Water Online

January 2017

Water Innovations gives Water and Wastewater Engineers and end-users a venue to find project solutions and source valuable product information. We aim to educate the engineering and operations community on important issues and trends.

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established the environmental framework as the starting point and overarching standard for all its subsidiaries and projects. Magnus Borelius is Head of Treasury at the City of Gothenburg and is responsible for the green bond (GB) program. Enjoying a triple-A municipal rating, the city has issued four green bonds since 2013 for a total of 4.36 billion Swedish Kronor (approximately $488.2 million), which represents 10 percent of the city's outstanding debt. A new issue is planned for 2017. He explains their GB strategy. "As part of Gothenburg's framework of meeting climate change and sustainable environmental objectives, we established categories, such as waste management, sustainable transportation, water management, etc. Some of these are smaller projects. But there are larger projects, as well ... We have not defined what is 'green' or 'not green.' Instead, we established these categories, and investors in the green bonds know their money will be going to projects that fall within one or more of these categories." Borelius continues. "When we started, we didn't know if this would succeed or if there would be demand from investors. We were surprised by the huge interest from investors. All of our green bonds have been oversubscribed ... [and] we have investors calling for private placement of the future green bonds we issue. They are mostly institutional investors — bank treasuries, asset managers, pension funds, insurance companies ... [that] are Swedish, Scandinavian, and from Europe, especially Norway, Germany, [and] Switzerland." Shared Features Common to both bonds is achieving an environmental impact and doing so through rigorous vetting processes. Gothenburg started by having the GB investment structure validated by an independent evaluator. ix Thereafter, all investment targets were jointly vetted and selected by the City Office, made up of the departments of Urban Development and Treasury. The Environmental Administration scrutinizes their selection, with final approval for funding verified by the City Executive Board. Similarly, the EIB was designed with outside counsel and independent advisors. The parameters in the tiered performance structure were established by DC Water from existing runoff measurements and verified by outside engineers, with final approval by the investors. The approach to measuring results varies between the two bonds. Where Gothenburg has no formal evaluation standard, the EIB ties returns to verified results. But both structures require monitoring and reporting on compliance with the environmental objectives. For the GB, each subsidiary reports regularly on project status and Treasury monitors every project's economic development, including environmental indicators. In turn, this information is included in annual reports to investors. x Distinct Differences Gothenburg purposely chose not to issue "impact bonds" because of how "impact" might suggest a political agenda. Instead, issuing "green" bonds aligned with a more traditional financing structure and a universally held standard in Sweden of benefitting the environment. This crossed party lines and was a common denominator for small and large companies in the city's portfolio. This is a clear distinction from impact bonds, which seek to integrate innovation into the entire process of problem solving — from establishing collaborations to designing risk-sharing financial arrangements. One of the most obvious differences between the two bonds is the "demonstration" aspect of this first EIB. Its purpose is to prove green infrastructure for water management and the impact bond as a model for financing impactful solutions. On the other hand, green bonds have become much more common, with almost $75 billion issued in 2016, up from $42.2 billion in 2015. xi Gothenburg's green bonds are tested and funding multiple projects. The End Game These bonds represent two alternatives to mobilizing private investment to achieve environmental and social objectives. As the Rockefeller Foundation stresses, this effort is "critical, because philanthropy and government only have billions to spend, while private markets hold an estimated $210 trillion." xii This is not an insignificant point for nature either. It is dependent on all parties delivering sustainable results. n i UN Water, Fact Sheet on Climate Change ii Impact investments are investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. See also: The Core Characteristics of Impact Investing, the Global Impact Investing Network (GIIN). iii Establishment of the Social Impact Investment Taskforce, headed by Sir Ronald Cohen by the UK during the 2013 G8 Social Impact Investment Forum. Concentrated efforts by the Taskforce served as a significant catalyst in rapidly mainstreaming the concept of 'impact investment' and the development and maturing of innovation in a wide variety of investment models along what was called the "Impact Investing Spectrum" — from corporate investment in social and environmental initiatives and enterprises to optimising the areas for application of more traditional models of philanthropy. iv Impact Investing Emerges as a Distinct Asset Class. See also JP Morgan Report: Impact Investing: An Emerging Asset Class. v GIIN. vi Respondents are comprised of fund managers (60%), foundations (13%), banks (6%), development financial institutions, family offices and pension funds/insurance companies (2-3% each) – p. XI vii Development Impact Bonds are a type of impact bond aimed specifically at funding international development investments in emerging and frontier markets. Other organizations involved in the Group included the Rockefeller Foundation, the Bill and Melinda Gates Foundation, Citigroup, USAID, OPIC, Omidyar Network and government agencies such as the Swedish and UK International Development Agencies. viii "...hence the need for guarantees, early repayment triggers, etc. in many of those early 1.0 models, or indeed the need to find "particular" investors..." ix Cicero: the Norwegian Center for Interdisciplinary Climate Change Research. x Investor reporting, City of Gothenburg (English). xi ClimateBonds.net xii Innovations in Finance for Social Impact, Judith Rodin, President, The Rockefeller Foundation. wateronline.com n Water Innovations 37 FINANCING Julie King is managing director of Galileo Agency, a boutique agency working with companies and civil society organizations in impact areas — such as water, renewable energy, and the environment — to commercialize products, initiatives, and impact strategies. About The Author

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