Municipal Bonds

Channels: Green Bonds

Companies: MuniFin

People: Esa Kallio, Antti Kontio

Contributed article

First Finnish green bond hits the mark(et)

The inaugural green bond issue from Finland

In September 2016, Municipality Finance Plc (MuniFin) became the first Finnish issuer of an international green bond. This was hardly a surprise, for two reasons: first, Finland has already exported its so-called 'green gold' – its timber and forestry expertise – and has an extremely strong clean-tech industry. Secondly, as MuniFin is the third largest financial institution in Finland, it took on green financing because it could. It is so far the only domestic public sector operator with the volume of transactions, diversity of portfolio and international investor base that could comfortably put together the necessary funding.

"We have great potential for green investments in our loan portfolio and will continue to build up environmental awareness in the Finnish municipality sector. The positive investor and media response to our first green bond is an indication of MuniFin having made the right strategic decision," says Esa Kallio, executive vice president at MuniFin.

The green bond is by no means a new debt instrument, having been around since 2007. However, pronounced interest in the instrument has flared up in the past few years, mainly because of the growing awareness of green technologies' impact on the management of climate change. Consumers want greener products with greener processes, and regulatory authorities both incentivise and tax industries based on how 'green' or 'brown' they might be. There is both the pressure and a willingness to 'go green'.

The life-cycle of investment is transparent

As green lending is now in the spotlight, its advantages and challenges are being assessed.

One of the challenges has been (and is) the unstable system of standardisation: what can be considered green and how are the metrics organised? For MuniFin, this has been a particularly heartfelt question.

"We want to make sure that the funding we secure goes to the correct end. Unlike many other issuers in the field, we have established an unbiased Green Evaluation Team, whose task it is to both assess and follow-up the use of proceeds. This team acts independently and comprises leading experts of environmental performance evaluation," says Kallio.

MuniFin has seven categories in its green framework: renewable energy, sustainable buildings, public transportation, energy efficiency, water and waste water management, waste management and environmental management.

Antti Kontio, MuniFin. Image: Sami LambergCurrently, the size of the green portfolio is approximately €400 million ($442 million). It has been concentrated on sustainable buildings, public transportation and water and waste water management, but there are additional projects in the pipeline. "Every project will be analysed on a case-by-case basis but, generally speaking, there is a high likelihood of accepting a project if there are clear and measurable positive environmental impacts," Kallio says.

Most of MuniFin's financing goes to sustainable projects anyway, but the green bond acts as a specialised tool for combatting climate change.

"At the moment, the bond alone provides a good starting point, but much remains to be done. Currently we are marketing the new product for our customers and increasing awareness around this topic. Our main task is to deepen the co-operation between the financial and environmental functions of Finnish municipalities. Both functions play a key role in our green financing as we have a commitment to report the environmental impacts to our investors," says funding manager Antti Kontio.

Starting from 2017, MuniFin will publish an impact report for its green investors. The report will include project related information and impact metrics such as the emission reductions achieved (in tonnes of carbon dioxide equivalent) and the amount of clean power generated (in MWh).

To attract demand from municipal lenders, municipal customers and green project developers, MuniFin's green bond comes with a maximum margin discount of 10 basis points depending on the 'greenness' of the project. Dark green projects get a higher discount, which is logical given that these projects have a larger impact for the society.

Everybody wins eventually

"This is to incentivise making investments with green financing. We believe that green lending can lead to a positive cycle: as investor interest in green bonds increases, funding becomes more accessible and the cost of money eventually goes down. This makes green bonds more attractive sources of income from the issuers' point of view. The end result is that it becomes more feasible to launch green projects that actually solve concrete problems, which is the entire point of green financing," Kontio explains.

Esa Kallio, MuniFin. Image: Sami LambergIn the ideal scenario, everybody wins: the investor, the lender, the environment, and society. But currently, it is the lender who ends up absorbing the costs of the additional work linked to green bonds.

"In the long run, green financing must, of course, be a profitable business. For issuers, the main benefits emerge in the long run: they can diversify their investor base, position themselves as leaders in the green space, communicate their values, or access economies available to repeat issuers since most of the costs are one-offs," explains Kontio.

That said, from an issuer's point of view, it would be encouraging to see the additional costs be shared with others, remarks Kallio.

"In the end, the responsibility for finding the tools to combat climate change lies with the state. In green financing and its implementation on the municipal level, the state's participation is not very clearly defined. However, if the state were to support green financing by, for example, providing tax exemption on the interest yield or by issuing its own green bond, things would be more even-footed," he suggests.

First in Finland in figures

The first Finnish green bond was traded on 27 September and settled on 4 October 2016. The five-year $500 million bond was priced 33 basis points over five-year mid-swaps and pays a fixed coupon of 1.375 %. The re-offer price was 99.495 % and the spread over the five-year US Treasury bond was 36.7 basis points.

Investor demand was strong from the outset and the book was oversubscribed by the afternoon of 27 September, with buying interest from around the globe. Europe, excluding the Nordics, accounted for 42%, Americas 29%, Nordics 22% and Asia Pacific 7%. Almost 50 investors participated and 20 of them were new investors for MuniFin. The transaction received very strong support from environmentally focused accounts including CalSTRS, Calvert, Mirova, NIB, Praxis Impact Bond Fund, Raiffeisen Capital Management, Swisscanto Funds and Syz AM.

Learning to be green in a green school

The municipality of Tyrnävä, located in Northern Finland, is growing rapidly. Its population of 7,000 has an exceptional age structure: about 50 % are under 30 and 20 % are under the age of six. The average number of children per family is four. There are currently five schools in the area but, by late 2017, there will be six.

The mayor of Tyrnävä, Marjukka Manninen, says that the need for an additional school was pressing and, during budget preparations a few years ago, the municipality was in negotiations with various financing parties, including MuniFin.

"The initiative for green funding came actually from MuniFin. They saw the green potential in our new school project and made us an offer. We were very enthusiastic about the funding, since environmental issues are at the core of our strategy and being able to build a learning environment that was both green and educationally advanced was a fantastic opportunity," says Manninen.

Open space, modular, energy efficient

The new Rantarousti school will be heated with geothermal energy, and solar panels will generate some of the electricity used. The lifecycle efficiency imperative shows in the innovative space arrangements and choice of materials. During the planning stage, the municipality and its main contractor, NCC Building, came up with the idea of an open-plan facility with a reduced square footage. The original plan of 7,800 square metres could be taken down to 6,500 without compromising function or comfort.

"Our strategy underlines bio-economy, the circular economy and lifecycle efficiency, which all are visible in the new school building. Also, environmental considerations are integrated in our curriculum, so that the pupils not only study at a green school but also learn how to assess and promote environmental thinking," says Manninen.

The new Rantarousti school will be a showcase in modularity: there will be no canteen and no specified classrooms – the number of corridors and other contained spaces is limited. The open spaces can be organised into different functions by means of furniture and textiles, for instance.

"We've had a wonderfully cross-disciplinary team of people at work, students and teachers included. We're looking forward to new types of teaching and learning," concludes Manninen.

The school is a life-cycle project, which means that its energy-efficiency will be continuously monitored and its care and maintenance carried out according to the best practices available.

The Rantarousti school project

Customer: Municipality of Tyrnävä
Project category: Sustainable construction
Loan amount: €13 million
Loan maturity: 21 years

The municipality of Tyrnävä will build a primary school for 400–500 pupils and, as the customer, it is seeking long-term energy solutions on the basis of a 20-year long maintenance agreement. Some of the electricity used on the property will be generated using solar panels.

Geothermal energy will be the main source of heating, in addition to which district heating will be used as a reserve energy source. Based on these solutions, the total energy consumption of the location will be 101 kWhe per square metre, over 40% less than the maximum value (Energy Class B) laid down in the current provisions for school buildings.

MuniFin's Green Evaluation Team says: "In terms of energy efficiency, the Tyrnävä primary school represents good, modern construction and provides the opportunity to create an impressive example of local production of renewable energy."

Municipalities – pathfinders to greener living

In Finland, municipalities are the most extensive and important system of self-government. Municipalities are responsible for providing their residents with most basic services. The most important of these are social welfare and health, education and culture, the environment, and technical infrastructure. Basic services are mainly financed through municipal taxes, central government transfers to local government, and fees charged for services.

As municipalities have a great degree of weight on both the operational and strategic side of overall well-being and national competitiveness, they are important customers for financing institutions. The more municipalities make use of green lending and invest in green initiatives, the more the entire green mind-set will get realised in tangible achievements such as environmentally friendly buildings and construction, waste management, and renewable energy.