How government bonds can help cities manage extreme weather
Morgan Stanley Sustainable Investing12/11/23
Summary: US state and local governments are increasingly using bonds to raise capital for infrastructure and housing projects that mitigate and protect against extreme weather events. Here’s what it could mean for your portfolio.
US cities and states are experiencing severe and increasing financial impacts as a result of climate change and extreme weather events. From 2010-2019, the US experienced 131 climate-related disasters that generated losses of more than $1 billion each; this is a stark comparison to 33 such incidents in the 1980s.1
To both mitigate and respond to future events, US municipalities are exploring ways to fortify infrastructure and provide energy-efficient affordable housing. Sustainability bonds, which fund projects with both environmental and social benefits, are one key way that cities and states are raising capital for these efforts. Here’s what retail investors should know.
The need for sustainability bonds
Appetite for sustainability bonds has grown over the last five years, among both the investors who purchase these bonds and the companies and municipalities that issue them. For issuers, these bonds can help address both environmental and social issues associated with climate change; mitigate impacts from extreme weather disasters; and, in some cases, respond to government-mandated standards for energy usage and carbon emissions.
Some Investors are seeking sustainability bonds, which might:
- protect portfolios against climate risks;
- fund projects that reduce energy consumption and carbon emissions;
- and capitalize on opportunities from the biggest sustainability challenges.
Based on these trends, the size of the market grew from $17.8 billion in 2018 to a record $191.7 billion in 2021, before declining to $141.6 billion in 2022.2
“Through bond offerings, increasingly labeled as sustainability bonds, states and cities are able to dedicate the necessary capital to respond to the evolving environmental and social needs of their communities,” says Zachary Solomon, Co-Head of Morgan Stanley’s Public Finance Group. The proceeds will support efforts that include climate change resiliency projects and affordable, energy-efficient housing.
New infrastructure helps adapt to flooding and storm surge
In 2012, Hurricane Sandy ravaged the East Coast. At the southern tip of New York City, the aftermath included displaced residents and flooding in homes and public spaces. To help ensure that future weather events have less of an impact, in 2023, the Battery Park City Authority (BPCA) issued $349 million of municipal bonds designated as sustainability bonds, underwritten by Morgan Stanley, to raise funds that will help fortify the area along the Hudson River against storm surges.
The proceeds from the new bonds will allow the BPCA to help raise the landmass for some parks and community centers, so water does not rush in after storms.3 Another initiative will manage coastal flooding to protect institutions such as the Museum of Jewish Heritage.4
Through bond offerings, increasingly labeled as sustainability bonds, states and cities are able to dedicate the necessary capital to respond to the evolving environmental and social needs of their communities.
Increasing affordable housing while reducing emissions
In an effort to reduce greenhouse gas emissions, states and cities have new environmental requirements for affordable housing. Sustainability bonds are helping states build new housing that meets these criteria. For example, in 2022, New York State announced proposed legislation to ensure that new building construction reaches net-zero emissions by 2027.5 In 2023, the New York State Housing Finance Agency (NYSHFA) issued $285 million of sustainability bonds, which were underwritten by Morgan Stanley, to finance the new construction of 797 affordable multifamily housing units located in Brooklyn, the Bronx, Westchester, and Suffolk County.
The units will have a positive environmental impact because their building materials and appliances are required to be energy efficient. They also create the significant social benefit of offering low-income residents rents they can afford and that include amenities such as community rooms, fitness centers, laundry rooms and shuttle services to train stations.6
New York City is also meeting heightened environmental standards in affordable housing. The New York City Housing Development Corporation (NYCHDC) issued $495 million of sustainability bonds, underwritten by Morgan Stanley, to finance the new construction of seven multifamily rental developments to create 1,818 new affordable multifamily housing units. The new construction developments are all expected to comply with Enterprise Green Communities standards.
The bottom line
As cities continue to explore ways to mitigate the impacts of natural disasters and provide energy-efficient affordable housing, sustainability bonds may offer compelling opportunities for retail investors. They have the potential to protect portfolios against climate risks and fund projects that reduce energy consumption and carbon emissions.
The source of this article, How Bonds Can Help Cities Manage Extreme Weather, was published on September 13, 2023.
1 National Centers for Environmental Information, “United States Summary,” https://www.ncei.noaa.gov/access/billions/state-summary/US, November 8, 2023.
2 Environmental Finance Bond Database, S&P Global Ratings, “Sustainable Bond Issuance Will Return To Growth In 2023,” https://www.spglobal.com/_assets/documents/ratings/research/101572346.pdf, February 7, 2023.
3 Samantha Maldonado, “In Battery Park City Another Plan to Destroy a Green Space In Order to Save It,” https://www.thecity.nyc/2022/5/16/23070850/battery-park-plan-destroy-green-space-resiliency, Mat 16, 2023.
4 New York State, “North/West Battery Park City Resiliency Project: Post-30% Design Progress Update Meeting, September 30 @ 4:30PM,” https://bpca.ny.gov/nature-and-sustainability/resiliency/, accessed November 15, 2023.
5 New York State, “Governor Hochul Announces Plan to Achieve 2 Million Climate-Friendly Homes by 2030,” https://www.nyserda.ny.gov/About/Newsroom/2022-Announcements/2022-01-05-Governor-Hochul-Announces-Plan-to-Achieve-2-Million-Climate-Friendly-Homes-By-2030, January 5, 2023.
6 New York State, “Completion of 65-Unit Supportive Housing in East Buffalo,” https://hcr.ny.gov/pressroom, November 9, 2023.
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