48.5 bn USD in 2018 (CIB, 2019).
Growing global awareness of climate change risks and desire to invest in environmentally friendly
projects and assets will further fuel the development of this burgeoning segment of the fixed-
income market. The growing need for energy efficient and clean technologies globally in emerging
economies, will help drive issuance going forward. Also it‟s important to highlight that green bond
proceeds are increasingly used to finance low carbon buildings and energy efficiency projects,
confirming the high relevance of the real estate sector.
Figure 5. Use of proceeds based on project type highlights the important role of Energy and Buildings (CIB, 2019)
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Focusing more on the evolution of the European green bond market, global green bond issuance
started with multilateral development banks raising funding mainly for climate related projects
during 2007 and 2008. In following figure some of the first European issuers entered to the
emerging green market has been exhibited.
Table 6. European at the forefront of green bond issuance. * EIB is a supranational and is not included in country figures (CIB, 2018)
The European green bond market is very diverse that spans the continent in a variety of debt
formats, currencies and maturity date. European green bond deals are denominated primarily in
Euro and the second most popular currency is USD and it appears to create an opportunity for
attracting USD investors. Moreover, 98% of issuance benefits from external reviews and reporting
standards are in the high level. About 70% of European green bond issues have maturity date of
ten years. Both public and private non-financial corporates prefer to issue their green bonds with
medium to long term maturity date between 5 to 10 years. Longer maturity date is particularly
suitable for the development and operation of bigger scale and is strong institutional investor
demand for such bonds.
Based on use of proceeds analysis in European green bonds market will be visible a substantial
part of them have always allocated to the energy sector. 60% of them issued by energy sectors
such as Enel in Italy and the rest comes from local government, sovereigns and financial
institutions. They use 90% of bond proceeds for energy investment but also allocate funds to
buildings, water and waste management.
The third chapter describes the growth and composition of the green municipal bond market as
local approach. Moreover, it tries to examine the benefits of issuing green bonds and details the
challenges facing the green municipal bond market especially in emerging economies.
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2.7. Green Bond in the Real Estate Sector
Property sector gets the most challenging objectives regarding transition to a low carbon
economy as buildings are the largest producers of CO2 accounting for 40 per cent of all
emissions. Green bond could allow for an alignment of interests between investors, tenants and
commercial real estate companies (CREs). CREs are getting the funds to develop the buildings or
office spaces with more energy efficient and follow the environmental goals. As a result, the first
green bond in real estate sector was issued by Swedish property company for its different asset
classes in 2013; commercial real estate, municipal, private housing and public property such as
schools, care homes, government offices and courts. Tenants, mostly the large international
companies are increasing the demand of the environmental performance of the renting building
as it helps them saving the cost of the building and exhibit better sustainability performance.
At the same time, buildings and their energy consumption are important areas for future growth
of cities and also one of the main concern in seventeen Sustainable Development Goals of UN as
“Sustainable Cities and Communities”. As a result, governments and subnational entities are
looking to low-cost and long-term sources of capital to finance climate mitigation and/or
adaptation infrastructure requirements. It is the reason why the green bonds can find a fertile soil
in which they can flourish.
Figure 6. Green property Bonds, two distinct types of real estate application, GSE (Government Sponsored Enterprise)
The Figure 6 exhibits how green bond issuance started with private Swedish real estate company
and become more popular among other types of green bond issuers.
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In general, as it is pointed out in the previous section in Figure 5 allocating use of proceeds to
buildings is in the second place after energy sector. In 2018, almost 26% of green bond proceeds
by total amount have been used to finance development and improvement regarding energy
efficiency in buildings and construction. Real estate allocations fund certified buildings and energy
efficiency improvements alongside the high standards.
Figure 7. Variety of property assets funded by green bonds in Europe from 2013 to 2017 (CIB, 2018)
Also it‟s important to highlight that green bond proceeds are increasingly used to finance low
carbon buildings and relevant energy efficiency projects, confirming the high relevance of the real
estate sector. During 2016, 21 per cent of the green bond proceeds were allocated to real estate
sector while at the end of 2017 this number increased to 20 per cent and reporting record growth
in terms of a 2.4 time increase year-on-year (CBI, 2018).
Figure 8. Use of green proceeds in the real estate sector (CIB, 2018)
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In non-financial corporates, the Swedish real estate company Vasakronan was the first corporate
to issue a green bond in 2013 to raise funding for their real estate plans. Later, many private
corporations start issuing green bonds to fund the renovation of buildings to make them more
energy efficient and to lower occupancy costs by improving the overall energy footprint of their
buildings. Nowadays the most of the real estate green bonds are used for projects that fund
construction of green buildings, energy efficiency upgrades of the buildings, on site renewable
energy generation such as implementing the solar panels, sustainable waste management upgrades
and improvements in water management. The public benefits of green bonds are significant and it
seems to continue increasing. Meanwhile there are many aging buildings with huge demand of
major environmental interventions or upgrades to remain profitable and attractive for future
tenants or buyers. The single challenge for the wider acceptance of green bonds is the lack of
standards.
However, with groups like the GRESB (Global Real Estate Sustainability Benchmark) becoming
more involved in pushing common standards and also publishing the green bond guidelines for
the real estate sector in 2015, the number and types of issuers and value for green bonds in real
estate sector seems likely to evolve in the coming years.
GRESB is an industry-driven organization committed to creating transparency in the sustainability
performance of the global real estate sector. GRESB aims to help the institutional investors in
both real estate equity and debt, and has drawn on the expertise and recommendations voiced by
the different stakeholders for the development of the Guidelines, including institutional investors,
listed property companies, green bond underwriters and the largest green building certification
bodies.
An Eligible Green Project should be in conformance with the Green Bond Principles, meaning
that they received the supposed proceeds or are used to collateralize a bond in the context of the
construction and real estate sector.
Hence, to establish the eligibility there should be a base of information disclosure and
transparency that guarantee the affinity with the laws and general guidelines behind the Green
Bonds. When applying the Green Bonds to the real estate sector, should be considered that the
industry is a complex asset class that faces the wide range of issues with the environmental
impacts. Therefore, the guidelines should provide a framework to recognize the eligibility of the
project as green, implement the right management of the proceeds and focus on the importance
of reporting the outcomes.
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The guidelines are based on the four components expressed by the Green Bond principles and are
summarized in the following table:
Figure 9. Green Bond Principles applied to real estate (GRESB. 2015)
Each category of the Eligible Green Project in the real estate sector has an environmental impact.
These categories are renewable energy, energy efficiency, pollution prevention and control,
environmentally sustainable of resources and land use, biodiversity conservation, clean
transportation, sustainable water and waste management, climate change adaptation, eco-efficient
circular economy, green buildings.
Regarding the last one, the real estate sector has a long track of rating systems that address the
impacts of the buildings. The certification system for the green buildings has a define framework
that establish the fundamental terms and concepts, address the impacts on the environment and
value the outcomes across the lifecycle of the asset (GRESB, 2015). The certification given by the
third party is a recognition of the green value of the building, and it is widely accepted by the real
estate industry, government policies and the general public, giving a framework to address the
suitability to the Green Bond Principles and the Eligible Green Project attributes. The results are
a fundamental information for the potential stakeholders.
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The protocols or certifications of sustainability were born in the 90s with the aim of spreading the
culture of sustainable building, guaranteeing and evaluating the application of strategies to reduce
the environmental impact in the project and in the construction of the building or a group of
buildings. The protocols also allow comparability between buildings and can be used as guidelines
for determining sustainability objectives. Various certification methods for building sustainability
have been developed during the last decade worldwide and domestically, and despite the fact that
the domestic methods take into consideration the proper climatic and culture condition of the
place, there is the aspiration to reach a standardised method of assessment for the global real
estate sector.
By now, the most known and used building environmental certification systems are BREEAM
(Building Research Establishment Environmental Assessment Method) and LEED (Leadership in
Energy and Environmental Design method), while in Italy in 2001 was developed a domestic
assessment method called Itaca (Istituto per l‟innovazione e trasparenza degli appalti e la
compatibilità ambientale). The protocols are characterized by a great attention to energy efficiency,
a thematic area that generally has the greatest weight on the overall assessment of the building.
Another common aspect, although with different variations depending on the system, is the
assessment of the environmental impact of the entire life cycle of the building: from construction
to its decommissioning or redevelopment. The aspects related to the quality of the internal
environments are also present in all the protocols, however with a relevance and a different
number of indicators.
Figure 10. The components of the Sustainable certifications
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LEED, the Leadership Protocol in Energy and Environmental Design was developed in the
United States by the U.S. Green Building Council. It is the most widely adopted in the world,
firstly introduced in 2000. The certification is based on standards for the construction and the
recognition of eco-compatible buildings able to guarantee environmental and economic
sustainability as well as the autonomy of energy. The categories of rating are 8, common to all the
other systems.
Figure 11. The categories of Sustainability certifications
A score is given to all of these categories, and the sum gives the level of sustainability of the
building and LEED has 4 levels:
Rating Score
Certified ≥ 45 points
Silver ≥ 60 points
Gold ≥ 75 points
Platinum ≥ 90 points
Table 7. Four levels of LEED certification
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This certification might be applied for new constructions, existing buildings, schools, commercial
interiors, homes, neighbourhood development, “core and shell”. All buildings or projects must
have some prerequisites that are the minimum requirements to be eligible for a certification.
In Italy, LEED arrived in 2009 thanks to the commitment of the Global Business Coalition
(GBC), which has aligned the international standards both to our regulatory system and to the
constructive features of our buildings.
By now, LEED Italia has 441 certified and registered buildings, for a total of 5,3 millions of sqm,
especially in Lombardia (236), Trentino (95) e Lazio (80) ( GBC Italia ).
BREEAM was established in the United Kingdom in 1990 as a voluntary assessment for the
purpose of evaluating the environmental performance of buildings. The judgment is assigned
taking into consideration various environmental factors and obtaining a score, like the LEED one.
It verifies the design, construction and use of the property, considering categories from resource
management to ecology, and include aspects related to the use of energy and water, the internal
environment regard to health and wellbeing of inhabitants, pollution, transportation, materials,
waste, ecology and management processes.
Rating Score
Pass ≥ 30%
Good ≥ 45%
Very Good ≥ 55%
Excellent ≥70%
Outstanding ≥ 85%
Table 8. Different levels of BREEAM certification
Also in this case, this certification might be applied for offices, schools, hospitals, commercial
buildings, residential buildings, new constructions and existing ones, neighbourhoods, industrial
buildings, EcoHomes etc.
ITACA is a voluntary process, as the others. It was developed in 2002, by the ITACA Institute
and a group of researchers that wanted to create a new method to assess the energy-environmental
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situation of residential buildings. The protocol allows to verify the performance of a building in
reference not only to the consumption and energy efficiency, but also taking into account its
impact on the environment and human health, thus promoting the construction of increasingly
innovative buildings, with zero energy, reduced water consumption, as well as materials that in
their production involve low energy consumption and at the same time guarantee a high level of
comfort.
It evaluates the level of sustainability in respect of the construction practice, with a scale of rating
from -1 to +5. It considers quality of the site, resources consumption, indoor quality, service
quality and environmental loads.
Performance Rating
Performance lower than current practice -1
Current practice 0
Moderate improvement of the performance respect to the current practice 1
Substantial improvement of the performance respect to the current practice 2
Best current practice 3
Increase of the best current practice 4
Excellence 5
Table 9. Different ratings of ITACA certification
This method is suitable for residential buildings, offices, commercial buildings, schools, industrial
and receptive buildings. This protocol has been adopted by Toscana, Friuli, Piemonte, Basilicata,
Liguria, Marche. Emilia-Romagna, Calabria, Sicily and Puglia.
Green Star is another voluntary sustainability rating system that can be used in real estate sectors
in Australia. The Green Building Council of Australia (GBCA) launched it in 2003. The Green
Star rating system evaluates the sustainability of projects in the all different stages of the built
environment life cycle. Ratings can be achieved at the planning phase, during the design phase,
construction or fit out phase of buildings, or during the ongoing operational phase.
It has been considered in this rating system assessing and rating the buildings, fit-outs and
communities against a range of environmental impact categories. This rating system aims to
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encourage leadership in environmentally sustainable design and construction, also in showcase
innovation of sustainable building. Moreover, It takes in consideration the occupant health,
productivity and operational cost savings.
Green Star uses the nine Green Star categories for benchmarking the projects. These nine
categories are Management, Indoor Environment Quality, Energy, Transport, Water, Materials,
Land Use and Ecology, Emissions and Innovation. Green Star certification is a formal process
and during this process an independent assessment panel has to review documentary evidence to
be sure that a project meets Green Star benchmarks within each credit. The assessment panel
awards points, with a Green Star rating determined by comparing the overall score with the rating
scale (GBCA, 2019).
Category Score Rating
Minimum Practice 10 - 19 One Star
Average Practice 20 - 29 Two Star
Good Practice 30 - 44 Three Star
Best Practice 45 - 59 Four Star
Australian Excellence 60 -74 Five Star
World Leadership 75 + Six Star
Table 10. Different ratings of Green Star certification
By using the Green Star Performance rating tool will be able to achieve a Green Star rating from 1
to 6 Star Green Star. But Green Star rating tools for building, fit-out and community design and
construction reward projects that achieve best practice or above, which means ratings of 1, 2 or 3
are not awarded. The on-going performance of a building can be rated at any of the 6 star ratings.
The GBCA released a report with the title of The Value of Green Star, in which analysed data
from 428 Green Star certified projects occupying 5,746,000 million square metres across Australia
and compared it to the average Australian building and minimum practice benchmarks. The
research exhibited that on average Green Star certified buildings produce 62% fewer greenhouse
gas emissions and use 66% less electricity than average Australian buildings ((GBCA, 2019).
Green Star buildings use 51% less drinking water than average buildings. Green Star certified
buildings also have been exhibited to recycle 96 per cent of their construction and demolition
waste, compared to the average 58% for new construction projects.
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To obtain the certification, the rating requires a detailed documentation about the performances
of the building and the environmental attributes compared to a baseline of specific measurements,
then revised by the appointed third party. In the end, the certification score shows the
performance achievements and environmental attributes. In the following table are shown, the
most common Criteria of the Eligible Green Projects in reference to the primar rating systems for
the green building.
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Table 11. Eligible Green Project Criteria for Real Estate (GRESB, 2016)
Disclosure and transparency are necessary for investors to better discern the risks behind the
investment, pick out the best practices in the industry, inform of the positive outcomes regarding
the categories of the GBP. The issuers and underwriters should identify the criteria, categorizing
the environmental objectives and the impacts derived based on them. Gathering the information
in this first stage allows the issuer to manage correctly the investment aims, to obtain certifications
based on the famous rating systems or environmental ratings, and detect the outcomes.
Therefore building third-party certified under one or more green building rating system mentioned
above. These certified buildings are known as green in real estate sector. Indeed, there are “Energy
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Ratings” that are specifically focused on the efficiency performance and might be used to identify
a projects as eligible. And there is also “non-building certifications”, specific for the the land use
objectives, in which a green property bond includes real estate sector without buildings such as
agriculture.
However, in annual reporting of investor disclosures about green bond investing and impacts
should include the asset level green certification and energy rating data. They have been exhibited
in the following table as primary indicators.
Table 12. Primary indicators for Eligible Green Projects (GRESB, 2016)
The primary indicators should always be present in the Green Bond for real estate sector, and
always provided to the stakeholders. All of them are scorecard-based, that define the project level
attributes and provide a base for the final rating. Issuers should be clear in informing their
stakeholders regarding these results. Investors on the other hand, can use them to guide the
investment decision making, monitoring the process, understand the outcomes achieved.
Another important step pointed out earlier is the Management of proceeds. In this step issuer
should exhibit and declare the proceeds have been allocated to the eligible green projects which is
a compulsory requirement for the investor reporting. Issuers are recommended to provide a
periodic report about the ongoing organization and monitoring to the investors in the forth and
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most important step. It can be implemented with a further level of transparency using also Impact
Assessment. Moreover, the issuers can implement their level of transparency, increase the
confidence of the investor and the market credibility producing additional documentation that
majorly focus on the impact metrics that specifically relate to social and environmental problems.
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3. Governments Take Action for a Sustainable Future
The importance of acting on a local level and the central role of the cities in the fight against
the climate change was made clear in the Paris Agreement of December 2015, as well as in the
2030 Agenda for sustainable development guides. In developed countries promoting the
sustainable development on a urban level means to work on the regeneration of the mobility
systems, transportations, sustainable energy production and its distribution. Indeed, in urban level
development has to be considered also the built environment with focus on the business-as-usual
scenario, it is expected that an average investment of 4.1 to 4.3 trillion USD yearly will be
demanded to finance just urban infrastructure from 2015 to 2030. This amount is calculated
considering that the infrastructures will be built with similar conditions to the current
infrastructures stock in terms of emissions. However, keeping into consideration the low-carbon
scenario and the increasing demand for low-emission urban infrastructures, the investments will
reach 4.5 to 5.4 trillion USD over the same 15 years period (CCFLA, 2015).
Taken together, nowadays the local resources are not enough to cover the liquidity demand and
the necessary capital. Therefore, it‟s possible to identify different ways in which the public
administrations (PAs) could obtain additional resources to finance a sustainable urban
development. Green Bonds might be a solution to fulfil this demand.
3.1. The Role of Governments in the Green Bond Market
As was pointed out in the previous chapter, the green bonds can be issued by banks, private
and public entities, sovereign and local governments. From the structural point of view, green
bonds are exactly like an ordinary bonds, with the difference that the proceed are going to be used
just for projects with a positive impact on ESG. This is still a developing market, nevertheless
there has been a significant growth over the past 5 years. The Figure 12 exhibits the strong growth
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of the green bond in Europe over the last years and it‟s noticeable how the governments are
increasing their presence on the market.
Figure 12. Growth of the green bond market globally and main issuers until Q1 2018 (CBI, 2018)
Figure 13. Growth of the public sector in the green bond market and main issuers until Q4 2018 (CBI, 2018)
Looking at the above data, it‟s possible to see how the government have had a central role in the
development of this financial tool. Actually, the public sector issuance started in 2010 in the
Nordics, when the Norwegian KBN (state-owned bank) and the Nordic Investment Bank
(multilateral institution owned by the Nordic and Baltic states) issued the first green bond
meanwhile the market was still in its early days (CBI, 2018).
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Since then cities, municipalities and government-backed entities have been active in the issuance
of these green financing instruments. Considering the European panorama, the Nordics and
France are particularly supportive of initiatives against climate change and dominate the green
bond market. The first local government green bond issued by the Ile de France 6 years ago
created the blueprint for today‟s labelled local green bond . Later, it followed by Swedish local
government in city of Gothenburg and Stockholm Läns Landsting. The other cities joined to local
green bond market were city of Oslo and canton of Geneva.
The government can be part of the issuance through sovereign bonds, local government bonds
(muni-bond), or government-backed entities. As explained earlier, green bond frameworks feature
a wide range of eligible investment categories. The key point is having a positive impact on
environment, social and governance factors. In particular the main sectors are renewable energy,
low carbon buildings, sustainable land use and low carbon transportation. However, proceed
allocation may vary from bond to bond and different countries.
Figure 14. Green bond proceeds allocation by sector (CBI, 2018)
Nowadays the sovereign bonds, debt securities issued by a national government, boosted the
volume of the public sector issuance, with Belgium, France and Poland taking the lead. More
issuance is expected both from existing sovereign issuers and new ones. For instance, the
government of Lithuania issued a 10-year bond to finance a loan to its Public Investment
Development Agency for renovations that leads to improve energy efficiency and reduce heating
costs in 156 multi-apartment buildings. It‟s clear in below figure how much sovereigns dominate
government issuance.
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Figure 15. European government issuance in 2018, data is as of 31th March 2018 (CBI, 2018)
Next to the sovereign issuer, many cities, regions and provinces took part in this evolving market
issuing local government green bond. As mentioned before, the first one and also the largest bond
launched by a local authority is the one issued by Ile de France, inaugurated in 2012 with a value
of 350 million Euro. Since then, the Region Ile de France reached to 2.7 billion Euro, becoming
the largest local issuer through the end of 2017 (Moody‟s, 2018). To date, the majority of local
government issuance in Europe mainly divided between France, with 5 issuers accounting for
44%, and Sweden, with 10 issuers accounting for a further 42%. The use of the funds is not
always the same, and generally the selected project follows some kind of green criteria established
by one of the voluntary Initiatives and Association active in this field. In the case of Ile de France,
the funds were given to a different projects: primarily public sustainable transportation, following
building for leisure and education, social housing, wastewater management and biodiversity.
On the other hand, Canton of Geneva funded energy performance improvements in three
hospitals and the City of Oslo allocated the funds to sewage network projects, a sewage treatment
plant expansion, and the construction of primary schools and metro depot.
Lastly, government-backed entities are those companies with more than 50% ownership by the
state or local government, are also enabled to take part to the green market. Those entities are
related to energy, financial, transport, water, property sector, and they give a major contribution to
the issuance of green bond at a local level; at the end of the first quarter of 2018, the cumulative
amount raised by the government backed companies were exceeding about 4 bn Euro from the
capital raised by the government itself (24.9 bn Euro Vs. 20.7 bn Euro).
Between these entities there are financial institutions that are accounted for the 47% of the
issuance volume of this segment, energy and rail companies cover part of the rest, respectively
29% and 20%. The more sectorial companies invest in their own field, such as energy with 36% of
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the cumulative investment, transport 26%, water management 15%, instead the financial
institutions have a more varied allocation mix.
Figure 16. (a) Government-backed entities issuance coming from different sectors (b) earmarking the government-backed green bond proceeds (CBI, 2018)
In the end, the government can have a huge role in the shifting toward the green economy, to
create a more inclusive and environmentally friendly growth. The Governments should carry out
policies, create the right conditions for prosperity, fix governance failures and system
imperfections, provide economic incentives to pursue the path of sustainability. On their whole
the state and administrations have many aces that can be used also at the local level to be more
effective.
3.2. The Local Government Approach : Muni-Bond
As was pointed out earlier, the local authorities have the possibility to actively be involved in
the financing of sustainable project at urban scale through the issuance of the local bond, called
municipal bond. Green municipal bonds are an important financial instrument for future
development as cities and other subnational entities look to low cost and long term source of
capital to finance their big scale projects.
While still a developing market, but green municipal bond has not broadly used in different cities
around the world. The bulk of green municipal bond issuance are more popular in United States
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with the first issuance by the State of Massachusetts in 2013, which were earmarked to finance the
state‟s Accelerated Energy Program to reduce energy consumption by 20 to 25 per cent at over
700 sites across the state. Since then, a number of other United States municipalities including
Indiana, Iowa, Chicago and so on, have issued green bonds. Green bonds are an alternative
financial tools even in the situations the PAs‟ budgets significantly reduce, for example in the case
of the economic recession. As during economic recession local governments appear to have more
coherent balance sheet compared to the national government's‟ one. In average, the local
governments normally have debt-to-GDP level less than the national governments. Debt-to-GDP
ratio is the amount of a country's total gross government debt as a percentage of its GDP. It is an
indicator of an economy's health and a key factor for the sustainability of government finance. A
peculiar example is the city of Birmingham as a local governments that has a higher rating than
Germany‟s national government, Aaa from Moody‟s and AA+ from Standard and Poor‟s,
respectively. This could highlight the municipalities‟ active role in the market that has strengthened
by a solid and verified financial condition (OECD, 2017).
A municipal bond is the security debt issued by the local administration with specific terms for the
capital restitution. The issuer is obliged to pay a defined interest (coupon) and repay the face value
of the bond at the maturity date, so the reasoning behind it is the same of a regular bond.
Generally, apart from the public administration, the other figures that can issue green bonds at a
local level are utilities in the sector of energy, water and waste, private companies in the sector of
development, construction and management of „green‟ implants, national entities and banks.
Usually the green municipal bonds are convenient to cover the PA gap in long-medium financing,
with a maturity of 3 to 10 years to raise large scale capital to invest in big urban projects. They
require an higher attention and transparency by the issuer (PA), therefore a better financial
position will ensure better conditions of indebtedness. Then, considering the possibility to
exchange these bonds on the market, the costs might be lower than the commercial bank debts
and they are useful for growing or diversifying the investor base. This financial tool helps
municipalities to attract investors who do not typically buy normal municipal bonds.
Indeed, issuing a green municipal bond, requires more attention and study before the issuance, to
be sure about the „green‟ status of the project, the structure of the bond and the reporting after the
issuance. For preparing a green bond at the very beginning of process, municipality call a financial
adviser. The advisor acts as a consult to help whether bonds debt is the best and most appropriate
means of dealing with a project or need. The advisor usually works with the financial director of
the municipality and lawyers for organizing, collecting and also representing the final green bonds
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to prospective investors. Basically, the actors involved are primary the local entity (the issuer) and
the investor (the borrower), there is a place in which the bond is issued and it‟s possible to
buy/sell it. Around this scenario there are figures like the independent review agencies that work
on the accuracy of the „greenness‟ of the project, they are usually called by the issuers to be sure
that their bond follows the rules established by the standards of reference. All and all, these
processes are useful for generating greater cross-agency collaboration within a city by bringing
different responsible departments together. The city of Johannesburg has reported this s a key
benefit that helped to break down information silos and promote better teamwork across different
areas of government. Also, Johannesburg received international sustainability awards and
significant positive media coverage for municipal green bond issuance that bolded the
responsibility of cities to promote and follow their commitment to sustainable development.
The process behind the issuance of a municipal green bond, can be summarized in this simple
scheme;
Figure 17. Municipal Green bond emission outline and actors
Just in the 2016, the municipal green bond reached the value of 12 billion USD, of which the 60%
was represented by the United States. Sweden is the most active issuer in the European scenario,
followed by France and Norway. In the developed countries the municipal green bond issuance is
made 84% by the municipality and on the rest part mainly by the development banks. Instead, in
the developing countries, almost the total of the bond issuance is made by the support of a
financial institutions, a part from the bond of Johannesburg, the only one issued by a local
authority (Padraig, 2016).
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Figure 18. Municipal Green Bond emission in the world (CBI, 2017)
The United States are the biggest exponents in the use of muni-bond. The annual emission of
municipal green bonds in the States exceeded the about of 10 billion USD. More exactly, in 2017
the issuance of the muni-bonds reached 11,05 billion USD ( 26% of the total United States green
bond emission of 42.3 billion USD). The reasons that brought the wide usage of this instrument
in the U.S. were multiple: the majority of muni-bonds are issued as tax-free instruments, there is a
low risk of default for the issuer entities. So far, green muni bonds seemed to be highly
appreciated by the investors and able to attract a diversified investor base.
In 2013, the state of Massachusetts issued two bonds alongside, one green bond of 100 million
USD and one regular with the same yield. The state thought that the regular one would have been
able to raise up to 1 billion USD, instead it reached just a bit more of 500 million USD. The
surprise was that the green bond ended up being 30% oversubscribed.
As a result, green bonds are useful for leveraging demand to achieve better bond terms. The
demand for green bonds currently outstrips supply, and green bond issuances are regularly
oversubscribed as mentioned in the case of Massachusetts. Therefore, the issuers can try to
leverage this demand to seek more favourable terms. At the same time green bond investors may
be willing to accept a longer term to maturity for instance 350 million USD green bond issued by
DC water in 2014 with maturity of 100-years to fund construction of storm water and sewage
tunnel to a treatment plant to reduce sewage overflows to waterways. There are also cases in
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which issuers have achieved a better price through green bonds such as cheaper debt, i.e. DC
water was able to increase the size of the issuance and the price by reducing the interest payable by
0.15 per cent (CBI et al, 2015).
Figure 19. Local Government cumulative green bonds, 2012-2018 (CBI, 2018)
There are two types of municipal bond, the general obligation bonds and the revenue bond.
The general obligation are secured by the “full-faith and credit” of the issuer, namely its taxing-
power. It means the restitution of the money is linked to the available municipal finances coming
from taxation and transferring the national government funds or regional fund to municipalities.
Meanwhile, the revenue bonds are issued to finance a specific project and are backed by the
revenues coming from the project itself or the municipal agency operating in it. Indeed, a
specialized agency is usually established with the aim of managing and collecting the revenues. The
typical issuers in this case are hospitals, airports, port authorities.
There can be also special tax and projects bonds, the former in which the emission is link to a
specific taxation system, for example related to the transportation system, and the latter in which
the financial cover is ensured by the revenues from another specific project. However, all of them
can be adapted to the green bond market.
As was mentioned earlier apart from the United State, another pioneer issuer of green city bond is
in the South Africa, the city of Johannesburg the only developing country issuing municipal green
bond. The city of Johannesburg issued a 143 million USD worthy green bond with maturity of 10
years and annual coupon rate 10.18 per cent payable semi-annually with credit rating A1/ AA- in
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2014. This green bond issuance had the aim of funding a wide range of sectors, especially a
resilient, liveable. sustainable urban environment that is underpinned by infrastructure supportive
of low-carbon economy. This included goals to reduce the city‟s carbon footprint, create a safe
and walkable city with access to public transportation with the conversion to biogas and dual fuel.
In this way, the city was able to commit to the path of the climate change mitigation, providing a
new funding source for the implementation of the sustainable strategy and e not a new
instrument. It move towards a new and low carbon infrastructure. This was possible because of
the supportive political leadership, willing to find new financial instruments to finance green
projects, and to the high creditworthiness of the issuer (C40, 2016).
Generally, in the European scenario the sub-national bonds are especially used in the countries
characterized by a federal government, like Germany as a federal republic country consisting of
sixteen states or Länder that cover the 72% of the total sub-national European bonds per se. The
emission of sub-national bonds represents the 47% of the German sub-national debt, while in
other countries like Spain and Italy represents 24% and 20% of sub-national debt respectively. In
Spain, there are the “Comunidad Autonomas” in regional level that issued 6.5 billion Euro of
bonds with a maturity of 3 to 30 years in 2014, for example the Comunidad of Aragona with 4
emission of 775 million Euro and Madrid with 6 emission for 3.5 billion Euro. One of the main
reason makes Germany so suitable for the bonds‟ emissions is the high rating of the Länders, just
above the AAA national rating, and the low costs for refinancing. On the other hand, the Spanish
and Italian local rating are usually far from the national one, also it could be possible to have 5
levels difference with respect to national ranking (Vetter, 2014).
At a local level, the main issuers of green bonds are in Sweden and France and there has been the
issuance of 20 municipal green bonds since 2012, for a total value of almost 2.3 billion Euro. The
value of these bonds are various, from a minimum of 25 million Euro in Sweden, up to 500
million Euro from London Transport Agency, the average is about 127 million Euro (Climate
Bond, 2016).
The table below shows the municipal green bond in Europe until the end of 2016, excluding the
French regional bonds issued in 2016 that alone have a value of 1.75 billion Euro.
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Figure 20. Municipal Green Bond emission in Europe till middle of 2016 (Croci et al, 2017)
The main reasons lead some nations to actively take part in the market of the local green economy
are strictly related to the economic and financial situation of the country, the political participation
and the awareness of the inhabitants and investor‟s interest in the social and environmental
purpose of their investments. These nations recognized very well the power they have to support
initiatives their stakeholders care about to achieve both financial and social return.
France always showed an interest in the green economy, and they have been issued their first local
green bond in 2013. The value of first issuance was 350 million Euro, the second 600 million Euro
and continues issuing these Bonds with bigger value. All of them have a long duration, between 10
to 12 years of maturity. The proceeds were used for a mix of green investments, going from green
building to waste management. Ile the France could benefit from a high rating of Standard &
Poor‟s and Fitch, AA/AA and stable/positive outlook, a credit risk of 20% and solvency of 0%.
Above that, France asked for second party review to ensure the greenness of its projects, it has
always been in compliance with the Green Bond principles and committed to report annually the
use of the funds.
In the next chapter, the analysis focus more in detail the green bonds issued by Ile de France as
the first case study and it will be followed by Nordic countries. The reason to choose Nordic
countries as other case studies is that the public sectors cover half of the green bond emission.
The major examples in here are the Stockholm Läns, the city of Gothenburg and Malmö. The city
of Gothenburg was the first European city to issue a green bond in 2013, with a first tranche of 50
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million Euro, second in 2014 of 180 million Euro and followed in 2015 with 105 million Euro and
maturity of 6 years. As the total equal to 330 million Euro that was almost 10% of the municipal
debt. In this case, the proceeds were earmarked for three main areas: mitigation for 76%,
adaptation for 19% and the rest for other relevant environmental issues. More precisely, they were
used in sustainable housing, biofuel projects, water management.
The fund allocation happens once a year, when all the steps and projects are verified. The city
develops a report in terms of reduction of greenhouse gas (GHG) emission and a qualitative
analysis. Later, the Environment Agency prepares a report about the development of the
Environmental Program and Strategy, and all the information are given to the investors.
Another relevant case of success in the European green bond market for project in a local level, is
the Transport of London (TfL).
TfL is a local government body responsible for the transport system in Greater London. The
Treasury of TfL firstly dedicated time to get a better understanding of the expanding market of
the green bonds, to see if their transport assets would be suitable for that. Apparently, it was more
than fit for the bill, thanks to the low-carbon transport goal. Later, the Board of TfL, management
and Sustainability team had to work together to get an internal buy-in, after which Tfl, with the
help of Bank of America Merrill Lynch (underwriter), set up the framework of the green bond.
Gothenburg was the first in many aspects: it was the first entity to open a new branch in the
London Stock Exchange dedicated to the green bonds and it was the first city with a green bond
rating issued by Moody‟s (GB1). In addition, Gothenburg has great economy policies, financial
management, flexibility on the budget, low current liabilities, that made possible to obtain a stable
city rating of AA+, by Standard & Poor's, and Aaa by Moody‟s.
Then, once the funds are ensured, the selection of the projects happens in 4 steps: the city council
draw up an environment strategy plan with the necessary funds, the Urban Development and
Treasury offices select the projects, the Environment Ministry verifies them, then the Treasury
make an investment plan and the Municipal Board make the final approval.
Even if Tfl was sure about the green impact of its bond, it decided to get an independent second
review, following the best practice, from DNV GL to ensure the green credentials of the
obligation based on the international guidelines of Green Bond Principles. This move was justified
also to be prepared in case of investors‟ doubt on the realistic impact of the bond. The issuance
was in April 2015, of a 400 million GBP with 10 years of maturity. The project had a rating of Aa2
by Moody‟s, AA+ by Standard & Poor's and AA by Fitch.
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The bond had a great success: it was oversubscribed by 50%, the investment mostly funded by
green bonds and they obtained a diverse investor base, also geographically speaking, from UK,
Europe, Asia, and the Middle East. This allowed TfL to promote its figure on a worldwide scale,
obtaining international diversity, and create a green credibility.
The proceeds are used to improve the low carbon transportation system aligned with TfL business
plan, and the Treasury adjusted its reporting system to fulfil the green bond requirements. The
reports have to inform the investors about the allocations of the proceeds and the environmental
impact in different steps of project. Following the success of the first emission, TfL has almost 4
billion GBP of eligible green project that could be financed in the same way and pave the way to
other issuers who want to use this financial tool in their green projects.
However, there is a wide market of bonds for municipalities to finance their project but is not
labelled as green. As such, municipalities should figure out whether a green bond is the most
appropriate financial toll for raising the capital or not. As pointed above, the benefits of green
bonds can be significant by accessing to a wider range of investors, more information
transparency and coherent financial reports. Over time, increased demand can also drive
favourable terms and a better price for the issuer. Moreover, public sector and other relevant
financial actors in emerging economies can develop country-specific standards and definitions.
For instance, at the end of 2015 the People‟s Bank of China published its Green Financial Bond
Guidelines that made China the first country in the world to create the official rules for issuance
of green bonds (ICMA, 2015). This type of country specific frameworks and guidelines are useful
to speed up the process of issuing the green bonds and fulfil the environmental priorities of the
country.
Last but not least, the public sector should provide educational materials, workshops, and support
market-led initiatives for green bond investor engagement and training as currently the majority of
investor demand is in developed countries. Based on this research, public sectors have played the
active roles in the countries with high rate issuance of green bonds to encourage more green bond
issuance into the market.
Chapter four looks at some of the European cities that issued green bonds and created blueprint
for others to analyse how their models and initiatives can be applied to help achieve the
Sustainable Development Goals in other cities.
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3.3. The Local Government Financial Tools in Real Estate Sector
The construction and real estate sectors together are responsible for 36 per cent of total global
energy consumption and almost 40 per cent of all amount of CO2 emissions. Their energy
demand continues to rise. Hence, improving the energy efficiency of buildings through energy
upgrading could be crucial to reducing Europe's carbon footprint, but it is certainly not an easy
thing to do. Local governments, whether they are cities, provinces, regions and states are in
charge of public buildings and their spending on relevant programmes, policies and incentives
could enable environment for energy efficiency investment by private sectors. It also could
decrease the cost of more-efficient services and products in buildings sector by their presence in
the market, programmes, policies and incentives.
Government usually use seven different ways to facilitate investment in real estate and
construction sectors in global scale; tax exemptions, public procurement, loans or loan
guarantees, grants, administrative costs, auctions and obligations. Definitely, in different countries
based on their cultural and political situation some of these categories are easier to roll out for
facilitating energy efficiency in buildings. For instance, the category of obligations or bonds is the
largest due to Italian program for energy-efficient buildings and followed by Tax exemptions.
Moreover, local governments are responsible of the public buildings and any intervention regard
those buildings. They know very well energy saving is an important issue in both new buildings
and infrastructure and already existing ones. The European Directive 31/2010/EC introduces
the concept of almost zero-energy buildings and requires that all newly built public buildings,
starting from 2019, be at almost zero energy (nZEB - nearly Zero Energy Building). This
obligation is also extended to private buildings starting from 2021. The new directive requires
Member States to support the efficient restructuring with the aim of reducing EU emissions by
80-85% compared to 1990 levels. Nowadays, the existing stock of public buildings have a huge
potential in term of energy savings, which might translate in a significant reduction in the cost of
energy in the total budget of a Municipality and a best practice example for the citizens.
However, people must continue to work in such places especially institutional buildings, and this
raises many questions such as health and safety as well as the interruption of the working day.
Moreover, recent developments in an EU-funded project have shown that the energy upgrading
of hospitals, school buildings and administrative centres is not only possible, but could even lead
to a drastic reduction in energy consumption up to 50 per cent (European Commission-Cordis,
2014). Hence, achieving energy reduction in the real estate sector has to be governments‟ primary
55
target for the short and long term plans. Their plan definitely includes taking the lead in energy
saving of their public real estate sector.
Each city has a sustainable energy action plan that assess the priority of intervene on energy
retrofit of buildings, and the types of financing for realizing each project could be different. It is
usual to fund the necessary investment for public building interventions, especially energy
retrofitting, from the municipality‟s budget and grants. There are also other possibilities to fund
this kind of projects by local governments;
- Local government financial resources; the public administration has a sufficient amount
of funds, therefore it is possible to use them for financing directly this interventions on
public buildings. However, the recent financial limitations on municipalities expenditure
decreased the possible amount of capital that can be invested and the amount that can be
borrowed. Moreover, it sometimes happens for a municipality not be able to finance a
project directly because it doesn‟t have the access to its own financial savings for specific
controls or budgetary law limitation (Mayors in Action, 2015).
- Community financial initiatives; the public administration or a relevant association can
raise funds through various sources, for example local shares offers for projects. In this
case, a portion of the profits coming from the projects goes in a community fund that
will finance the low carbon building intervention.
- Leasing; it finances the use of the services or the necessary equipment without buying it.
This is a particularly suitable method in case of energy efficiency projects, for example
generating plant, especially on movable equipment.
- Vendor finance; it involves the major suppliers of equipment, such as Philips or Siemens,
that use the financing resources to offer “point of sale” financing for the equipment.
- Regional or national budget transfers; opportunity basis contributions that are part of a
strategy at an higher level.
- EU structural funds; European Structural and Investment Funds and Cohesion policy
Funds Programme (2014-2020) have a significant role in financing the intervention of
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refurbishment and construction of buildings in European countries. In the Regional
Development Funds, part of the money are directed towards low carbon economy.
- EU Funding Programmes; there are programmes such as Horizon 2020 that are funding
opportunities for the same purpose. These funds help to increase the performance of the
existing building stock and provide the capability for municipalities to plan and
implement their energy efficiency strategy.
- PPP; Public Private Partnerships is another way to help municipalities achieve their goals.
Other "non-public" methods for financing the energy efficient projects of the public buildings
could be project bonds, bank loans, mini-bonds, instalment payments, project financing and
equity crowd funding (Portale 4 E for Public Administration)
Indeed, this result of this study indicates that the local governments, whether they are cities,
provinces, regions, states, usually are the early issuers of the green bonds in their own domestic
markets, and after their first issuance they continue to issue them regularly. The amount they
invest is based on their domestic economy and financial policies, and there is not a specific trend
or rule behind the amount of money to invest. Nevertheless, this dedication is a proof of their
awareness and commitment to achieve the goals set by their country about climate and energy
efficiency.
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4. Local Green Bond Application: Case Studies
In the previous chapters, there were many examples of how the regions or local governments
had the possibilities to actively make a difference in the market and help in paving the way to a
more green future. The literature reviews and analysing the successful projects that carried out in
other countries draw inspiration from varied sources and builds upon the work of many scholars,
governmental and financial institution. Therefore, this chapter is going through „state-of-the-art‟
in the successful project occurred in France, Sweden and Norway, as the major examples of the
best practice. It will be helpful to understand their methodologies, common factors and keys of
their success to be able to go beyond the political and financial barriers in Italy.
The bulk of green municipal bond issuance continues to be in the United States and Europe for
financing or refinancing the green projects. As pointed earlier, the first green municipal bond was
issued in the United States by the State of Massachusetts in June 2013 and its proceeds were
earmarked to finance the accelerated energy program of the state. This programme aimed to
reduce energy consumption by 20 to 25 per cent at almost 700 sites across the state (Daigneau,
2013). Later, in July 2014 the first green bond with a century maturity and a 350 million USD
taxable fixed-rate issued by the District of Columbia Water and Sewer Authority (DC Water). It
was also the first U.S. green bond with an independent second party opinion. They became
another active participant in the green bond market over the past few years. (Cherney, 2014).
European cities and municipalities have also been issuing green bonds during the past years.
After Ile-de-France green bond issuance in 2012 and Gothenburg green bond in 2013, there is a
steady growth in green municipal bonds in Europe. Moreover, each year new entrants join the
green bond markets and it can see many repeat issuances by the existing local governments
already in the market. Although going through the United States green bonds provides important
insights, our case studies remain narrow in focus dealing only with European cities.
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4.1. France: Ile de France
Green and sustainability bond issued by Ile de France region exhibits very well the the long
term commitment of the local government in financing the green projects that promote
sustainable development programs. Half of the debt of region had green origin in 2018, which
highlights the outstanding Paris financial center position regard to issuance of green bonds and
how much the regional developments are in line with SDGs by the United Nations. In 2016, the
region also won the award for “First Municipal Green Bond” by the Climate Bond Initiative
organization (CBI). Also in 2016, the region won two other awards in September by the
GlobalCapital, “Most Impressive Municipal/Local Authority Green/ SRI Bond Issuer” and
“Public Sector Green Bond Deal of the Year”. Before proceeding to analyse more the green
bonds issued by Ile de France, it will be necessary to know better this region.
Ile de France often called Paris region as the city of Paris is located in it. It covers 12,012 km2 or
two per cent of the national territory and is considered the most populated of the 18 regions of
France. The region is made up of eight administrative departments of Paris, Essonne, Hauts de
Seine, Seine saint Denis, Seine et Marne, Val de Marne, Val d‟Oise and Yvelines. It has official
estimated population of 12,213,364 as of January 2019 which contains 18.2% of the overall
population of France . Moreover, it has 30% of France GDP and largest stock of commercial
real estate in Europe (Paris Region, 2019).
Figure 21. Key figures of Ile de France (Paris Region, 2019)
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Ile de France region has a budget of 5 billion Euro that makes it a leading local authority in
France. the highest amongst French regions. Approximately half of this budget is devoted to
long-term investments that are mainly the projects of promoting regional dynamism and
attractiveness. At the same time, Ile de France plays an important role in promoting the
sustainable development initiatives on the French territory and also in bigger scale Europe. It is
the expert authority to set the strategic guidelines for local and public actions on the territory
such as territorial development, transportation, economic development, research and
innovation, climate and energy, biodiversity, waste management. The Region has also the aim of
integrating the sustainable development and social responsibility in all its activities throughout
the different fields. As the result, the environmental factors are at the heart of regional plans and
policies, with a huge ambitious and comprehensive roadmap with the focus on territories. This
roadmap cares about all the regional policies as followed;
- Including the environmental bonus in the social housing subsidies for achieving to the
most efficient programs, using eco-materials and having the target of positive energy
building.
- Reducing the emissions of GHG in transportation, mobility, construction and real estate
sector as environmental objectives.
- Defining the new economic development strategy in regional scale including also
innovation and internalisation. This new strategy has to include the environmental issues
to fulfil a dual objective of detecting the potential economic activities, employment and
innovation and at the same time improving the wellbeing of the inhabitants.
- Organizing the regional environmental policy as the territorial policy to find out new
environmental dynamics for including into the projects of future development in Ile de
France communities.
- Promoting the key research networks with the target of the main environmental issues
such as resources, climate and energy.
- Defining the high environmental requirements for different projects. The various plans
over the last two years were the best examples such as the "Change of air" projects since
2016, the "Green" and "Bike" plans in 2017, and in 2018 the implementation of a new
Energy and Climate Strategy with the focus in innovation and the development of
renewable energies sector that improve also the energy efficiency in real estate sector.
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- Supporting the organic farming and promoting the direct producer to consumer business
in Region Ile de France for benefit of communities.
It‟s obvious why Ile de France region was chosen as first case study as it has been a frequent and
regular issuer in the green bond market since 2012. The region has an outstanding credit quality
of French National State rating that allows it to be involved in the long term on its territory
under the best conditions. Ile de France currently has rating of Aa2 and AA with a stable
standpoint by Moody‟s and Fitch standards respectively (AA by standard & Poor‟s). Following
timeline exhibits very well the history of green bonds issuance in this region by French public
local authority;
Figure 22. History of green and sustainability bonds by the region (Region Ile de France, 2017)
Prudential weights of these bonds are 0% solvency and their liquidity coverage ratio (LCR) is 2A.
These bonds are issued in Euro and they have the long maturity of twelve years. The other
interesting thing to highlight is the use of proceeds of these green bonds, which defined in seven
categories of projects invested by the region; building and facilities for education and leisure,
public transport and sustainable transportation, renewable energy and energy efficiency,
biodiversity, social initiatives aimed at assisting vulnerable population groups, social housing,
economic and socially inclusive development. Many of these seven categories indirectly integrate
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in real estate sector such as energy efficiency. In following figure these seven categories are
exhibited based on the 2017 green and sustainability bond.
Figure 23. 7 categories of the use of proceed in Ile de France green and sustainability bonds (Region Ile de France, 2017)
It has been demonstrated that the second category in which the proceeds is using is construction
and real estate sector as the major area of interest for us. Since construction, renovation and
retrofitting of the buildings in accordance with a sustainable development approach will contribute
to protecting the environment. Among these public projects there are construction of two new
high school, four new site for higher education, reconstructing of two high schools and one
project of new construction, renovation and development of the a sport complex. Also projects
aimed at constructing and renovating of 61 new housing, 144 new student housing units and 50
new social housing units. Moreover, in biodiversity projects included the restoration work of
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southern park in the region that could be considered among the built environment projects. All
these projects with environmental and social factors highlight the importance of green bonds as a
new financial instrument for local government public buildings. The region publishes the report
every year on the issue‟s anniversary date to illustrate the fulfilment of commitments made to each
transaction in terms of allocation of funds. Each project responds to different parts of the
Sustainable Development Goals of United Nations mentioned earlier but the ones related to built
environment have common values and exhibited below.
Figure 24. Reading just built environmental projects from the point of view of UN SDGs (Region Ile de France, 2017)
Ile de France is the interesting case studies in which the local government take the first initiative
for making a portfolio of green projects then in collaboration with the financial corporations has
been structured and launched the green bonds and continues issuing them. Dedicating the 34.4
per cent of green bond proceeds to Construction and real estate sector in different projects of
optimising the building impacts, air quality and acoustics for better energy efficiency, better
maintenance plans and waste management. Later, the framework for each project was published
for instance subsidy or direct contracting work in higher education buildings, direct contracting
work for sport complex building and procurement contracts for contracting authority in high
school buildings.
In the region green bond report, the progress of each projects explained very well in details that
could increase the interest of investors for being part of future projects and alt the same time
attracts new investors.
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4.2. Sweden: Gothenburg
The Nordic countries are considered between the leaders of green bonds and have recorded
many global and European firsts in innovative financial tools. The Nordic model of governance
and public service efforts are all about sustainability and social cohesion. On the environmental
side, the Swedish Association of the local authorities and region issued a position paper outlining
their priorities for energy and climate policy in 2009. Their focus on sustainability is extensive.
Along the same line, in 2017 Swedish pension fund AP7 sold all its investment in six energy
companies it said violate the Paris climate agreement. More broadly, pension funds in Sweden
have largely integrated the sustainability agenda in their investment strategies. Nowadays most of
them are focusing on engagement and supporting the transition to a low carbon economy
(Filkova, 2018). Therefore, it‟s clear how much the governmental actions can lead the whole
society in more sustainable direction.
Nordic issuers embraced the green bond market when it was still in its early stages. As it was
exhibited earlier, Sweden is the eighth largest source of labelled green bond issuance in the world.
Sweden issued the first corporate green bond and the first City bond of 57 million Euro in
October 2013. The city of Gothenburg made history when it became the first city issuer globally
and has become a poster child issuer for C40 cities engaged in sustainable urban development
(C40, 2018). In the following picture the green points exhibit the cities with green action plans
that highlights active role of Nordic countries.
Gothenburg is the second largest city in Sweden and it is considered as one of the largest cities in
all of the Nordic countries although we should consider and compare just with Nordic countries.
The city has a population of 581,822 while the metropolitan area has a population that exceeds 1
million residents. The city has the roots stretching back to the days of heavy industry, but it‟s
visible how it has successfully transitioned from the industrial heartland to the global climate
leader. The city issued green bonds to fund the green projects and used more than 75 per cent of
proceeds to fund climate change projects with the aim of promoting the transition to low-carbon
and climate-resilient growth. The first green bond issuance was equal to 500 million SEK, later the
city made a second foray into green bonds market in 2014 with 1.8 billion SEK issuance, a third
issuance for 1 billion SEK in 2015, and a fourth issuance for 1 billion SEK in 2016 and so on.
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Figure 25. 73 committed cities to 2020 horizon, 8 cities between them have climate action plans aligned with Paris agreement (C40, 2018)
The city of Gothenburg sets high environmental and climate goals in its action plan, which leads
the city to let its finance be part of the solution as a powerful way to mobilize capital for climate
change related investments. There was also an additional benefit of the green bond program that
highlighted by the municipality. It was in improving collaboration between the city‟s finance and
environmental departments, they work much more closely and effectively together nowadays as a
result of the green bond program.
The city of Gothenburg uses its green bonds proceed for financing projects mainly with the goals
as followed;
- Climate change mitigation projects, in which investments dedicate into the clean and low-
carbon technologies such as energy efficiency and renewable energy programs and projects
including zero-emission electric cars and near zero energy buildings besides biogas projects.
- Climate change adoption such as investments in climate-resilient growth for the city and its
infrastructure and existing built environment.
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- Aggregation of small green projects also has up to a maximum 20 per cent of green bond
proceeds, they are mainly in line with sustainability instead of just pointing the climate
change.
Moreover, there is an annual letter sending to investors for providing thorough insights regard
prioritized areas and also help them to follow the development in the projects. There is also the
list of projects financed and the other selected projects to finance later. Also they make this letter
public on the city‟s website for having more transparency and at the same time informing other
inhabitants in Gothenburg regard to positive impact of green bonds (City of Gothenburg, 2015).
Nowadays Swedish local government deals with over 2.3 bn euro green bonds that account for
41% of European local government green bond issuance. This is the reason Sweden is in the
second rank after France in local government green bond issuance and also our second case study
for having better idea about local government approach in green bonds market and using their
proceeds in real estate and construction sectors.
The Swedish local government issuers have international green bonds quoted in euro on the
London Stock Exchange‟s Green Bond list. It shows how they used green bonds for having
diverse and broader investors to fund the local projects in Sweden. However, there are local
differences as in Sweden issuers rarely issue in anything other than local currency so SEK bonds
account for 45% of the outstanding Nordics total. after the SEK bonds, Euro denominated green
bonds with 28% of outstanding amount among Nordic issuers. Moreover, The volume weighted
average maturity time of Swedish bonds is 4.5 years, whereas the most common maturity time are
in the 3-5 year range.
Diversity in the use of proceeds has increased over time, in line with the global trend. It was
interesting for us how much Swedish government dedicated funding to real estate sector. In 2013
when the city of Gothenburg issued its first green muni bond over 75% of raised funds were
allocated to low carbon buildings and transport.
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Figure 26. 6 categories of the use of proceed in muni green bonds of Gothenburg (City of Gothenburg, 2017)
This local government actions led private real estate companies using the new financial tool of
green bonds for investing in their real estate and construction sectors. For instance, Vasakronan
private real estate company as the first corporate and the first real estate company entered to green
bond market in 2013. Nowadays it is the second largest green bond issuer in Sweden and had
issued 23 bonds with total amount of 1.2 bn euro for financing low carbon buildings till 2018.
Later, SFF as a funding platform for five other property companies issued 21 green bonds and
raised over 864 million euro. The green bond issuance in real estate sector trends followed by
other real estate companies as well, which moved forward Sweden to the third spot in the low
carbon and energy efficient buildings in the world. All and all, Swedish real estate companies have
helped to push the best practice with considering the high standards of LEED certification which
provides a benchmark for other issuers.
The Nordic Model is based on decentralisation and cooperation between regions and
municipalities to deliver an extremely wide range of services to the people they serve. As a result
of this governance model, local and regional governments have a lot of fiscal responsibility. They
are in charge of many services such as health care, education, housing and also energy generation
and heating are managed by local governments but may be delivered by municipally owned
companies.
A high volume of public sector issuance is not surprising as help the local governments to fund
their social and green projects. Green bonds from issuers in the following categories account for
almost half the Nordic green bond issuance:
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- Local government – municipalities, cities, counties, regions.
- Government-backed entities – companies which are majority owned by municipalities
and/or the state, they usually consider as municipally owned companies (MOCs) and
state-owned enterprises (SOEs).
- Local Government Funding Agencies (LGFAs), three of the public sector financing
institutions are owned by member municipalities, one is state-owned.
However, this study showed that Sweden has a very active real estate sector both in public and
private sector so it‟s not surprising to see a lot of Swedish green bond in real estate sector. There
are also green bonds issued by specialised real estate companies in Sweden in charge of public
buildings such as schools and student facilities. Specialfastigheter is one of them in charge of
courts, police stations and institutional care facilities and the other one is Hemsö in charge of
primarily education properties and healthcare facilities. What has been achieved in Sweden is really
impressive and highlights the active role of local government in the provision of public services .
The path of Gothenburg has scaled up and expanded across the Sweden by other municipalities
joining the stream. Municipality of Stockholm issued its first green muni bond in May 2014 and
later in the October of the same year Örebro Kommun issued it. Then other cities became aware
of the benefits of green financial tool and issued their green muni bonds such as cities of Lunds,
Malmö, Norrköping, Västerås and so on.
4.3. Norway: Oslo
We chose Norway for the last case study as Norwegian took the first step in 2010 for issuing
the green bonds by KBN Kommunalbanken, state-owned municipality funding agency, but later
has seen muted green bond issuance till the recent years. The popular bond in Norwegian market
was local vanilla bond which has been issued by mortgage companies. Nowadays municipalities
and cities have an active role in issuing green bond. Municipalities are often repeat issuers but just
in the domestic market, though many of them only issue green bonds in a small amount. The
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biggest green bond issuer in Norway is the city of Oslo, which has issued one green bond but has
another 50 bonds outstanding. The Norwegian green bond issuers are multiple companies and
particularly government-backed entity (GBE) which includes all municipally owned companies
and state-owned enterprises. Therefore we can consider also the local government funding agency
(LGFA) such as KBN as GBE issuers. Simply based on the volume of bond issuance from the all
the public sector, there is high potential to convert vanilla bonds issuance at least part of that into
green bonds, backed by suitable assets. Like the other case studies before focusing on green bonds
issued by Oslo, it could be useful to have a better clue about the city of Oslo.
Oslo is the capital and most populated city of Norway. It had a population of 673,469 as of the
end of 2018. The city of Oslo has become the latest city to tap the green bond market, with its
first 1.5 billion SEK issue. The bond has a maturity of 9 years with a coupon of 2.35%, is also the
first from a municipal to be listed on the Oslo Børs. The bond proceed used to fund eligible
projects in four key areas based on definition of Finance department of Oslo;
- Energy efficiency and sustainable housing projects
- Water management and water cleaning facilities
- Environmental transportation services
- Environmental projects (including reducing the amount of vehicles in the city centre)
The first one which is more related to built environment is aligned with the city of Oslo‟s goal to
reduce energy consumption in building within 2020. The reduction shall be achieved by using
national and local instruments. For making the new constructions in a line with the city‟s goals,
new schools, kindergartens and nursing homes shall be built according to national standards for
energy efficiency. Also the use of fossil fuel sources for heating purposes in commercial buildings
and private houses shall be completely phased out by 2020 and replaced by alternative sources of
energy. The City of Oslo will publish investor letters in relation to each specific green bond
issuance to provide information on the projects financed through the issuance and the expected
climate effects. To enable investors to follow the development and provide insight to prioritized
areas, the City also annually releases publicly available information to fulfil green bond principles.
The Department of Environmental Affairs, which is the City‟s competent unit on environmental
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matters, will be responsible for the continuous reporting on the climate- and energy strategy to the
City Council (City of Oslo, 2015).
Figure 27. 4 categories of the use of proceed in muni green bonds of Oslo (Based on the data from Oslo Kommune)
Environmental research firm Cicero has provided a second opinion on Oslo's green bond
framework, awarding it as "dark green" classification. SEB, Danske Bank, Nordea, Swedbank and
DNB were joint bookrunners on the deal (Filkova, 2018).
4.4. The Key Factors
All these activities by green bonds promote and enhance the city finances, in which they have
been issued. The green bonds spread the financial risks so that the city has a solid financial base
that frees resources that can be used in activities that benefit all of citizens in a city. On the
other hand, the projects financed by green bonds aim to contribute and help to cities reaching
their environmental targets by increasing the number of investors and at the same time broaden
diversity. The most obvious finding to emerge from these case studies is local government‟s role
in promoting this new financial tool of green bond in each country and encouraging financial
and non-financial corporates in joining to the green bond market. This analysis also pointed out
that the local governments should have an adequate economic situation to be able of issuing
green debt as one of the important pillars of green bonds is financial reliability. This is the
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reason the early pioneers of local government issuers are from big European cities and they all
have very good rating. Although small municipalities are joining to this green stream by
removing little by little financial obstacles especially in Nordic countries. For instance, the city of
Gothenburg tries to help other cities, municipalities and regions to the largest extent possible by
being transparent and sharing information and knowledge about its green bond market issuance
to provide a blueprint for others.
Issuer Ile de France region City of Gothenburg City of Oslo
Population 12,213,364 (2019) 581,822 (2019) 673,469 (2019)
GDP per Capita 53,617 Euro 64,744 Euro 103,730 Euro
Issue date March 2012 October 2013 December 2015
Maturity 12 years 6 years 9 years
Size 350 million Euro 500 million SEK
(57 million Euro)
1.5 billion SEK
(158 million Euro)
Annual coupon 3.625% 2.915% 2.35 %
Credit rating AA/ Aa2 AAA/ Aaa
AAA/ Aaa
Issuer type Municipal Municipal Municipal
Use of proceeds Building and facilities for
education and leisure, public
transport and sustainable
transportation, renewable
energy and energy
efficiency, biodiversity,
social initiatives aimed at
assisting vulnerable
population groups, social
housing, economic and
socially inclusive
development
Funding projects for climate
change mitigation, adaptation
and sustainability initiatives
such as sustainable
transportation, smart grids,
biofuel, water management,
renewable energy, and waste
management, energy
efficiency and sustainable
housing projects
Energy efficiency and
sustainable housing projects,
water management and water
cleaning facilities,
environmental transportation
services, and environmental
projects (including reducing
the amount of vehicles in the
city centre)
Percentage of proceed used in real estate and construction sector
34.4% 55% 25%
Reporting Annual Annual Annual
Independent second opinion provider
None till 2014 (Vigeo) Yes (Cicero) Yes (Cicero)
Table 13. Comparison between three regional and municipal bonds in different countries
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Therefore, analysing the key factors of these case studies and comparing them could be used to
provide a framework for our best practice in Italian local government especially in the way of
using the green bond proceeds. Moreover this study provide a benchmark of first amount
issuance, coupon rate, maturity rate, the popular green bond ratings and independent second
opinion provider in the market. It seems so common for having long term green bonds to cover
the whole necessary time to complete the big scale projects. It was also pointed that the amount
of the first green bond issuance with respect to repeating it in coming year is smaller, it can help
to municipalities with less risk first create a framework and then use it for next issuances.
There are so many big cities where can be a start point in Italy but we should study better their
financial tools and situation. This could lead to offer the world-class solutions in the fields of
sustainable urban development and green buildings, energy efficiency, waste and water
management especially in developing and emerging Italian cities such as Milan, Turin or
Florence.
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5. Financial Tools of Municipalities in Italy
Italian local administrations faced a significant growth in their financial market over the last
two decades before the crisis hit, thanks to a new regulation, introduced in the mid-90s, that
increased the autonomy and financial possibilities available for regions, provinces and cities.
The bond market for local governments started in 1996 with 6 pilot issuances for a total of 227
million €, that increased up to 150-200 issues annually for a value of 5-7 billion €, and touching 25
billion € in 2014. In those years 85 sub-sovereign governments had a credit rating given by the
most important agencies.
As said before, the municipal bond market is widely diffused in the US but also Europe has a few
example of efficient usage of this financial method. The Italian system is a constitutional one, so it
differs from the US that has a federal model: that‟s the main reason why the market findings of
the US might not have the same applicability in the Italian context.
Regarding the green bond market, Italy has been present since 2014, when Hera issued its first
green bond for projects related to renewable energy. Since then, many Italian entities and
companies entered in the market, reaching a total volume of 5,1 billion at the beginning of 2018,
conquering a position for Italy in the top 15 of major issuers.
Hence, the literature research in this chapter is focused on the better understanding of the main
financial methods used in Italy, in order to adapt the existing obligation to the green purpose at a
sub-sovereign level, mainly if issued by a local government.
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5.1. Institutional Framework
The role of the local authorities in the last decades is deeply changed. Originally, the authorities
of higher grade such as Region and the UE had the task to plan the investments on the territory,
but thanks to the law 142/1990 and Bassanini Law of 1997, this responsibility shifted to a lower
institutional level.
The constitutional law n. 3/2001, establishes that the Italian Republic is divided in four level sub-
regional governments: municipalities, provinces, metropolitan cities, regions (actually, the law n.
56/2014 started the abolition process of the provinces, making them a second-level institution).
Anyway, all of the cited governments are autonomous entities with their own regulations, powers
and functions, following the principles of the Constitution. The law introduced the fiscal
federalism, on one hand giving to the State the powers to act exclusively in the fields of
international relations, national security, foreign economy, monetary policy, justice. On the other
hand, the local government can act in the areas such as public works, resources, transportation
(Costituzione Italiana, 3/2001). From then, not only the administrative functions, but also the
programmatic ones, are in the hands of local administrators, who are enabled to use different
instruments to carry out the endogenous economic development plans. This choice is in
accordance with the principle according to the public functions should be managed by those who
are the nearest to the people, to grant the best services. (Costituzione Italiana, section 118). In
addition, the article 119 of the Italian Constitution establishes that the local institutions can go
into debt solely for financing an investment. This rule was already part of the local entities‟ set of
laws and precludes, excluding the possibility to use the proceeds to finance the current expenses.
However, the opportunities to obtain resources to invest, have to be seen in accordance with the
metamorphosis of the financial structure over the years. In response to the crisis there was a
structural change in the local financing system.
The introduction of the internal stability pact, that then became the law n. 243/2012, establishes
the respect of the balanced budget by the local entities, who collaborate for the reaching of the
government objectives underwritten in the Stability and Growth Pact, made by the 28 state
members of the EU, to promote and maintain the economic and monetary stability of the
Eurozone (Maastricht Treaty of 1992).
The articles from 9 to 12, dictate the dispositions to ensure the balance of the budget of regions
and municipalities, that contribute to the sustainability of the public debt, and the impossibility for
them to use the budget surpluses to complete public works or re-launch investments. Moreover,
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the recourse to debt by municipalities was allowed just in the limits of the reimbursed equity
shares of the previous year.
In the Stability law of 2016, the repayment plan was kept, but the quantitative limit was broken
down between entities with a surplus and not: in the first case they can go into debt up to their
balance surplus, in the second case respect to the total balance equilibrium of the entities of the
same region (Camera dei Deputati, 2018).
The same law, allowed wider possibilities on the investment front, but blocked the fiscal
autonomy of the local entities to limit the increasing local and regional taxes.
Lately, the circular n. 25/2018, as a result of the sentence of the Constitutional Court, the
administrative surplus is now available for the local entity that made it and it cannot be forcely
taken for the balance of the budget. This choice, after 20 years of impediment, will finally let the
virtuous municipalities use their own available resources, made by the administrative surplus, to
finance their local investments.
5.2. The Available Financial Resources for Municipalities
The public finance instruments available for the local entities are many, and driven by legal,
economic and procedural characteristics, from which the credit risk and worthiness of the entity is
made clear.
The main sources of finance are taxation, transfers from higher level government entities and
revenues from user charges, that account for 87% of the total revenues. Regarding the expenses,
Regions spend about the 65% of the resources, Provinces 5% and municipalities 30% ( Croci,
Colelli, 2017), and just 9.1% is allocated to investment, slightly under the percentage registered in
the OECD states, equal to 11% ( Croci, Colelli, 2017).
Looking at the municipal dimension, the main financial resource is the taxation, that just in 2016
was more than 40% of the total entries (Istat, 2016). The revenues come from property tax and
the municipal service tax: there are IMU (imposta municipale propria), taxes for permission to
built, tax of waste (TARI), TASI (tassa sui servizi indivisibili), now eliminated, and IRPEF. Other
than these, taxation is applicable on the use of the public areas and from public advertisement.
Other than this, the municipalities can benefit from Fondi di Solidarietà Comunale, coming from
the region or the national government, that cover a 20% of the total entries (Istat, 2016). Actually,
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between 2010 and 2017 there was an increase in the fiscal responsibility of the public local
administration, reducing the transfers from the State.
Local government can also count on non-tax revenues obtained through charges for public
services, rents, investment yields, owned firms (Pinna, 2014), and from the European funds.
In 2014, the European Commission agreed with the member States upon the “Partnership
Agreement”, strategic plans that describe the objectives and priorities of investment of each State,
in order to define the usage of the funding regarding the European structural and investment fund
(ESIF) for the period 2014-2020.
The ESI fund, are the major instrument of the investment policy of the European Union, with a
budget of €454 billion and they include 4 funds divided for thematic objective: European
Agricultural Fund for Rural Development (EAFRD), European Maritime & Fisheries Fund
(EMFF), European Regional Development Fund (ERDF), European Social Fund (ESF).
Italy obtained through operational programme at national and regional level (PON, POR) around
€ 41 billion that was divided as shown below;
Figure 28. Partnership Agreement 2014-2020 in Italy (European Network for rural development)
Between these funds allocated in the regional operational programme, there are financing that
might be non-refundable and others that include a reimbursement of the contribution such as
Community financial instruments (CFI). In Italy, where local PA undergo limitations in
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expenditure and investments, the availability of those CFI allow a more efficient management of
the resources based on the type of investment: the “cold works” , that don‟t have a pay back and
don‟t create revenues, can be funded with non-refundable contributions, the “hot works”, the
ones that generate profits, can be financed through CFI.
Many other programmes of financing and sustainment for development might represent a support
to the development of local projects, like LIFE, URBACT III, Horizon 2020 (Croci et al, 2017)
Also banks might give a hand, thought credit lines, for example the European Bank of
Investments that recently launched the Urban Agenda that touch topics like:
- direct investments on a specific program with a cost of over € 100 million
- Loans directed to municipalities to finance different projects in many sectors and with a
3-5 years period
- Loans to smaller municipalities through an intermediary
- Investments with a infrastructural fund
- Support and consulting through many initiatives and instruments to create technical
capabilities, recruiting of experts, help in program structuration.
Hence, the Bank offers credit lines to the national Credit Institutions when the projects are
between € 5-25 million, but invest directly in projects of over € 25 million.
In the case of the Framework loans, the ones directed to the municipalities. the bigger and
smaller ones can benefit from the economic facilitations, and the allocation is entrusted to the
PA that manage them in the context of the local strategic plan.
In all the cases the Banks doesn‟t cover the entire costs of the projects, but a part of the equity
must be given by the municipalities.
All of the instruments presented are cover just a portion of the financial resources necessary to
finance a sustainable urban development, taking in consideration the limits of the Patto di
Stabilità and Balance laws.
The next paragraph will cover the topic of the municipal green bond, an instrument used in
Europe and almost unknown by the Italian PA, but that has its roots in an existing instrument
already present in the national context.
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5.3. The Municipal Obligation in Italy
In Italy, a debt security can be issued by Regions, Provinces, Municipalities or union of
municipalities, “città metropolitane”, mountain communities, associations of local authorities. The
issuance of debt securities by a local authority was firstly introduced by the art. 32, L.142/90, as
part of the reform for the local autonomy, regarding only Municipalities and Provinces. Then, the
municipal bonds (BOC) were further regulated by the articles 35 and 37 of the law 23/12/94 n.
724 (“Misure di razionalizzazione della finanza pubblica”). This financial instrument was a big
revolution at the time, and still represent a possibility for the future green economy. It is a bearer
bond, the allow the local entity to ask loans to small investors (savers) and on the market. Besides
the municipal bonds, there is the existence also of BOP and BOR, respectively ordinary bonds for
provinces and for regions.
The law establishes that the resources obtained by the BOCs must be spent to finance specific
projects, and they cannot be used to cover the current expenses. Moreover, there are a series of
conditions for the issuance of the BOC, that are linked to the economic stability of the different
municipalities, with specific characteristics and allowed options, that are a sort of guarantee from
the investor point of view.
Indeed, local entities that are in a situation of distress or structural deficit, cannot issue bonds,
neither if in association with other entities. In addition, the regions must not have paid off any
administration deficit of the local entities, there should not be any administration deficit in the last
2 years and the entity must put in the estimated balance sheet the emission of the bond. Even if
the Constitution doesn‟t allow the central government to guarantee any local government debt, it
dedicates special funds to the local authorities in distress. Other conditions are linked to the
characteristics of the bond itself. It cannot have a maturity of less than 5 years, but it is allowed
the conversion of the obligation, directly or with warrant, in shares of companies that are property
of the local entity that issued it in first place.
The bond must be placed au pair, and pay an interested with coupons that may be annual, half-
yearly or quarterly, at a fixed or variable rate. The new bond enjoy the preferential tax treatment,
for which the interest tax amount to 12.5%. Moreover, the Bank of Italy have to give its approval
for the emission and those bonds can be listed on the regular markets. The characteristics of a
BOC - Buono ordinario Comunale are summarized in Figure 29.
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Figure 29. Municipal bond (Borsa Italiana, 2015)
Regions and municipalities are the major issuers of this debt securities, in particular the “comuni
capoluogo” or capital municipalities have issued the 30% of the ordinary bonds between 2004 and
2014, and regions about the 41%. Provinces accounts for just a little more than 10% of the
market. (Croci et al., 2017) .
Figure 30. Issued bonds by different entities (Croci et al., 2017)
Actually, the emission of municipal bond had a steady growth reaching a pick in 2005 and 2006,
but progressively decreased to € 40 million in 2014 due to the sovereign financial crisis. Until
2011, 198 bonds were issued, of which 94 just between 2004 and 2006.
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Figure 31. Issued muni-bonds from 1998 to 2014 in Italy ( Pinna, 2014 )
The main causes of this the decrease started in 2007, are detectable in the complexity of the
regulations, that reduced the transparency toward investors, and in the missing economic
advantage compared to other form of indebtedness. In addition, the stability law of 2012, imposed
that the debt was usable just in the limits of the shares of the capital reimbursed in the previous
exercise (year).
Anyway, looking at the total usage of this instrument, it‟s notable how it has been a fundamental
role especially for the capital municipalities.
In the end, even if the economic difficulties and the balance conditions made many municipalities
take the distance from the emission of bonds, it doesn‟t undermine the possibility to use the green
bond as an instrument for virtuous municipalities in the Italian context.
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5.4. Green Bond in Italy Up to Now
Even if municipalities apparently have not taken part in first person to the green bond world,
many other private entities and public companies in Italy used this instrument to finance their
projects, with what seems to be a successful outcome.
Between 2014 and the first quarter of 2018, Italy issued 5.1 billion of green bond, by 9 issuers, 12
deals and appears in the top 15 issuers in the global ranking.
In 2007, Unicredit took part as Lead Manager to the emission of the first green bond done by
BEI, 7 years after it entered in the „Climate Bonds Partner‟ programme.
In 2010, there has been the first example on GB with an outcome in Italy, American SunPower
issued a green bond for a solar project, finalized to the creation of a photovoltaic park in Montalto
di Castro, it had a value of 195 million euro.
Later, in 2014 the multi-utility company Hera was the first one to issue a corporate green bond
(500 million euro). The booking for subscriptions where three times the amount and the proceed
were allocated to finance or refinance 26 sustainable projects with the following objectives: fight
against the climate change, improve the air quality and the water, management of the waste. It has
a 10 years maturity, a rating of BBB by Standard & Poor‟s and Baa1 by Moody‟s and it has been
listed in Luxembourg Stock Exchange.
The same year, Innovatec (ESCo) issued a bond for € 15 million, with the aims to finance energy
efficiency, but no second opinion or report have been published since then.
Enna Energia followed with a not certified mini-bond of 3.2 million € (Borsa Italiana, 2014) and
later Consorzio Viveracqua had its first issuance of an hydrobond of a value of 150 million €.
Viveracqua is an original case: it is the first case of cartolarization of mini-bond in Italy, corporate
bonds issued by a not listed company. The “consorzio”, is an association of 8 public managers of
the water service, and the programme established the issuance of 8 mini bond for the
improvement of the water infrastructures with 728 interventions, amounting for € 300 million, in
Belluno, Padova, Venezia e Vicenza. The bonds are listed in the segment ExtraMOT PRO of
Borsa Italiana and they have a maturity of 20 years. The bonds have been rated by an Italian
agency CRIF, with a “unsolicited” rating, meaning free of charge, based on the information
available.
Due to the success of the project, it was proposed again the following year, this time with 14
participants and a value of 160 million euro meant for the cities of Belluno, Rovigo, Verona and
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Treviso . BEI was primary subscriber in both cases. Veneto Sviluppo, finance corporate of the
Veneto region, guarantee up to 6 million EUR.
The success of this bond is due to the cover of the risk thanks to Veneto Sviluppo, avoiding
asking mortgage collateral to the participants of the Consorzio or the local entities, and the
reaching of the amount necessary to access the EU community resources.
In 2015, the World Bank issued a Green Growth Bond for the not institutional Italian investors
(retail investors), reaching 83.4 million USD. In the same period, a not certified green project
bond of 150 million EUR, was issued for the extension works of the Metro 5 in Milan by a SPV in
which CdP contributes.
In 2016, Elaris Holding group and Foresight Group established a fund of 80 million EUR for
mini-bond emissions and Enel a bond of 1.25 billion for its activities in Mexico and South Africa.
Since 2016, Alperia, a South Tyrolean company specializing in renewable energy and district
heating, has placed 4 green bonds as part of the Programme Euro Medium Term Notes. . The
first three between June and December 2016 totalling € 375 million: one of 100 million EUR with
2024 maturity, 1.41% coupon, the second of 125 million EUR with 2025 maturity and 1.68%
coupon, the last one of 150 million EUR with a maturity of 2026 and a 2.5% coupon. The
placement was managed by Bnp Paribas and was meant for international institutional investors.
2017 saw the forth emission of 100 million NOK, 10 year duration, reserved for Norwegian
institutional investors and with Norwegian currency. The company will use the funds raised to
refinance a debt contracted to detect the control of hydroelectric plants in the region.
In 2017, Intesa San Paolo is the first Italian bank to access in the green bond market, issuing a €
500 million GB directed to renewable energy projects and green building.
The same year has seen the broad success for the inaugural green bond of Ferrovie dello Stato
Italiane (rating: S & P's BBB, Fitch BBB, both stable outlook). The issue is the first green bond
issued on the market by a railway operator to finance new trains for both regional and high-speed
transport. The issue has a nominal value of € 600 million and has a duration of 6 years.
The energy group IREN launched its first green bond in the same year, an amount of € 500
million, maturity of 10 years and BBB rating by Fitch. It is going to finance improvements in the
eco-friendly energy production, and the demand of 2.2 billion fourfold the offer with a great
diversification of the investor base.
Always in 2017, CAP Group, the public company that manages the integrated water service of the
Metropolitan City of Milan and in other municipalities of the provinces of Monza, Brianza, Pavia,
Varese, Como, issued a seven-year green bond to finance water service projects related to the
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circular economy. The new product will be listed on the regulated market in Ireland, has a value of
40 million euro at the rate of 1.98% with maturity date in 2024. The bond is reserved for
institutional investors and is managed by UniCredit as advisor.
In 2018, Terna issued its first green bond for € 750 million, meant for international investors. It
reached a demand that sevenfold the offer, the rating by S&P‟s is BBB+, “Baa1” by Moody‟s and
“BBB+” by Fitch, 5 years maturity. The proceeds are going to be used to finance the eligible green
projects of the company, following the Green Bond Principles of ICMA. It also asked a second
opinion by Virgo Eiris, to ensure the veracity of the aims. (Affari Italiani, 2018).
Cassa Depositi e Prestiti Spa (CDP) has launched in 2018 on the capital market the first
"Sustainability Bond" in Italy consistent with the guidelines issued by the International Capital
Markets Association. The collection, based on the new "Green, Social and Sustainability
Framework", will allow CDP to finance projects with an environmental and social impact in four
areas: Infrastructures and Urban Development, Education, SME Financing, Energy and the
Environment, contributing to the achievement of the United Nations Sustainable Development
Goals. The issue, intended for institutional investors, with a nominal value of € 500 million, at a
fixed rate, not subordinated and not backed by guarantees, follows the first social bond issued in
Italy by CDP in 2017.
The last green bond issued in Italy in 2019, is the one from a PMI, called P&A Public Lighting
S.p.A.. It is the first infrastructural bond, listed in Green & Social of ExtraMOT PRO of Borsa
Italiana, for a value of € 7 million meant to finance public lightening in the region of Campania.
Foresight is the main subscriber.
Therefore, 80% of the volume appears to be covers by private companies, 10% by financial
organizations and 12% by public entities (Rienergia, 2018). Italy appears to be primary interested
in funding green projects related to energy sector, energy efficiency and low emission buildings.
Hence, investing in the urban development in a eco-friendly way, requires a commitment also at a
local level, taking example from other countries like Sweden and France.
In 2017, in occasion of a meeting of the finance commission at the Camera, the Consob
commissary Anna Genovese talked about the possibility of issuing BTP (Buoni del Tesoro
Poliennali) green. Therefore, in a context in which the sovereign green bonds are increasing, like
France, Fiji Island and Nigeria, also Italy might take this new path.
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5.5. Opportunities and Limits for Local Green Bond
In the previous chapter it was illustrated how the green bonds can be an excellent instrument
to obtain funds to invest in a more sustainable projects. By now, in Italy the GB is not unknown,
but it is actually used and is having a very positive impact in the mind of companies.
This chapter showed the difficulties crossed by municipalities and local entities over the years,
especially after the financial crisis caused many limitations in their work and the use of bonds to
finance their investments.
The law regulating the financial possibilities of the local authorities had a progressive change in
accordance with the need of those difficult years and can be summarized with these few
following points. The provisions of Article 204 of Legislative Decree no. 267/2000 ( Testo
Unico degli Enti Locali, 2000 ) say that the local authority can take on new mortgages and access
other forms of financing only if the annual amount of the correlated interest, added to the
charges already in place, does not exceed a certain percentage of current revenue (relative to the
first three revenue titles in the statement of the penultimate year preceding the one in which it is
expected borrowing). This reference percentage was gradually reduced over the years, up to the
6% limit from 2014( Article 11-bis, paragraph 1, Legislative Decree June 28, 2013, n. 76 ). That
was a big limitation because was almost impossible to access new source of debt financing for the
small entities already put on their knees by the crisis.
More recently, on the other hand, in order to favour the recovery of local authority investments,
provisions have been envisaged to increase the capacity of indebtedness of local authorities,
raising the value of the ratio between the annual amount of interest and current expenses of the
institution from 6 to 8 per cent in 2014 (article 1, paragraph 735, law no. 147/2013) and, most
recently, from 8 to 10 per cent from the year 2015 (article 1, paragraph 539, Law No. 190/2014).
That‟s an excellent upgrade that allow the virtuous municipalities with a positive balance sheet
and the right cards to access new form of debt to finance their investments more easily.
Another aspect, as seen before, the theme of the rating is very present when talking about loans,
bonds and creditworthiness. The rating is a value that express the value given to a debtor based
on its capability to repay the capital and the interests related. The rating are express by specialized
societies like Moody‟s, Standard & Poor‟s, Fitch. The criteria upon which a value is given, are
related to the financial stability of the city, the institutional and economic context, how the PA
manage the public finance, the indebtedness level, the expenses of the city, the liabilities.
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All of these factors determine a score that express the risk, from AAA and BBB (Standard &
Poor‟s, Fitch) and Aaa and Baa (Moody‟s) in the investment section, and less than BBB or Baa in
the speculation.
Moody’s S&P Fitch Meaning
Investment
Grade
Aaa AAA AAA Prime
Aa1 AA+ AA+
High grade Aa2 AA AA
Aa3 AA- AA-
A1 A+ A+
Upper Medium Grade A2 A A
A3 A- A-
Baa1 BBB+ BBB+
Lower Medium Grade Baa2 BBB BBB
Baa3 BBB- BBB-
Junk
Ba1 BB + BB + Not investment Grade
Speculative Ba2 BB BB
Ba3 BB- BB-
B1 B+ B+
Highly speculative B2 B B
B3 B- B-
Caa1 CCC+ CCC+ Substantial risk, on
verge of default Caa2 CCC CCC
Caa3 CCC- CCC-
Ca1 CC+ CC+ Crucial risk, may have
defaulted in interest
payment
Ca2 CC CC
Ca3 CC- CC-
C C C In default or imminent
D D D General default
Table 14. Rating in comparison (World Economic Forum)
The rating level of the majority of the Italian municipalities results to be lower than the average
of the European municipalities that have successfully issued local green bond such as Goteborg
AA+.
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Having a positive rating has many advantages for the local entity that want to issue a bond: lower
interest to pay, higher possibilities to attract a diverse investor base, high credibility with the
central government, in the relation with credit institutions, and a better image marketing wise
(Cuzzola et al, 2015).
In the early Nineties, even if it was a new market, many local government obtained a rating and
the number grew over the years from 4 entities in 1996 to 85 in 2008 between cities, provinces
and regions (Pinna, 2014). Although, the financial crisis hit strongly and that was a huge drop in
the cities and provinces the majority of which lose their rating. Italy in 1996 had a AA/AA3
rating, started dropping in 2006 an hit its lowest in those last years with a BBB/Baa3, a barely
reliable investment grade.
Abruzzo, Region of STA Ba1
Basilicata, Region of STA Baa3
Bolzano, Autonomous Province of STA Baa1
Campania, Region of STA Ba2
Cassa del Trentino S.p.A STA Baa1
Lazio, Region of STA Ba2
Liguria, Region of STA Baa3
Lombardia, Region of STA Baa2
Milano, City of STA Baa3
MM S.p.A. STA Baa3
Molise, Region of STA Ba2
Piemonte, Region of STA Ba2
Puglia, Region of STA Baa3
Roma Capitale, Metropolitan City of STA Ba1
Sardegna, Autonomous Region of STA Baa3
Sicilia, Autonomous Region of STA Ba1
Trento, Autonomous Province of STA Baa1
Umbria, Region of STA Baa3
Valle d‟Aosta, Autonomous Region of STA Baa2
Veneto, Region of STA Baa3
Venice, City of, Region of STA Ba1
Table 15. Italian rating (Moody‟s, 2019)
The attribution of the rating are predominantly due to the PIL, the relation between interest
expenses and current resources. It‟s curious to see how many cities, have a different rating
compared to the national one. For example Bolzano and Trento, now rated Baa1, but A3 last year,
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are protected by the statutory independence, the fiscal position, balance flexibility, low
indebtedness grade.
On the other hand, Civitavecchia and Naples, have lower rating compared to the national one, due
to problems in the debt position, the economic context and the high risk.
That said, the stability law says that the city with an excess of balance, might be indebted for the
same amount of the surplus, and that can represent the maximum emission of a green bond.
Observing the Ifel documentation available online, it appears clear that a big percentage of the
local administrations in Italy investment in a potential green sector like, public housing of local
interest, water works, viability and transportation and energy, that .
Table 16. Italian loans to local entities 2017 - in million EUR for class of the entity and object of the loan (MEF, 2017)
Table 17. Italian loans to local entities 2017 - percentage for object of the loan (MEF, 2017)
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Moreover, a study made by Croci and Colelli of Bocconi University, analysed the potential market
of green bonds in Italy. Taking into account the average value of the net balance of each
Municipality, just the cities with more than 250.000 inhabitants might have the sufficient resources
to issue a green muni bond. They assess this value at 25 million Euro, in lines with the case of
success in other European cities that were analysed in the previous chapters. The case of the
municipalities between 100.000-250.000 inhabitants, the possibility of issuing a green bond might
be linked to the method of “multi-municipality” or bundling.
Population Municipalities Balance 2016
Budget surplus
Amount eligible for green investments per
municipality
Bundling Single emissions
(mln of inhabitants)
n. (mln EUR) (mln EUR) % average annual tot. (mln EUR)
annual tot. (mln EUR)
< 20 712 626 0,9 50% 0,4
20-60 416 1094 2,6 50% 1,3
60-100 59 479 8,1 50% 4,1
100-250 34 594 17,5 50% 8,7 295.8
>250 12 608 50,7 50% 25,3 303.6
Table 18. Potential development of muni-bond in Italy (Croci et al, 2017)
Nevertheless, the choice of investing in a green project, should not be dictated by the financial
return, also because there is not such a difference compared to other bonds. The key point is there
should be a moral responsibility behind the choice, not a financial return reasoning, but it‟s
necessary to take into consideration the impact on the territory.
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6. Empirical Analysis of Italian Perspective on Green Bond
After a literature review to understand the framework and application of the Green Bonds,
from the analysis of the best practice examples it was possible to summarize the common factors
between the project cited. From this material, a series of considerations has been done regarding
the Italian context and the possibilities that a municipality might have in case of issuing this kind
of obligation. In this chapter, a survey was sent to the major Italian municipalities, in terms of
population, based on the consideration made previously.
6.1. Survey Outline
For this thesis, a questionnaire was created to obtain a general knowledge about the
municipalities position toward the green bond at the same time to understand better the main
instrument of financing and the financial situation of them. It sent out to 44 Italian municipalities
in November 2018 and then followed up by telephone calls and reminder emails during
December, January and February 2019.
The sample was selected thought the Italian municipalities that are “capoluoghi”, for a double
reason: based on the previous literature review, the capital municipalities have been the major
users of the BOC through the years before the crisis, so they should have a knowledge about how
this instrument works out, and secondly because they are the most populous municipalities, so
they might have, based on the consideration of Croci and Colelli (2017), a budget sufficient to
finance an investment in line with the best practise examples previously cited.
In Italy there are almost 8.000 municipalities, 110 of which are capoluoghi di provincia. For this
questionnaire, the number of municipalities that have been contacted are 44, considering the cities
with a population of over 100.000 inhabitants and that are “capoluoghi”. The first 12 cities have a
population of over 250.000 inhabitants, so based on the theory mentioned earlier, they should be
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the more eligible to issue a green bond without using the bundling option. The Table 19 is the list
of the contacted municipalities.
Regione Comune Population
Lazio Roma 2.872.800
Lombardia Milano 1.366.180
Campania Napoli 966.144
Piemonte Torino 882.523
Sicilia Palermo 668.405
Liguria Genova 580.097
Emilia-Romagna Bologna 389.261
Toscana Firenze 380.948
Puglia Bari 323.370
Sicilia Catania 311.620
Veneto Venezia 261.321
Veneto Verona 257.275
Sicilia Messina 234.293
Emilia-Romagna Padova 210.440
Friuli Venezia Giulia Trieste 204.338
Puglia Taranto 198.283
Lombardia Brescia 196.745
Emilia-Romagna Parma 195.687
Toscana Prato 193.325
Emilia-Romagna Modena 185.273
Calabria Reggio Calabria 181.447
Emilia-Romagna Reggio Emilia 171.944
Umbria Perugia 165.683
Emilia-Romagna Ravenna 159.115
Toscana Livorno 158.371
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Sardegna Cagliari 154.106
Puglia Foggia 151.372
Emilia-Romagna Rimini 149.403
Campania Salerno 133.970
Emilia-Romagna Ferrara 132.278
Sardegna Sassari 126.769
Lazio Latina 126.470
Lombardia Monza 123.598
Sicilia Siracusa 121.605
Lombardia Bergamo 120.923
Abruzzo Pescara 119.217
Trentino Alto Adige Trento 117.997
Emilia-Romagna Forlì 117.863
Veneto Vicenza 111.620
Umbria Terni 111.189
Trentino Alto Adige Bolzano 107.317
Piemonte Novara 104.183
Emilia-Romagna Piacenza 103.082
Marche Ancona 100.924
Table 19. Chosen Italian municipalities for sending out the questionnaire
The questionnaire has been sent by email to various professional figures inside the municipal
administration, due to the fact that the green bond might interest many sectors inside the same
administration. Mostly, the figures involved are the “assessori comunali”, that should have a
broadly knowledge of the procedures that the city is activating. Indeed, the major response has
been given by the “Assessore al Bilancio”, the figure that take care about the financial situation of
the municipalities, manage the investments and knows the economic possibilities of the entity.
The questionnaire was divided in three sections: the first one was more general and meant for all
the participants. Depending on the answers to this first section, they had to complete just one of
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the following two, one was meant for who already issued a green bond or are in process, the other
was dedicated to who never did it. In both cases the aim was to see if the municipalities would be
in lines with the principles proposed by the Climate Bond Initiatives and which difficulties would
they find in using this method.
As it is pointed out during analysing of the case studies, the greenness of the projects is very
important in green bond market. Hence, we decided to find out two main things by sending out
this survey; which sectors are among their main interests and if it‟s possible to apply this new
financial instrument in those sectors. Also knowing better the ways usually have been used to
certified their projects whether are in line with the Green Standards or not.
Here is the survey.
I PARTE
1) Quali sono i metodi di finanziamento principali per opere di carattere sostenibile nell‟ambito dei trasporti
pubblici, edilizia a bassa emissione, progetti di efficientamento energetico, gestione delle acque e dei rifiuti,
produzione di energia pulita? (più di una risposta è ammessa)
Fondi europei
Fondi statali
Tassazione
Obbligazioni
Linee di credito
Altro: …………………………………………………………………………………………………
2) Dove vengono destinati principalmente i mutui/finanziamenti concessi agli enti locali?
Edilizia di interesse pubblico
Opere idriche
Viabilità e trasporti
Energia
Altro: …………………………………………………………………………………………………
3) Avete, negli anni passati, mai emesso dei Buoni ordinari comunali per finanziare progetti a scala locale?
Si
No
4) Se sì, si potrebbero elencare alcuni progetti?
……………………………………………………………………………………………………………
……………………………………………………………………………………………………………
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Si
No
Non lo so
6) Vi è stato assegnato un rating da aziende specializzate quali Moody‟s, Standard and Poor‟s o Fitch? Se si,
quale?
Si: …………………………………………………………………………………………………..
No
7) Siete a conoscenza dell‟esistenze delle obbligazioni verdi (“green bond”)?
Si
No
Ne ho sentito parlare
8) Avete mai ricorso all‟uso di un Green Bond per il finanziamento di un progetto verde a scala locale?
Si
No
9) Avete in programma di ricorrere ad un Green Bond?
Si
No
Forse
II PARTE
RISERVATA A CHI HA GIA’ EMESSO UN GREEN BOND
10) Nel caso in cui abbiate un green bond all‟attivo, vi siete avvalsi di una certificazione esterna che garantisse la
sua veridicità?
Si
No
11) Se si, tale certificazione da che organizzazione è stata emessa?
CICERO
Sustainalytics
Vigeo EIRIS
Altro: ………………………………………………………………………………………………
12) Quali sono i settori a cui è finalizzato l‟investimento? (più di una risposta è ammessa)
Trasporto pubblico e mobilità sostenibile
Energie rinnovabili
Edilizia a bassa emissione ed efficienza energetica
Gestione sostenibile delle acque
Gestione sostenibile dei rifiuti
Protezione della biodiversità
Altro: ………………………………………………………………………………………………
5) Al giorno d‟oggi, sareste in condizione di emettere un bond comunale?
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13) Per quale motivo avete preferito questo tipo di finanziamento? (più di una risposta è ammessa)
Era la più adatta al tipo di progetto che volevamo realizzare
Aveva maggiori benefici finanziari per l‟emittente
Diversificazione dell‟asset
Incrementare la reputazione dell‟ente
Per stare al passo con i piani per contrastare il cambiamento climatico
Per assecondare le preoccupazioni dei cittadini verso l‟ambiente
Altro: ….……………………………………………………………………………………………
14) Avete riscontrato delle problematiche nelle diverse fasi per l‟emissione di questa obbligazione?
Si
No
15) Se si, quali?
Poca chiarezza nelle informazioni e linee guida
Difficoltà nello scegliere la organizzazione esterna per una review indipendente
Difficoltà nel tracciare l‟uso dei proventi
Difficoltà nel quantificare il beneficio ottenuto
Difficoltà dell‟effettuare un monitoraggio dei fondi
Altro: ………………………………………………………………………………………………
III PARTE
RISERVATA A CHI NON HA MAI EMESSO UN GREEN BOND
16) Nel caso in cui non abbiate mai ricorso ad un green bond, quali sono le ragioni per tale scelta?
Non se ne vede la necessità
Non conosciamo questo metodo di finanziamento
Abbiamo riscontrato difficoltà nella creazione di un green bond
Crediamo non possa avere un riscontro sufficiente sul mercato
Non abbiamo una situazione economico-finanziaria adatta per l‟emissione
Altro: ………………………………………………………………………………………….
17) Per quali progetti (settori) potreste pensare di indirizzare i proventi di questo metodo di finanziamento?
(più di una risposta è ammessa)
Trasporto pubblico e mobilità sostenibile
Energie rinnovabili
Edilizia a bassa emissione ed efficienza energetica
Gestione sostenibile delle acque
Gestione sostenibile dei rifiuti
Altro: ………………………………………………………………………………………...
18) Nel caso in cui pensiate di fare un green bond, vi avvarrete di una certificazione esterna che ne confermi la
veridicità?
Si
No
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6.2. Results
Here is a summary of the information acquired through the analysis of the results of the
questionnaire. In the end 33% of municipalities responded to the questionnaire, which means 14
out of 44 municipalities.
The majority of the financial resources used in potential green sectors come from Europe and the
State.
0 2 4 6 8 10 12
European funds
State funds
Regional funds
Credit line
Project financing
Loans
Taxation
Provincial funds
n. of municipalities
1. What are the main funding methods for sustainable works in publictransportation, low-emission construction, energy efficiency projects,water and waste management, clean energy production?
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The municipalities appear to invest more on mobility and public buildings, taking into account
that the needs of a city and the financial possibilities change every year. Many of the projects in
these sectors might be eligible for a green muni bond.
The majority of the interviewees had a previews experience in the issuance of a municipal bond, a
little less than 60%, that might be an advantage because it means that the municipality might have
a better understanding of the practise and a better knowledge of their assets.
0 2 4 6 8 10 12 14 16
Public buildings
Roads and transportation
Energy
Water projects
Others
n. of municipalities
2. Where are primarily allocated the loans granted to local authorities?
0 1 2 3 4 5 6 7 8 9
yes
no
Uncertain
n. of municipalities
3. Have you, in the past few years, ever issued Ordinary Municipal Bondsto finance projects on a local scale?
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Apparently, almost 57% of the municipalities don‟t have a clear image of their financial position
and their financial possibilities. The 35% reported they are not capable of issuing a bond, and just
one said yes.
Just 3 out of 14 municipalities have a rating, barely superior or equal to the Italian one..
0 1 2 3 4 5 6 7 8 9
Yes
No
Uncertain
n. of municipalities
5. Nowadays, would you be in a position to issue a municipal bond?
0 2 4 6 8 10 12
Yes
No
n. of municipalities
6. Have you been assigned a rating by specialized companies such as Moody's, Standard and Poor's or Fitch?
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The existence of the green bonds is not completely unknown, more than the 50% of the
respondents have at least heard about them.
None of the respondents ever used a green bond before.
0 1 2 3 4 5 6
Yes
No
Heard about
n. of municipalities
7. Are you aware of the existence of green bonds?
0 2 4 6 8 10 12 14 16
Yes
No
n. of municipalities
8. Have you ever used a Green Bond to finance a green project on a local scale?
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The 35% of municipalities express the idea of issuing a bond, even if some of them answered that
they haven‟t a financial structure that allows them to do that. 65% do not plan to use this method.
The second section of the of survey was meant for the cities who used green bonds before.
Apparently, no one ever did or are in the process of issuing it, because no one answered this part.
On the other end, each one of the participants answered the third part.
The main issue coming from this question is that the municipalities are not sufficiently informed
about the green bonds. Many don‟t see the need to use one, others don‟t have a financial
situation that allows the issuance.
0 1 2 3 4 5 6 7 8 9 10
Yes
No
Uncertain
n. of municipalities
9. Are you planning to use a Green Bond?
0 1 2 3 4 5 6
To follow the European trend
We believe it cannot have sufficient response on themarket
We do not have a suitable economic and financialsituation for the issue
We don't see the need to use this method
We don't know this financial instrument
n. of municipalities
16. In case you have never resorted to a green bond, what are the reasons for this choice?
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The sectors in which they would invest are primary the real estate one and the transportation
systems. The energy is a topic in which they are focusing an increasing attention. Someone
answered “i don‟t know”, because it didn‟t know the method and therefore its application field.
Accounting that the municipalities probably don‟t have a clear idea about the importance of
transparency and second opinions for this kind of bond, there was a clear confusion in the
answer. 40% answered “Maybe”, 40% were positive, and a few answered no.
0 1 2 3 4 5 6 7 8 9
Low emission building and energy efficiency
Sustainable transportation system
”Green areas
Waste sustainable management
Water sustainable management
Renewable energy
I don't know
n. of municipalities
17. For which projects (sectors) could you think of directing the proceeds of this method of financing?
0 1 2 3 4 5 6 7
Yes
No
Uncertain
n. municipalities
18. In case you think about doing a green bond, will you have an external certification that confirms its truthfulness?
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6.3. Outcome
The survey has revealed that the Italian municipalities acknowledged the existence of the green
bond, but it is still a quite unknown instrument for them. The cities that happens to be more keen
on taking a chance of using this new financial instrument are mainly located in the North of Italy,
and are the cities with a major financial stability. However, Milan appears to be the only city really
interested in this instrument and has the right background and experiences to do so.
Even though the response rate wasn‟t really high, what come up is in line with what has been
found in the literal review and explained in the previous chapters.
The first section of the questionnaire showed that the municipalities mainly use the funds coming
from Europe or the State to finance their investments, mainly in public real estate and mobility, as
confirmed by the Ifel data previously shown. So, based on the literature and this data, 30-50% of
the investments are linked to a potentially green sector.
A good number of the interviewees issued a municipal bond in the past, mainly in the period
2000-2007 when there was the higher interest in them, but since the issuance are equal to zero.
The municipalities showed a general impossibility or disinformation in terms of their financial
situation and possibilities of financing: many didn‟t know if they are in a condition suitable for the
emission of a BOC, many other said that they are have no possibility to do that at all. Just Milan
showed a virtuous financial situation. Moreover, just a few of them have a rating nowadays, some
of them lost it in the years, others have had a downgrading. The actual credit situation in Italy is
not positive, and the rating of the State influences the one of the cities. In some cases it‟s possible
to notice what have been already seen in the literal review, namely that municipalities have an
higher rating than their country.
Surprisingly, the green bond existence is not completely unknown. Many know it or have at least
heard of it, that‟s a positive sign that the municipalities are taking a closer look at the green
possibilities that are rising in the last years. On the other hand, ⅓ never heard of it.
Even if the green bond is at least known, nobody ever used one and many are not really informed
about the possibilities linked to it. That‟s why just 2 out of 14 say that they might issue one and
the other 12 is answering no. That‟s a number that might change in case one of the two virtuous
municipalities interested in an emission will give a positive feedback and a best practice example,
encouraging the others to follow its steps
The third part of the survey showed the reasons behind the difficulties or the absence of interest
in issuing a green bond and the reasons for this choice.
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Apparently the reasons are many: the most frequent answer is that they don‟t know the method,
followed by that they don‟t have a financial structure suitable for it or they don‟t see the benefits.
These answers express a general lack of information and willingness to try new methods, even if
the risks related are not different from the ones of other bonds, but the consequences, in terms of
environment and image, might be very positive.
The sectors object of a possible green investment would be related to energy efficiency, buildings
and transportation, but the municipalities made a point saying that, due to the fact that the
method was known, they couldn‟t pick a sector to use it. So the trend of the investments are going
to increase the amount of money meant for these sectors, that nowadays are object of the 30% of
the loans.
In the end, the positive side is that the municipalities are taking seriously into account the
necessity to be transparent and clear, in favour of the citizens and the investors, and many would
choose to use a second party review.
In the end, the economic situation of Italian municipalities in general seems not ideal to issue a
bond in many cities right now. As a result, probably 90 per cent of them are not able and also they
don‟t have the right motivations to issue green bonds. The bright side is in the remaining 10 per
cent that they have a financial stability and the willingness to try. The important step in this
situation is a pioneer, which has the courage to follow the European trend and dive into this new
market. Later, this municipality could offer an example in terms of best practise to the rest of the
municipalities that have the same possibility, but are not sure of the outcomes.
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7. Milan: Gearing up for the Green Bond Market
The most interest and relevant information coming from the survey was the strong interest
expressed by the municipality of Milan, that confirm itself as a possible pioneer in the new path
directed to a greener and more sustainable future.
After receiving their questionnaire, the Assessorato al Bilancio, the organ in charge for the
management of the expenses and resources of the city, was available to do an interview and
discuss more deeply about how they are facing this novelty and where and how they are planning
to use it.
7.1. Questionnaire and Interview with the Municipality
What emerged from the questionnaire is that Milan has a well structured and functioning
Administration that are trying to follow the steps of other major European cities toward a more
sustainable source of finance.
Q.1 What are the main funding methods for sustainable works in public transportation, low-
emission construction, energy efficiency projects, water and waste management, clean energy
production?
A.1 The city primarily uses funds from Europe and Italy, and lines of credit from banks to
finance its investments.
Q.2 Where are primarily allocated the loans granted to local authorities?
A.2 At the moment, the sectors in which this money goes are transportation and public buildings.
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Q.3-4 Have you, in the past few years, ever issued Ordinary Municipal Bonds to finance projects
on a local scale?
A.3-4 The city had a previous experience with the municipal bond market, in 2005 a BOC was
used to finance the early repayment of loans burden of the municipal budget with various credit
institutions.
Q.5 Nowadays, would you be in a position to issue a municipal bond?
A.5 Yes.
Q.6 Have you been assigned a rating by specialized companies such as Moody's, Standard and
Poor's or Fitch? If so, which one?
A.6 The city of Milan has the following ratings:
Rating Agency & Rating type Rating Rating Date Outlook Outlook Date
S&P Long-term Issuer Rating BBB 10.11.17 Negative 2.11.18
Moody’s Long-term Issuer Rating Baa3* 23.10.18 Stable 23.10.18
Fitch Long-term Issuer Rating BBB* 4.05.17 Negative 21.09.18
*Unsolicited Rating
The Assessorato underlines that the rating assigned by the three agencies, to the Municipality of
Milan, is indexed to the rating assigned to the Italian Republic; if the CdM was considered
independent of it, its rating (stand-alone credit profile) would be equal to A +.
Q.7 Are you aware of the existence of green bonds?
A.7 Yes.
Q.8 Have you ever used a Green Bond to finance a green project on a local scale?
A.8 No.
Q.9 Are you planning to use a Green Bond?
A.9 Might be.
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Due to the fact that the emission is under development, the Municipality didn‟t answer the
second part of the questionnaire but the third.
Q.16 In case you have never resorted to a green bond, what are the reasons for this choice?
A.16 Given their recent diffusion, especially at European level, we are investigating the efficiency
of its possible issuance.
Q.17 For which projects (sectors) could you think of directing the proceeds of this method of
financing?
A.17 In case of an emission, the fields that are going to be financed are the sustainable
transportation, through which the city started a rigid and successful programme that have fund
great appreciation, low-emission buildings, energy efficiency, and green areas.
Q.18 In case you think about doing a green bond, will you have an external certification that
confirms its truthfulness?
A.18 Yes, the second party review will be done by Vigeo to ensure the greenness of the project
and to built up trust and transparency toward the investors.
Many questions arose from this questionnaire, due to the fact that Milan was the first
municipality to express a real interest in the green bonds. Therefore, the next step was to
interview the municipality: the first meeting was useful to get an idea of the reasons that led
Milan to consider this kind of bonds. What came up has been a general framework of Milan
financial situation and structure, the figures involved and interested in catching up with this
European trend, the motivations behind, and understand how far they have come.
If the first meeting was more focused on getting a general idea behind the construction of the
bond and understanding the fields involved in a possible investment, the second has been
structured to get a deeper knowledge about their approach to public real estate sector considering
the various new European regulations about the energy efficiency of public buildings and
analysing the possibility to use their green bond to invest in them. The interviews had drawn the
scheme that the municipality is following, also underlying the major problems that they are facing
along the way.
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7.2. The Outlook of Comune di Milano for Green Bond
Milan municipality started approaching the green bonds in June 2018, firstly taking the time for
an investigation phase to ensure the convenience of issuing green muni-bond, to decide the best
and the most appropriate means of dealing with green projects. They are trying to learn from the
experiences of other European cities that have taken this path before. There has been an informal
confrontation with the city of Paris, that issued a Sustainability and Climate bond in 2017, and the
Canton of Geneva. Despite the fact that in the case of Canton of Geneva has completely different
financial and economic background, considering taxes and interests, that made it difficult to be a
role model for Milan municipality.
Geneva issued the green bonds with a low interest rate of 0.5 % last year but Milan‟s yield curve is
higher, therefore they have to use underwriters in Italy to figure out the best deal. Also the Canton
of Geneva was incredibly fast in the process of issuance, as they started discussing of preparing
the green bond in August 2018 and in November 2018 they issued. In addition, Geneva obtained
very low fees from the banks, just the fees to structure the operation, on the contrary Milan will
have higher commissions at the level of other conventional bonds, no discounts even if it is green.
Milan has many projects that can be considered in sustainability and green principles guidelines,
and there could be an effective advantage also in terms of taxes and interests. These facts made
the green bonds for Milan municipality more and more attractive.t
A green bond is an obligation, so a form of debt. In terms of limit of indebtedness, Milan is in a
positive financial situation: the current law establishes that the maximum debt limit, represented
by the incidence of the cost of the interest on the current revenues, is of 10% and Milan has a
3.9%, so it has a great margin on this parameter, moreover their objective is to reimburse an
amount higher than the debt issue in the year, to continue the trend of constant production of
debt.
The principles that define the equilibrium of the balance sheet, make the sources of debt
inconvenient respect to other sources. That‟s because of the debt-service that must be paid in the
future years, the capital reimbursement and the interests, that are part of the current expenses.
What is financed by debt has the capital expenditure as a significant expense and the entry of
disbursement of debt as not relevant income, which creates an imbalance that must be remedied
by other sources. Instead, using the surplus, balances are respected.
The idea of the Municipality is of issuing a green BOC with a 30 years maturity not later than the
end of the year, to better exploit this wave of interest and to defer the reimbursement of the debt..
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They are thinking about an issuance for a total of 200-300 millions, divided in tranches of 50
million over the years and the priority is to invest on the viability. They have not decided yet the
minimum size of the obligation but probably it will be in line with the previous practices and
meant for institutional investors, so 100.000 EUR. Also the coupon rate is not clear yet, it should
be equal to the one of the mortgages, around 2.6%. If it were higher than the current mortgages, it
would be necessary to justify it at the higher levels, because it is not a financially convenient
option, but it can be explain in a prospective to give more impulse to green investments. Green
bonds with this amount have a coupon rate at 1.75% in the case of Italian utilities.
Most municipalities do not have financial advisor staff in-house to be able prepare a green bond.
Therefore, Milan, as done by all the other issuers, is searching for a bank to assist the municipality
in this process. To do so they use a League Table, based on the example of Paris and Geneva, a
ranking of the best 12 banks, which helped the public companies in the issuance of green bonds
before. There are some banks that appeared in the list of many green bond issuances lately, the
first three of them are Credit Agricole Corporate and Investment Bank SA, HSBC Bank and Bank
of America Merrill Lynch.
Figure 32. Green bond underwriter league table in 2018 (CBI, 2018)
Milan will send a tender offer to the banks, if the top three of the list are going to take part to it,
they are going to be selected as underwriters.
In the United State, the municipal bond is attractive also for the citizen himself, because the
lowest denomination, the smaller size, of the obligation is around 1.000 Euro. In Europe this is
not possible: the other European examples, Paris and Belgium, showed that the minimum size is
100 thousand EUR, that limits the entrance in the market to institutional investors, In addition, in
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the existing Italian green bonds, issued by corporates, the majority of the investors are “extra”,
coming outside Italy.
In terms of yield, there is not such a difference between green and vanilla bond, the margin is 2-3
bases point, almost insignificant. A saving is likely to be obtained in the cost of funding, the
interest rate at the beginning: cost of funding might be reduced of 30 bases point compared to a
traditional bond. The green theme is not really considered into the performance of the Green
bond, meaning that in the end the Municipality has always a BBB rating, so to the investor it
doesn‟t matter the green theme, but the solidity of the financial and economic status (Milan had
three credit rating agencies, now they have only 2 with contracts and one gives unsolicited
valuations). In fact Milan has A+ in the standing alone credit profile, that inserted in the Italian
Republic context it goes into the background, being parameterized on the BBB with negative
outlook of the State. This is a big limitation, because Milan indeed depends on the transfer from
the Central government and Region to the local entities: the transfers are progressively reducing,
and this make the city very dependent to the central power and not flexible. Moreover, the low
credit rating influence the interest rates applied.
There are just vague ideas about the market in which the bond is going to be listed, probably on
the Eurobond market, not excluding the ExtraMot.
The other rating that must be considered is related to the bond itself: Milano will have a issuer
rating, and also the the bond will have one, given by Standard & Poor‟s or Fitch.
Moreover, Milan will ask for a second part opinion from by Vigeo, who collaborated with the
Municipality before, to have an ESG valuation, for environmental social government topics, that
will not take into consideration the finance structure of the city.
Figure 33. Vigeo valuation scheme (Vigeo Eiris, 2018)
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Actually, Vigeo reached out a few years ago, behind a request of international investors (Milan has
now a big bond with institutional investors) who asked for a rating of the City in an ethical
perspective, considering the respect of labour laws, of social equity, of the environment, of equal
opportunities. Vigeo offered always unsolicited valuation, but in the case of a green bond it will be
selected to provide a second party opinion.
The possibility to invest in specific sectors is not clear, they are valuating in the PTO, Piano
triennale delle Opere Pubbliche, what would be actually eligible for this kind of bond, considering
the possibility to collaborate with BEI, the European Investment Bank, or CDP, Banca Depositi e
Prestiti. Generally, the municipality sees the application of this instrument primary for mobility
and transportation projects, starting from the financing of the extension of the Metro 5, already
financed through a loan by Banca Depositi e Prestiti.
The projects in which Milan is going to use the proceeds are going to be probably at an initial
phase and the duration of them need to be counted in the duration of the bond: the obligation
maturity should cover the entire time of construction and be proportional to it, also to give more
certainty to the investor and avoid repercussions on the yield. What has already been financed
with debt often has a clause that prevents it from being financed by another source. So probably
the best use of the green bond is to finance projects not already started or started but financed
with funds proper of the municipality.
The 30 years maturity is big difference compared to Geneva with its short maturity of 3 years: this
is because the Canton invested in already started projects.
The other major problem that the municipality recognizes is related to the lack of an official
regulamentation approved at the European or International level, ICMA and its Green Bond
Principles are just voluntary process guidelines, to promote transparency and integrity on the
market. Therefore, the absence of clear and widely accepted guidelines around what is green has
given rise to concerns about a risk of greenwashing, where bond proceeds are allocated to projects
and assets that have little or dubious environmental value. This information asymmetry can be
reduced through a second party opinion, by Vigeo for example, that can validate the rightful and
green allocation of the proceeds. Nowadays, this lack of international regulations put the brakes to
the green emissions.
On the other hand, the investor‟s uncertainty is reduced by the presence of the second party
opinion, but anyway the demand is always higher than the offer, compared to vanilla bonds, that
shows a persistent interest in the sustainability theme.
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The hopes of the Municipality for their future green bond is that it will represent a possibility to
give to green investments already in place or to be made, a label, an enhancement, and in addition
to launch a marketing and communication operation that enhances the mobilization of green
investments. The launch of the bond has longer and more complex times and aspects to manage
than a classic loan. Launching a green bond means doing more than one tender invitations: one to
select the advisor, that will help identify green projects that can be monitored with specific
indicators, and understand which portion of the investment actually has a green impact. There is a
work to do on the technical and financial sides to ensure that the investments I have chosen will
have dignified progress and times and with immediately reportable impacts. What is necessary is a
joint work within the technical sectors: it‟s necessary to have the capabilities, the instruments to do
the reports and insert the cost, considering the right indices, in the balance sheet . There is also a
problem of costs: even if the municipality were equipped on the technical front, the cost of the
green bond were the same as that of loans (European banks give 1% interest rate), assuming that
the rate were the same, the issuer have to bear also the costs of the advisor, of the second party
opinion or the dedicated ratings. It is hoped that a good interest will flourish for this bond being
the first public one on the market in Italy. Hopefully, there will be a sort of award for the
operation for the purpose of the interest rates, followed by a general financial appetite and
consequently for the whole operation.
In the other European countries the public administrations have been the pioneers in the green
bond issuance: those are the ones who initiated the process, Ile de France and Paris first of all, and
later the private companies followed. In Italy there has been an opposite trend: public companies
(ex. A2A, Alperia) were the firsts issuers, and now the government is starting to follow the same
path. This is going to give a big incentive to the mobilization of private capital that is fundamental,
because the green thematic promoted only by the public administration is not sufficient to reach
the objectives proposed by the Paris Agreement.
7.3. The Municipal Approach to Public Real Estate Sector
The Municipality of Milan has an enormous amount of real estate properties in different parts
of Lombardia, but just in the city that account for 3472 public building units and 18583 lands or
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plots of land, recognized in “catasto”; those are comprehensive of schools, hospitals, museums,
offices, residential and many others (Geoportale Comune di Milano).
To understand better how the interventions on this class of assets are financed, it‟s necessary to
take a step back and understand how a municipality balance sheet works. The elements that
compose the revenues and expenses of a municipality are divided in two categories: current and
capital ( “ in conto corrente” and “ in conto capitale” ). The current revenues are used to finance
the daily expenses, to fulfil obligations towards the citizens; the capital resources are used to
finance investment, on a longer time span. That is the case of the municipal real estate properties:
investing on a public building is an action for a better future, not that improves the daily life of a
citizen. Indeed, the money used to finance the interventions on public buildings come from the
capital revenues and they are:
-contribution to investment (21%): the money that State or Region give to the Municipality. This
is a decreasing source because the governments are reducing their transfers in favour of the
already virtuous municipalities, to help the others that are in a worst financial condition.
- loans (14%): take out a mortgage, especially with Cassa Depositi e Prestiti. In the previous
years there were obligation, now they prefer the flexible loan from CdP, for its long amortization
period.
- alienation of real estate assets (35%): the city sells real estate properties that don‟t have a specific
purpose for the municipality anymore ( for example in December 2018, the city sold 15 barracks
that obviously were not useful for the municipality and only represent an expense, and now are
using the revenues of this sale to invest in existing buildings )
- budget surplus: some years is higher, some others is lower
The interventions that the Municipality declares as its future intention towards the city, in terms
of new constructions and maintenance, are listed in the plan of public works of that year or PTO.
Here is a scheme of the “Piano Triennale delle Opere” of 2019-2021, available on the portal of
the Municipality, even if not yet approved, where there is a framework of all the sectors that are
going to benefit of the investments this current year.
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Figure 34. Milan annual list 2019, PTO 2019-2021 (Comune di Milano, 2019)
Lately the municipality is trying to make this plan as realistic as possible, declaring their choices in
a transparent way, reducing the priorities to what is actually feasible, in a financial and technical
point of view. Once the list of projects is done, the priorities are given based on the financial
possibilities of the year. The budget available change over the years, other financial resources
might come from budget surplus, contributions to specific projects, urbanization charges,
monetization, finances of the municipality itself.
The attribution to priority investments is already partially constrained, in the case of specific
contributions, or takes into account the procedures needed, that‟s the case of debts and free
resources. What is ready, mature and with approval of the project, goes into the preliminary
investigation of the loan. What comes in late engage the resources of the municipality itself.
Therefore, it doesn't really matter the nature of the investment, but what resources are available
that year and which projects are ready to put into the financing list.
Considering the sectors object on financing, they change every year depending on the priorities.
The last years have seen the investment of 60 million in ERP, Edilizia Residenziale Popolare, and
more was meant for schools and in taking off the asbestos from public buildings.
However, investing in the ERP have the necessity to give an immediate impact on the
population, and prioritize the cost and time efficiency because of the necessity to use them as
soon as possible . So, for sure, there should be the intention to invest more for efficiency, when a
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renovation is already planned, but usually the need of finishing and offer visible progresses is
more important.
Discussing about the possible fields of action, the energy efficiency of public building is a great
possibility but presents a great limitation. If a bond is issued, the process must be very transparent
and clear: it means that an initial report and an annual one should be provided to the investors.
Studying the benefits of energy efficiency of buildings on a short time doesn‟t bring an immediate
value, that translate into a loss in terms of financial performance. So the bonds might not benefit
too much from this application.
Using a green bond to invest on public building is not a priority right now, but in the PTO are
recognized different buildings which would be in line with the green bond principles and on
which it would be done a work of energy efficiency. The PTO of 2019, estimate a total investment
of 958.513.784,00 EUR to be divided in the different branches of the administration, as
demonstrated in Figure 34. A study on the single interventions inserted this plan, has shown that
280.729.000 EUR are going to be invested in potentially green projects distributed across all the
different sectors. Indeed, 126 projects are in line with the Green Bonds Principles, providing a
benefit through energy efficiency, clean transportation and pollution reduction. In the following
graph is visible the portion of each investment that could be directed to a Green Bond application,
divided in correspondence with the branches of action of Milan Municipality.
Figure 35. Milan annual list 2019, PTO 2019-2021, and relative green investments (Comune di Milano, 2019)
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Parallely, the 30% of this 958.513.784,00 EUR are related to buildings (schools, healthcare,
administrative and residential ones), for maintenance works, new constructions, demolitions and
requalification. The interventions are a comprehensive range of extraordinary and ordinary
maintenance, decontamination from asbestos, recovery and reconstruction of old buildings,
energy and plant implementations. The works related to building can cover a wide variety of
branches inside the same administration, and that create the necessity of a great coordination
between the sectors and a common and shared list of the buildings property of the Municipality.
Further calculations and analysis showed that just in 2019, of this 280.729.000 EUR investments,
an amount equal to 20.000.000 EUR is going to finance the interventions on public real estate
covering different aspects, mainly energy efficiency, and acting on schools, residential and
administrative buildings (Figure 36). All these interventions in public buildings have the potential
of being part of green projects to be funded by green bonds.
Figure 36. Milan PTO 2019: investments on types of buildings (Comune di Milano, 2019)
There are a few key points that the municipality made clear during the interview, that are the main
obstacles for a future green bond focus on the public real estate.
There is a need for a list of public works to be done under a green prospective. There is no
mapping of the interventions that could be done on each building, but there is a mapping of the
emergencies and each year the city face the challenge to decide how many of these have to be
done immediately with the necessary budget constraint. It would be necessary to enter in the
perspective of adding an extra cost with a green purpose when there is already the need to
intervene for other reasons.
It has been perceived also an asymmetry between banks and municipalities: the latter say that it is
easier to identify a project framework rather than specific projects, so select many small ones, on
Social and SchoolBuildings (40%)
ResidentialBuildings (40%)
Administrativebuildings (20%)
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the other hand the banks prefer big deals and finance large projects. This creates a difference in
the time spent to follow and control many projects or just one.
The fewer and larger the projects are, more easy is the reporting, monitoring, and providing tools
to detect the important values. This would be a big investment, but more the project is unique, the
less diversified are the risks.
Other difficulties are recognized in the lack of indicators to detect the green impact, even if in a
green bond, it is easier than in a social one: measuring social effects is difficult, likely there are
more standards on sustainable issues.
Last but not least, the major necessity is to create an unique mapping, available to all the sectors of
the administration to allow a more clear communication and collaboration between the figures
involved and a better understanding of the necessity of each project.
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8. Proposals for Italian Municipalities in the Real Estate Sector
Following the literature review, the survey and the semi-structured interviews, what was fund
has been summarized in this upcoming chapter. The trend that has been detected in Europe and
in the rest of the world is that the governments usually have started the issuance of the green
bonds, later the financial or non-financial private corporates followed their own governments‟
approach. But it seems there is another storyline going on in Italy. Although the Italian
government haven‟t taken part yet into the green bond market, the private sectors and public
entities are already active and have issued green bonds in Italian market. This fact highlights the
existing possibilities provided by this new financial instrument for government‟s programs, policy
and incentives. Especially local governments could take this financial instrument in consideration
to use and adapt to their existing obligation. We chose our applied case in the city of Milan, where
its municipality showed the major interest compared to other Italian cities, and appears to be the
most suited to pave the road toward this new financial method in Local scale.
Green bond can be a powerful financial instrument that could help city of Milan become a greener
metropolis while transforming new and existing buildings into green buildings. Green bonds could
cover some of the renovation and retrofitting costs needed to make this transformation a reality.
These types of investments seek to finance projects that provide both financial returns for
investors and environmental and other benefits for all its stakeholders included state and local
governments.
As a result, the following sections are a suggested guidelines about the application of the green
bonds in the real estate sector for main cities in Italy, and how a municipality like Milan might
apply these suggestions.
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8.1. Prioritizing Goals in Public Property Management
Based on analysis of the case studies and conducted research, we found out in different countries
there is various approach in using of green bond proceeds. The reason relies on different local
governments‟ priorities. Therefore, the first step of providing a guidelines for Italian municipalities
is defining the priorities that could have a great positive impact for the city.
In 2014, nearly 85 % of the energy we used in Europe came from non-renewable energies, such as
petroleum products, gas, solid fuels and nuclear. Although the renewable energies are growing fast
in the last few years, they are not the predominant energy source in Europe. This is worrying
mainly because non-renewable energy source use and extraction causes the release into the
atmosphere of huge amounts of carbon dioxide and in some cases also other toxic substances.
The consumption of energy in Europe can be subdivided in five main categories: industry,
transport, households, services, agriculture and fishing. Energy and buildings are strictly related, as
all buildings incur energy use. Buildings are responsible directly for the household category of
energy use (25% in 2014), partially for the majority of the services category (13% in 2014) and in
the building phase, they also affect the transport category (33% in 2014). In this way, they account
for as much as 40% of total energy consumption of Europe in 2014. Hence, It‟s clear after the
transport the high priority sector to invest in is Real Estate sector.
Before the construction of the building, in the early design phase, a lot of energy has been already
consumed. It is the embodied energy, contained in the materials the architect chooses, to be
stocked in the future walls, ceilings, floors etc. Some other energy is spent to bring the materials to
the construction site and some other energy is spent to transform the materials into the buildings
itself. Once the building is built, before the inauguration, most of the energy has already been
spent. Moving from the outside to the inside, another group of the energies can be attributed to
operational energy needs: heating, cooling, illumination, services and power. In buildings the
biggest consumption of energy comes from heating and cooling loads, frequently due to bad wall
insulations or incorrect use of incidental sunlight and not having access to renewable energy
appliances. The second biggest consumption of energy in buildings is the water heating for the
residential sector and equipment for the services sector. During the end-of-life phase, energy
continues to be consumed by a building. Energy is required to demolish the building and to
process the material waste, whether recycled or not (Liddell et al, 2018).
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Figure 37. Inputs and outputs of typical building and components (Liddell et al, 2018)
As shown, buildings are „energivorous‟ (energy intensive) in all their phases of their life cycle. To
minimize the amount of energy in the construction and disposal phases, some steps might be
taken: (1) Choose eco-friendly materials: natural and biological materials and materials with a low
embodied energy. (2) Preference two different layers instead of a paired material: this helps in the
dismantling and recycling phases. (3) Reduce the transportation distances: choosing close sources
material can reduce drastically the amount of embodied energy (4) Reduce the weight of materials:
this too can reduce the transportation energy as well as the construction energy (5) Choose long
lasting materials since replacement costs energy. Following these architectural choices can
significantly minimize energy consumption of building components. As it was pointed out in the
beginning of this research, based on International Energy Agency (IEA) Sustainable
Development Scenario pathway regard to limiting the average global warming to less than 2°C.
IEA examined many new buildings and found out they are already on sustainable development
path (IEA and UN programme, 2018).
Therefore, reflecting on the state-of-the-art, one must acknowledge that the new building in the
world and also in Italy already perform very well from an energy perspective. They do not, in any
substantial way, address the world‟s energy crisis. Data shows that the most problematic building
are, in fact, those already in existence. As it is visible in Figure 39 existing buildings are 96% of the
built environment which creates 40.4% of energy consumption as pointed out earlier (Brady,
2017). These observations and others led to redefine and further specify the objectives in use of
green bond proceeds.
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Figure 38. The percentage of construction (Liddell et al, 2018)
Narrowing down our focus into the national scale helps us to have better idea about existing
building situation in Italy. According to data provided by Italian National Agency for New
Technologies, Energy and Sustainable Economic Development (ENEA), the 45% of the energy
produced is used by the building sector and also the 50% of air pollution caused by it.
Unfortunately, Italy has the highest emissions of Co2 generated by buildings in Europe counting
for 96 mln of tonnes with respect to the total amount of 550 mln for the entire European
Community.
Figure 39. The percentage of CO2 emission by buildings in European countries (Eurima, 2014)
Existing buildings (96%) Renovation (2%) New constructions (2%)
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The average energy consumption of the buildings in Italy is 180 kWh/m2, which with respect to
the average energy consumption of 160 kWh/m2 in Spain or 150 kWh/m2 in France is really high.
Over two thirds of the existing building stock in Italy was built before enforcing a Law 373/1976,
the first Italian law on energy that was also involved in construction. Hence, the potential for
energy savings in existing buildings is large and often obtainable through interventions with high
and favourable ROI (Enea, 2016).
In Italy, the directive of the European Union 2010/31/UE “Energy Performance of Buildings”
and the Decree 2012/27/UE, which mentioned in chapter 3, were both included in the legislative
Decree 4 July 2014, n. 102. This decree establishes a framework of measures for promoting and at
the same time improving the energy efficiency that contribute to achieve the national energy
saving target in Italy (D. l. 4 July 2014 , n. 102 art. 1).
As a result, the decree also sets national energy saving targets in which they foresee a reduction of
20 million tons oil equivalents of primary energy consumption by 2020, amounting to 15.5 million
tons of oil of final energy, with considering 2010 energy consumption as baseline. The law also
establishes that the administrations have to start the intervention in public buildings to reach
better energy saving in buildings; “intervene on public buildings of the central administrations, including
peripheral buildings, capable of achieve energy upgrading at least equal to 3 percent per year on the useful air-
conditioned covered area or that, alternatively, lead to an accumulated energy saving in the 2014-2020 period of at
least 0.04 Mtoe” (D. l. 4 July 2014 , n. 102 art. 5)
More recently the National Action Plan (interministerial decree 19 June 2017), clarifies the
meaning of "NZEB buildings", evaluating the energy performance of some of its expressions in
the different types of use and climate zones. By 2021, all buildings that are new or subject to a
major first-level renovation must have near-zero energy needs (Near Zero Energy Building,
NZEB). For new public buildings such as schools and hospitals, the deadline is advanced to 2019.
This National Action Plan highlights again why the new buildings are not in our consideration for
our proposal. NZEB are considered buildings with very high energy performance, in which the
balance between energy consumed and produced is close to zero and consumption for heating, air
conditioning, lighting, ventilation and domestic hot water production is minimal. According to a
survey carried out by the Energy & Strategy Group in the School of Management of Politecnico di
Milano, between 650 and 950 buildings have been built in Italy with high-efficiency in line with
NZEB systems up to now, of which 93% have residential use and almost all are located in
Trentino Alto Adige, Lombardy and Veneto.
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Figure 40. Diffusion of NZEB buildings in Italy (Energy efficiency Report, 2017)
Considering the Italian Public Administrations, they own and manage an extremely vast real estate
assets. The 63% of their total real estate patrimony has an age over 35 years, therefore
characterized by obsolescence not only physical, but also functional, technological and regulatory.
Moreover, the total energy consumption expenditure of the public building stock across the
national territory is estimated to exceed 4.5 billion EUR ( M. L. Del Gatto, 2010 ).
A report made by the Ministry of Economy and Finance (MEF) in 2015 has evaluated total value
of public real estate assets included all different public building categories which exhibited in
Table 20. The total amount of them is approximately 283 billion EUR for a real estate portfolio of
325 million square meters. The estimate was made on almost all the buildings, except for the fact
that there are some atypical real estate (MEF, 2015). The Table 20 exhibits the summary of report
by MEF.
About 20% of public real estate is owned by central administrations or national entities, and 80%
by local authorities as followed, the Municipalities own 227 billion euro, the Regions 11 billion
euro and the Provinces 29 billion euro of them. Figure 41 shows it in two different ways based on
area division and also based on value of these public assets.
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Cluster Cadastral units
(n.)
Declared surface
(mq/1000)
Estimated surface
(mq/1000)
Property value
(€/mln)
Offices 46.575 38.912 39.944 70.557
Residential 561.466 42.795 42.444 49.925
Historical Buildings 7.999 9.221 9.219 17.630
Warehouses 58.437 20.960 20.960 12.373
Collective residences 6.008 6.749 6.749 5.862
Parking 182.226 8.852 8.852 5.343
Shops 26.259 2.763 2.763 5.241
Hotels 2.913 1.719 1.719 2.121
Roadman‟s house 1.555 252 252 128
Schools 43.576 87.070 89.075 47.354
Hospitals 10.047 33.228 32.647 34.378
Barracks 13.578 25.576 26.253 25.060
Sport Facilities 14.481 41.889 41.889 4.326
Prisons 346 3.154 3.159 2.606
TOTAL of clusters 974.746 323.139 325.923 282.904
Non estimated 24.191 22.591 - -
TOTAL asset 998.937 345.730 - -
Table 20. Evaluation of the public buildings in Italy (MEF, 2015)
Figure 41. The public buildings evaluation in Italy divided by owner (MEF, 2015)
12%
86%
2%
Surface - percentage
AmminitrazioniCentrali
AmministrazioniLocali
Enti Nazionali diPrevidenza eAssistenza Sociale
17%
80%
3%
Value - percentage
AmminitrazioniCentrali
AmministrazioniLocali
Enti Nazionali diPrevidenza eAssistenza Sociale
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The assets of the ASLs are also very large, with a value of over 25 billion EUR. Added to this,
there are the Public Residential Buildings, managed by 110 local authorities, which consists of
over 1 million apartments, equal to a value ranging between 50 and 150 billion euro (Reviglio,
2011).
In terms of territorial distribution, the value of the estimated real estate portfolio shows higher
amounts in Lombardy (53.8 billion euros), in Lazio (31.4 billion euros) and in Emilia Romagna (29
billion euros), while lower values are located in Valle d'Aosta (1.8 billion euros), Basilicata (1.6
billion euros) and Molise (1.2 billion euros).
The analysis of public property types and their real usage showed the total value of 77% are
directly used by the P.A. (about 217 billion euro). The remaining 23% is dedicated to private use
for free or private individuals use them with the payment (51 billion), unused properties (12
billion) or under renovation (3 billion). However, all these public assets require maintenance,
restructuring and modernization interventions. Adequate improvements with regard to energy
efficiency would definitely save several million euros during building life cycle management.
Therefore, the following proposal targets under-performing buildings that do not meet today‟s
energy standards, and mainly find a great soil in public sector. Many of these structures were built
in the post-war period when social and political circumstances called for quantity rather than
quality of indoor space. Thus achieving energy saving in the buildings sector is our primary target
for both short and long term. Our main strategy includes the importance of Italian government
role in taking the lead in energy efficiency improvement of building sector by a local government
initiative in public sector buildings and using sustainable way of financing this project. Moreover,
green bonds can help government align financial goals and social values and offer opportunities
for investors who seek to fulfil their long-term investment goals considering ESG factors.
8.2. Milan as Potential Pioneer for a Greener Real Estate
Milan has its fair share of underperforming buildings from the last century and public buildings
have a notable part in it. As pointed out in chapter 7, municipality of Milan has an enormous
amount of real estate properties in different parts of Lombardia, but just in the city of
Milan accounts for 3472 public building units and 18583 lands or plots of land. Those are
comprehensive of schools, hospitals, museums, offices, residential and many others.
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Access to capital at big scale is critical for Milan to realize low carbon and climate resilience
transitions. It will need to shift from building business as usual built environment to green one. At
the same time access to bigger capital is essential, as green built environment often has higher
levels of upfront capital expenditure. Therefore, Bond markets can be a source of low cost capital
in the long run for Milan and municipalities in the same transition in Italy with respect to normal
loans from financial institutions. We already discussed in detail about the strong investor demand
for green bonds that are also consistently oversubscribed in many markets. It‟s clear the fast
growing market of new financial tool has high potential to help cities in attracting new investors
and competitively priced capital to fund their green projects. Moreover, becoming frequent bond
issuer and improving the rating also leads to a nice pop-up in the price and attracting also
international investors. As in Italy the bond issuance is in Euro, makes it easier the process for
international investors with respect to other currencies which is traded just in domestic market.
The reasons to choose Milan as our best practice are its bold role among developing and emerging
Italian cities, better financial situation and the interest of Milan municipality regard to green
bonds. If Milan manages to issue a green bond this year, the demand on the market will increase
also for coming year, as it has been for many other cases of municipal bonds in Europe. Based on
our interviews we already know Milan municipality is structuring its first green bond dedicated to
mobility sector in which they want to invest large capitals. They believe to have a better overall
control on mobility sector that enable them to use green bonds for funding as it will be easier to
evaluate and report annually its environmental impacts.
The main obstacle for using the green bond in real estate sector is not having the proper
information and mapping of public buildings in Milan. Therefore, the first step for municipality is
creating an integrated platform between different departments to be able to monitor actual
situation of public buildings, their energy consumption and push the best practice with
considering the high standards of building environmental certification. By using the data collected
in this mapping system then municipality will be able to prioritize and identify potential green
qualified projects in line with green bond principles. We proposed to municipality of Milan a long
term collaboration with Politecnico di Milano as mapping 3472 public building obviously is not a
easy task and at the same time can be great practice for the students of our course.
The second step after providing the mapping of the public building and list of interventions, is
arranging credible independent review and also certification for these projects. It will be the best
way to gain better reputation in the market and providing confidence for broader investors also in
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international market. The future investors should be assured of the quality of the green
investments.
The third step is to provide the framework including the procedures for tracking to be able
reporting the green impact of projects being made. They can use the Guidelines provided by
GRESB to create a national one by considering Italian factors too. Definitely spending more time
to define the proper green projects for each building will help us in third step. The intervention of
public building for the first issuance of green bond in real estate sector could be chosen among
those that seem easier for using indicators and measuring system of monitoring. At the same time,
it‟s better to choose the projects with bigger impact to be able using them as a way to promoting
green bonds and informing more other cities and community about positive impacts of this
method of investment and SDG factors.
The fourth and fifth steps are the process of issuing the green bond and monitoring the use of
proceeds and report annually respectively. Fortunately in these two last steps won‟t be any
difficulties as they could use their experience of first issuance. Indeed, Milan municipality could
use the same bond structure, work with the same advisors and banks and apply for the same rating
system which is going to use during this year.
Even if the green bonds have higher costs at the beginning due to issuing, tracking, monitoring
and reporting activities, it has been noticed that issuers especially the ones that repeatedly issued
these kind of bonds, compensate the initial costs with a series of advantages, not all measurable.
First of all, a positive impact and great attention of market and investors, attracting diversified
investors which are now more and more keen on ESG thematic, a diversified portfolio, direct and
measurable benefits from a social and environmental point of view, highlight the green assets.
Moreover, having the transparency and annually report will improve little by little the integration
and communication among different departments in municipality which in long term will bring
lots of benefit for the system.
The SWOT analysis in Figure 42 expresses the core strengths and weaknesses of the issuance of a
future green bond with use of proceeds also to finance real estate projects.
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Figure 42. SWOT analysis for our proposal
We provide this outline for Milan based on the information about its financial debt situation and
public buildings information, but the same framework could be used for other virtuous
municipalities that are willing to join the market. Indeed, Milan municipality can have an
important role of helping other municipalities by knowledge exchange, providing a guide on
issuance and toolkits of green muni bonds and make it accessible for others. It can be exactly like
the situation municipality of Gothenburg had in Sweden. Also they can speed up spreading the
knowledge by seminars and webinars to ease the creation of the green platform for engagement
with local governments, investors and banks.
•Information asymmetry
•Greenwashing
•Deversification of the risk
•Increase internal efficiencybetween departments
• Promoting green investments inreal estate sector
•Improving knowledge about themunicipal real estate assets
•Creating favourable financialpolicies
•Creating of more jobopportunities
•Measurability of environmentalimpacts
•Understandung the actual greenpercentage of the investment
•money and time consumingfor preparetion
•An apparent lack of integratedlist among differentdepartments regarding publicbuildings
•Take global responsibility
•Strong investor demand andincreasing diversification ofinvestors
•Branding and Reputationalbenefits for Milan municipality
•Reducing the environemntalimpact of the municipal assets
•Giving a impluse also to privateinvestments
•Ability to highlight the greenattributes
Strengths Weaknesses
ThreatsOpportunities
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8.3. A Blueprint for Smaller Municipalities
Having analysed the dimensions of the public real estate assets, it‟s impossible to be
unconcerned about the opportunities related to them, regarding the processes of promotion of
greener impacts and the new financial solutions to fund this aim. Capital cities and big local
governments can benefit from a direct access to the bond market or the financing from banks,
depending on the individual possibilities and preferences. Contrarily, smaller municipalities don‟t
have this freedom and they have to find other mechanisms to access long-term debt financing.
If Milan starts to pave the way towards the green bond market, many others might follow its steps.
Based on the result of conducted survey we understood that for many municipalities, especially
the small ones, there are some obstacles in using green bonds. It seems the local and regional
governments don‟t have proper knowledge of this new financial instrument in the market. Also in
the case of knowing about the green bond, there is the shortage of technical capabilities for being
able to issue it or do not have a sufficient green projects to reach the benchmark size of issuing
a green bond. Therefore, they usually prefer other form of financing principally related to
transfers from State, EU and/or PPP.
Nevertheless, a future approach to the green bond market is actually possible though the Pooled
financing mechanisms. “Pooled financing mechanisms (PFMs) enable cities to cooperate on financial issues and
borrow jointly from capital markets at advantageous terms. Green bonds can be raised through PFMs to finance
low carbon and climate-resilient urban projects” (CBI, 2018)
That‟s a possible way to overcome the obstacles underlined, with the creation of municipal
funding agencies, capable of issuing green bonds to institutional investors with the aim of funding
green loans for investment projects undertaken by local and regional governments (United Nation
Climate Change, 2018). Those agencies come from the association of municipalities or public
administrations at the local level, that create a financial intermediary and become the
representative figure in the emission of the obligation through a procedure called bundling of the
debt. In this way, also the small municipalities are given green financing opportunities (Croci et al,
2017).
Through this procedure is possible to reduce the cost of the indebtedness respect to the
traditional bank loans and increase the value of the bonds. As less risk brings the investors to
subscribe a higher quantity. The Nordic States have been the pioneers in the creation of an
aggregation model of the municipal debts, that can provide low cost of capital also for the smaller
municipalities.
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The Scandinavian countries have used this platform of financing since the Eighties, like
Kommunalbanken in Norway, MuniFin in Finland and Kommuninvest in Sweden. Recently also
French municipalities activated one, and other countries such as England, Germany and Spain
decided to use this method in coming year.
Kommuninvest in Sweden initially was created in 1986, has had a bond rating of AAA from Fitch
and Standard & Poor‟s and has provided liquidity to 260 authorities at different level, from region
to municipality. The Agency, once the funds are ensured, select the projects following guidelines
suggested by an international initiative and proposed by single municipalities. The sectors are
mainly renewable energy and green buildings. Nowadays, they issued also green bonds through
this platform. Until now, the Swedish Kommuninvest issued two green bonds, of € 550 million
and € 520 million.
Another case of success in Agency method is in French, Agence France Locale (AFL), that was
created in 2013 and now account for 161 local entities in which 45% are municipalities. It started
its activities with a bond of 1.25 bn euro. Until 2016, AFL has given 124 credit lines to the
municipalities, for an amount of 585 million euro (AFL, 2016). 70% of the investments made by
foreigners, from different sectors such as commercial investors, central banks, asset and fund
managers. Thanks to the proper framework and high control and transparency, the agency was
rated with a Aa3 by Moody‟s.
In the case of developed countries, the creation of partnership between commercial banks and
private companies might increase the potential presence of the muni-green bond by reducing the
cost of its issuance and management of proceeds.
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Figure 43. The structure of the hydro-bond emission by a consortium of water companies (Viveracqua, 2014)
For instance, the Figure 43 exhibited how the green hydro-bond Viveracqua issued by a
consortium of companies in the field of water management in Italy. Although this green bond
didn‟t issue by any PA, it is a case to bold the potential collaboration between of different
municipalities for the emission of a muni green bond.
A local government funding agencies might give the right impulse and instruments to smaller
cities to access the market: firstly they would fund a wide range of projects aligned with the
climate priorities of the Country, later by obtaining a competitive funding rates they could issue
green bonds with a wider range for broader possible investors in local and international scale.
The possible Italian Funding Agency, should be administered and made by the local governments;
the participants combine their common need of financing and the Agency borrows on behalf of
them at a favourable rate. That creates the possibility for local governments to access directly to
the financial markets, that wouldn't be possible to manage by PA per se for lack of technical and
structural capabilities. The Agencies, for being successful should carefully follow a “check and
control” policy. They should select their participants based on the creditworthiness of each one,
they should develop procedure to control the debt positions of their member overtime and create
penalties and awards based on the performances.
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Based on the Swedish example, the participation should be subject to payment of dues calculated
according to the population of each city and the funds raised would be then loaned only to the
members that will finance their budgets, taking of a percentage of operating costs.
The cooperation should be the heart of the agency, in which each member takes its
own responsibilities and the ones of the Agency itself, it means that in case of difficulties they
would be the guarantor instead of the central government. At the same time, this method creates a
synergy among these municipalities also in speeding up their projects. Further, sharing the
knowledge and information will be other advantage by this method.
The Agency would offer an alternative way to obtain financial resources, at a favourable cost, but
due to the novelty of the instrument municipalities might be reluctant to use it because of the
poor understanding of the system advantage and principles. Therefore, it‟s very important
informing them through seminars, events and any other internal communication among
municipalities. They should know very well that the agency would make possible for
municipalities:
access to financial market
favourable rates
diversified financial resources
build capacities with a transfer of expertise
create synergy to speed up urban projects in different regions
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Figure 44. SWOT analysis for proposal of creating an agency for the pooled financing mechanisms
Another option is the “multi-municipalities”, connected with the bundling cited before, a
cooperation between cities and regions that can merge their debts to issue a green bond with a
common positive outcome. The concept behind “multi-municipalities” lies in the fact that being
associated with another entity, brings more flexibility because you can count on the financial
structure of your partner. In this case, you have one municipality, region or public entity with
sufficient financial situation and structure to be as a leader and other small municipalities join
them to create a multi-municipalities bond. As down side, there is the necessity to carefully select
the partner, and that the budgets and needs are in line with each other‟s. The coordination of two
municipalities is not easy, and might have a negative impact on the investors and the yield. One
hand a small municipality has great difficulties in the emission of debt, on the other probably small
realities don‟t have any idea of what a green bond is. Smaller municipalities might prefer other
form of financing like PPP.
•Poor understanding of the functioning
•Dependance on common needs
•Access to the market for small municiaplities
•Financial expertise sharing
•Improve the creditworthiness the the municipality or the group
•Domestic and international market opportunities
•Municipalities have to maintain a positive financial situation
•Administrative challenges
•Local governments as guarantors
• Cost borrowing costs
• Best management of the risks through diversification
•Lower processing costs
•Owner by local authorities
•Increase transparency
•Aggregation of small projects are financed
Strengths Weaknesses
Threats Opportunities
131
Joint issuances bond is issued by some municipalities or provinces based on "agreements for the
unitary negotiation of the conditions for issuing bonds" pursuant to art. 30 of Legislative Decree
267/2000 signed with one or more lead bodies acting in place and on behalf of municipalities or
Unions of Municipalities concerned. The participants might be municipalities or provinces that
may already be predefined in the agreement and have expressly mandated one or more
municipalities to act as leader, or adhere in a second time to an agreement previously signed by a
municipality and a bank. The advantages for the municipalities would be (Risorse Comuni, 2007):
access to the domestic bond market under conditions that are difficult to achieve
individually by the various Municipalities by virtue of the critical mass deriving from the
agreement / agreement signed by the Leading Body
availability of predefined conditions (based on various types of amounts, maturities and
forms of capital repayment) until the end of the agreement
greater flexibility in terms and times of disbursement than other forms of financing and
therefore optimization of cash flows and reduction of the risk of mismatching the burden
of indebtedness and the return on financial assets
faculty of not having any immediate bond of issue or of being able to adhere (also at a
later time) to an agreement stipulated by the Leading Entity with the appointed bank
within a specific deadline
slenderness of the operation obtained thanks to the exclusion of the obligation to call for
tender as provided for by art. 19 letter d of Legislative Decree 163/2006
All and all, the proposal for smaller municipalities could be beneficial by providing a new way of
funding and more favourable financial conditions by increasing the number of issuance.
Moreover, the overall cost of issuing green bond will be less than issuing by individual
municipality as it is carried out together with others and the relative savings on the issue costs due
to economies of scale. In addition, the possibility of benefit from more favourable financial
conditions and instruments deriving from the creditworthiness of the leader municipalities could
be another advantage for small municipalities.
132
Conclusion
Returning to the questions posed at the beginning of this study, it is now possible to state that
the capital markets across different urban development projects have evolved over the last years
from a market where investors knew and cared a little about what they are investing in, to one
where purpose matters more than ever. Green bond is the fruit of this new trend, which have
been flourished also in the real estate and construction sector. Moreover, a revolution in these
sectors was provoked by growing awareness of climate change and enhanced focus on energy
efficiency in the whole life cycle of the buildings across the Globe. Although, the evidence from
this study suggests narrowing down the research focus to existing buildings, which are responsible
of extensive energy consumption and especially in Italy with the highest emissions of Co2
generated by buildings with respect to other European countries.
On the other hand, the pace of growth of this bond is likely only to rise in property sector, as
green bonds provide both public and private companies an important source of funding for green
projects regarding mitigation and/or adaptation to climate change. In coming years, guidance and
requirements over the use, management of proceeds and reporting of project performance are
likely to be streamlined and tightened as the committee draft of ISO/CD14030-1 published by
“International Organization for Standardization” dedicated to green debt instruments. This will
solve the problem of not having common standards in the market, which mentioned in the case
studies analyses and also highlighted again during the meeting with Milan municipality.
Green bond would be a more fruitful financial tool for improving real estate assets if the local
governments steer the capitals and potential investors towards their public properties, as they own
the biggest share of public buildings in Italy. The re-orientation of local finance is the key strategy
for sustainable development of a city, in particular with respect to the need of innovate energy
133
conversion of buildings. At the same time access to bigger capital is essential, as green built
environment often has higher levels of upfront capital expenditure which highlights more the
need of new financial instruments.
Another interesting finding, emerged from analysis of the European trend and chosen case
studies, is the role of local government in paving the path for using green bonds proceeds in real
estate sector and creating local guidelines for private non-financial corporates to join the market.
In this investigation process, the aim was to assess the possibility of muni green bond in Italy with
the use of proceeds in real estate market. Therefore, the instrument of ordinary municipal bonds
(BOC) has been analyzed, taking into consideration the decrease of their issuance in the last
decade, the idea of entering to the green bond market for municipalities could be a new financing
way. On the other hand, since the new fiscal discipline, starting from the 2016 Stability Pact,
allows us to look optimistically at the prospects of the municipalities to resort to debt, and
therefore also to „green‟ bonds.
After conducting the survey and analyzing the output, we decide to divide the target of our
proposal in two groups; big municipalities like the city of Milan, Turin and so on and small
municipalities which don‟t have proper financial situation to issue green bonds. The evidence
from this study suggests that Milan could be the pioneer in the muni green bond issuance by
having the right financial structure and many potential green projects to fund. The municipality
actually has a plan to issue the first Italian muni bond dedicated to mobility by the end of 2019.
Our proposal is instead of dedicating the proceeds just to specific green projects chosen before,
providing a portfolio of green projects for 2020. In this way it will be easier to dedicate the
portion of proceed to green intervention in public buildings. The most important limitation lies in
the fact that there is no proper mapping of public buildings owned by Milan municipality now.
The solution could be an integrated platform among different departments to create the mapping
of 3472 public building of Milan municipality. The thesis has provided a further application of the
green municipal bonds to the real estate sector, with guidelines and suggested improvements to
offer a best practice example to all the big Italian municipalities. Moreover, considering the second
target of our proposal, the smaller municipalities, that might not easily access to this new market,
could collect a large amount of funds through the unification of the individual financial resources
134
in securities issued by a Local Agency for municipal credit. That‟s a possible way to overtake the
underlined obstacles.
The findings in this report are subject to at least two limitations. First, there was no previous study
regarding local green bond in Italian real estate market and as pointed out no issuance of muni
green bond in Italy up to now. Therefore, it was difficult to find proper data regarding the local
government perspective. Second, dealing with green bond needs proper financial expertise which
made some parts of the research difficult for us to discuss in greater detail.
Nevertheless, the choice of issuing a green bond should not be consider by its financial return as
there is not so much difference to other bonds. The key point is raising awareness for the
challenges of global warming and relevant climate changes meanwhile highlighted the potential for
institutional investors to support green project investments through liquid instruments without
giving up financial returns of their investments.
135
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