Green Municipal Bonds and the Financing of Green Infrastructure in the United States

Green municipal bonds are a novel way to help unlock finance for investment in sustainable and urban infrastructure in the US. However, issuance lags in the US market due to negative perceptions such as high cost, low returns, and greater risk. In this study we aim to demonstrate that US green municipal bond performance is consistent with the returns of general municipal bonds, which can improve investor confidence and increase demand. The performance of this bond sector is assessed through two different means: through the creation of a green municipal bond index and benchmarking its performance against an overall municipal bond index; and by looking for a price difference between green municipal bonds and their conven- tional counterparts through yield curve assessment. Increased investment in this sector could be triggered by showing that the green municipal bond sector performs similarly to, or better than, conventional municipal bonds. We found that an in- dex comprised of green muni bonds outperforms the closest equivalent S&P index from 2014-2017, and there is a statistically significant green premium (“greenium”) present in the secondary muni bond market of at least 3 basis points in 2017. There was no conclusive evidence for the presence of greenium at issue in the primary market, however there are some signs that this could change, and furthermore we do not observe that green muni bonds come to market at a discount. These results are key to encouraging growth in the green municipal bond market, which can help American cities to target ESG and SRI investors and unlock more capital for green and climate-aligned infrastructure projects.