In 2022, S&P Global Ratings expects sustainable debt will likely represent a larger share of the U.S. municipal market. A diversifying and growing array of issuers are embracing the green, social, and sustainability debt labels, seeking to tout their environmental, social, and governance (ESG) credentials to the market, constituents, and peers. We also see the potential for a significant boom in labeled issuance, if additional large and frequent issuers in the affordable housing, education, and transportation sectors decide to add a green, social, or sustainability label to their already-planned offerings.

We expect that the market conversation surrounding disclosure and transparency will continue to evolve, and that many issuers, especially the largest ones, will obtain external review post-issuance. In the longer term, we believe the sustainable debt market segment's prospects will depend on the extent to which a pricing advantage emerges for labeled issuances. See the "A Note On Our Sample" section for a description of how we define sustainable municipal debt in our data tracking.

Sustainable Debt Has Room To Run In 2022

S&P Global Ratings estimates total municipal sustainable debt issuance could reach at least $60 billion in 2022 based on our baseline projection (chart 1), a $14 billion increase from 2021. Also for 2022, S&P Global Ratings anticipates $1.5 trillion in sustainable bond issuance, globally. For more information, please see the report "Global Sustainable Bond Issuance To Surpass $1.5 Trillion In 2022", published Feb. 7, 2022, on RatingsDirect. We believe the municipal sustainable debt market segment has ample room to run, given the natural alignment between the functions of many municipal entities and green, social, and sustainability considerations. In our opinion, the potential universe of labeled debt is much larger than the 9.7% municipal market share captured in 2021.

We expect several factors to combine to push this market segment forward in 2022:

• The market segment's powerful momentum, partly driven by an increasing focus on ESG considerations;
• The ever-present capital needs of municipal borrowers;
• A desire by U.S. municipal issuers to expand their international investor base; and
• Interest rates that will remain low, even if they rise somewhat to help control inflation. S&P Global Economics forecasts at least several interest rate hikes in 2022 but expects the federal funds rate to remain low by historic standards (see "The January Jobs Report: Resisting Omicron And Climbing Higher," published Feb. 4, 2022).

In 2022, our baseline projection anticipates municipal sustainable debt to increase by 34% to approximately $62 billion, while S&P Global Ratings Research forecasts total municipal market issuance will increase by only 2%, to $485 billion (see "Global Financing Conditions, Bond Issuance Looks Set To Contract 2% This Year As Monetary Policy Tightens," published Jan. 31, 2021). Our baseline for municipal sustainable debt issuance projects the segment's market share will increase to about 13% of the total municipal market. Sustainable debt represented 9.7% of the municipal market in 2021, a substantial increase from 5.5% in 2020, and 3.2% in 2019.

For our low case scenario, we anticipate municipal sustainable debt issuance to reach $55 billion, but we still expect market share to grow significantly higher to 12% of the total market. Our high case projection anticipates sustainable debt issuance reaching nearly $80 billion or about 17% of the municipal market. Given the growth-driving factors cited above, we believe it is possible that the sustainable market segment could surpass our baseline projections. We note there is substantial uncertainty in forecasting specific issuance figures for this market segment, given its extraordinary pace of growth, and the ongoing though somewhat diminishing, influence of a few mega-issuers that drive annual issuance totals.

Chart 1

Municipal sustainable debt market reached new peaks in 2021

In 2021, its ninth year, the municipal sustainable debt market segment climbed to new heights, rising 71% to $45.9 billion from 2020's then-record year. Calendar year 2021 saw large growth in each of the primary labels:

• Green-labeled issuance rose 36% to $21.7 billion,
• Social-labeled issuance jumped 148% to $16.9 billion, and
• Sustainability-labeled issuance increased 81% to $7.3 billion.

While the influence of mega-issuers remains a key factor driving total issuance, the sheer number of issues hit new peaks. In 2021, the total number of labeled issues in the municipal market increased 108% to 540 (chart 2). This growth occurred despite a 1.9% decline in overall municipal market issuance in 2021, following the broader market's record year in 2020.

Chart 2

Green bonds represent the largest portion of the market segment, and alone represented 5.3% of total municipal debt in 2021, an increase from 4.6% the prior year. Green bonds represented less than half of the market segment for the first time in 2021, falling to 47% (chart 3). Social bonds have grown tremendously and now represent a large share of the market segment, rising to 37% of the total from 26% in 2020, following an ongoing boom in housing bond issuances carrying the label. Finally, sustainability bonds represented 16% of the market segment in both 2020 and 2021.

With labeled issuances in the affordable housing sector accelerating in 2021, we expect that the relatively newer non-green labels could comprise a substantial component of the market segment in 2022 and beyond. We see the education sector as having a high potential to drive labeled bond issuance numbers in the coming years, given its natural alignment with social and sustainability considerations. At the same time, the broad societal trend toward a greener future is certainly not fading in terms of energy production and consumption, waste management, or other factors. As a result, we expect the green label to remain prominent, particularly in its top sectors of water, transportation, and green buildings.

Chart 3

Momentum, a favorable borrowing environment, and a still-uncertain greenium will likely drive future growth

Foremost among the factors influencing this market segment's year-over-year growth is the sheer momentum generated since the first issuance in 2013. New issuers joined the party in 2021 as labeled transactions emphasized issuers' existing policies or political objectives and bolstered longer-term sustainability strategies. Furthermore, high investor demand in recent years has seen some labeled issues oversubscribed at higher levels as new investors entered the municipal market. Coupled with persistently accommodative monetary policy, issuers have benefited from a long history of low interest rates and favorable capital costs.

In the longer term, we believe market segment growth could at least partly depend on the extent to which a pricing advantage emerges for labeled issues. This remains a subject of ongoing debate, with most findings suggesting a lack of any material pricing advantage, or greenium, in the municipal market. There are a few anecdotal instances where a marginal greenium may have been observed, including Oberlin College's green bond transaction that priced five basis points tighter than the non-green issue that sold simultaneously in 2021, according to Janney. Evidence from emerging research on the global sustainable debt market suggests that a modest greenium appears to be developing outside of the municipal space.

Lack of clear evidence of a greenium in the municipal market may also be at least partly due to the market's relatively more fragmented nature. Given the particular nuances of the municipal market and many factors that influence pricing (such as supply and/or credit rating), a direct comparison between labeled and non-labeled bonds with highly similar characteristics is rarely available. As such, it is challenging to ascertain whether any pricing differential that exists between two similar issuances, with one labeled and the other not, is due to labeling or to underlying market conditions or other factors. Even without a clear pricing advantage, increased demand and a larger investor pool for labeled transactions could prove beneficial to many issuers. However, factors like an increased administrative workload and associated costs related to transparency and disclosure, and the lack of a clear pricing advantage could discourage some issuers from using the labels.

The Bipartisan Infrastructure Law that was passed in November 2021 included historic levels of funding for roadways, ports, airports, transit, water systems, and broadband internet access while also promoting energy efficiency improvements to federal buildings, clean energy upgrades for schools, electric vehicle charging stations, and electric grid hardening and weatherization. This could lead to higher borrowings as local entities raise funds related to cost-sharing requirements.

2021 Market Trends: Social Bonds Are Booming

Bonds for affordable housing boost growth in municipal sustainable debt market; water, transportation, and green buildings round out top sectors

Bonds issued to finance affordable housing projects and carrying a social or sustainability label increased by $14.5 billion, or 288% in 2021. This equated to 76% of the total annual growth in the sustainable debt market. Multiple state-level entities led this growth, and four frequent issuers in the affordable housing space were among the top 10 sustainable debt issuers in 2021.

A single entity, the California Statewide Communities Development Authority Community Improvement Authority (CSCDA CIA, a California state financing authority and conduit issuer) was instrumental in driving total figures higher in 2021, as it came to market with 54 distinct social bond issues totaling $4.2 billion in 2021, equal to 9.1% of all municipal sustainable debt for the year (table 1). These bonds were issued primarily to finance projects under the authority's Workforce Housing Program. In our view, this is a high-profile example of the potential for decisions by state-level entities to generate large swings in sustainable debt issuance figures even as the segment grows.

Table 1

With its extraordinary growth in 2021, affordable housing is now the leading sector for all-time municipal sustainable debt issuance at slightly more than 24% of total issuance ($28.3 billion) (chart 4). Other leading sectors in municipal sustainable debt issuance are:

• Water (combined with wastewater and stormwater) at 24% of total issuance, or $28.0 billion;
• Transportation (substantially all mass transit and rail) at 21% or $24.4 billion; and
• Green buildings at 16% or $18.7 billion.

The remaining top seven sectors, including issuances with mixed-use proceeds, together accounted for 15% of total issuances.

In general, we classify a sustainable debt issuance's sector by the primary use of proceeds. For example, we would classify an airport's green bond issuance to construct a new Leadership in Energy and Environmental Design (LEED) certified terminal building within the green buildings sector category, not transportation.

Chart 4

External Review Not Required--Yet

For a second consecutive year, most municipal sustainable debt issues carried some form of external review (charts 5 and 6). External reviewers generally review issues and opine on whether the financing aligns with the relevant International Capital Markets Association or other standards. Reviewers also often consider the intended extent and means of transparency and reporting, the projects being funded or other planned use of proceeds, or both. External reviewers use either their own methodologies or methodologies approved by another organization, such as the Climate Bonds Initiative.

We believe the wider investor base interested in the sustainable debt market segment, as compared to traditional municipal bonds, may support the trend of financing teams seeking external review. The enhanced transparency and disclosure provided by financings receiving external review lend investors more clarity on the extent to which their investments align with the priorities or guidelines that led them to consider purchasing a labeled issuance.

Chart 5

Boosted by the CSCDA CIA's labeled social bonds, each issued with external review, 2021 saw most social bonds carry external review, up from 47% in 2020 (chart 6). A majority of municipal green bonds were also issued with an external review in 2021 (64% of issues compared to 73% in the prior year), having initially surpassed 50% in 2019. Sustainability bonds saw just 30% of labeled issues with an external review in 2021, which while lower than the other labels was still an increase from 23% in the two prior years. The sustainability label is perhaps where we may see the most growth in use of external review, though we note the more frequent practice of issuing for a combination of sectors and with a mixed use of proceeds may make external review somewhat less straight forward for sustainability bonds, as compared to projects with a more clearly identifiable primary green or social purpose.

Chart 6

The largest issues are the most likely to receive an external review, with 82% of all sustainable debt issues with a par amount greater than $500 million receiving external review since we began tracking them (chart 7). This continued in 2021, with 73% of issues over $500 million including external review. Prior to 2020, only one-third of issues with a par amount of less than $10 million carried an external review. In 2020, we saw this trend reverse, and this continued in 2021 when 73% of small issues were externally reviewed compared to 86% in 2020. In recent years, smaller issues have been catching up, due largely to the proliferation of labeled issuances by smaller water and wastewater utilities utilizing a review program provided by their municipal bond insurance provider.

Chart 7

Refundings remain a significant piece of the pie, meaning a label doesn't necessarily equal new sustainable projects

With $27.5 million issued in 2021, new money remained the largest driver of municipal sustainable debt issuance in 2021 at 60% of the total (chart 8). This was slightly less, however, than for the overall municipal market, where new money represented 66% of total issuance. Refundings represented 24% of sustainable debt issuance compared to 23% for the total market. Mixed-use proceeds represented 17% for municipal sustainable debt, which is somewhat greater than the 11% for the total market.

Chart 8

As we have noted for several years, the presence of substantial refundings in total issuance figures reveals that the mere presence of sustainable debt labels does not mean there is corresponding advancement of green or other sustainable debt priorities occurring in real-time. Refunding transactions may occur for projects previously funded or completed a decade or more in the past. We also note that some labeled refundings are refunding previously labeled debt.

Diversification means less reliance on the top all-time issuers

While 2021 saw new issuers emerge on the list of leading sustainable debt issuers, it also saw a relative pullback from its all-time leader. From 2016 through 2020, New York Metropolitan Transportation Authority (NYMTA) annually issued more than $1 billion in sustainable debt, except for in 2018 when its issuance of just $207 million in green bonds was one factor contributing to the 53% decline in municipal sustainable debt issuance from the prior year. In 2021, the municipal sustainable debt market grew and diversified, soaring to new heights even though NYMTA issued only one green bond for $495 million. Overall, a diversifying market has provided greater resilience to lower issuance by mega-issuers. The top 10 sustainable debt issuers in 2021 accounted for 35% of total municipal sustainable debt issuance, compared to 56% in 2020, and 63% in 2019 (chart 9).

Chart 9

The market segment showed an overall higher degree of diversity in 2021, including first-time sustainable debt issuers from four states, bringing the total to 44 for states with individual issuers going to market with labeled bonds (chart 9). These new entrants consisted of the:

• Alaska Housing Finance Corporation (social bonds);
• City of Wheeling, W.Va. (green bonds) and West Virginia Housing Development Fund (social bonds);
• Nebraska Investment Finance Authority (social bonds) and University of Nebraska Facilities Corp. (green bonds); and
• The Industrial Development Authority of the City of St. Louis, Mo. (sustainability bonds).

Though diversifying, issuance remains concentrated among the largest issuers and on the coasts. New York and California-based issuers represent the top five issuers all time in this market segment and comprise seven of the top 10 issuers (table 2).

Table 2

For several years, S&P Global Ratings has anticipated that market segment growth would at least partly depend on an increasing number of first-time sustainable debt issuers. This played out in 2021, when the 184 issuances by first-time municipal sustainable debt issuers marked the highest number of new entrants to the market segment in any year (chart 10). But it was not just a year for newcomers: 2021 also saw the highest number of issues by return issuers.

Chart 10

Green Bonds Reigned In 2021The segment is diversifying, but the three largest sustainable debt issuances from 2021 all carried the green label:

• $1.226 billion: New York Liberty Development Corporation, NY, series 2021A tax-exempt liberty revenue refunding bonds (4 World Trade Center Project) (green bonds): Bonds were issued to refund prior debt that financed the development and construction costs for the 4 World Trade Center Project. The 4 World Trade Center Tower Facility was constructed to LEED Gold standards.
• $1.085 billion: California Community Choice Financing Authority (CCCFA), series 2021B-1 Clean Energy Project revenue bonds (green bonds): Bonds were issued to prepay 30 years of Environmental Portfolio Standards (EPS) compliant energy, which CCCFA will then sell to the East Bay Community Energy Authority and the Silicon Valley Clean Energy Authority.
• $869.4 million: Central Puget Sound Transit Authority, Wash., series 2021 S-1 sales tax and motor vehicle excise tax bonds (green bonds): A combination of new money and a refunding of previously issued debt in support of the authority's capital program, in particular the build out of Sound Transit's light rail network.

Sustainable Debt Issues Are Typically Larger Than Standard Municipal Market Transactions

On average, sustainable debt issuances remain much larger than the average municipal market issuance (chart 11). The average annual sustainable debt issuance totaled $85.8 million in 2021, down from around $100 million in each of the three prior years, with the decline driven by the large number of first-time issuers coming to market with smaller issuances. Another factor for the drop was the lower level of mega-issuances in 2021 compared to prior years.

We believe several factors influenced this trend. First, many larger issuers may feel more incentivized by policy directives or explicitly encouraged by their leadership and other constituents to advance their ESG strategy for the purposes of gaining support for capital programs or to stand out amongst their peers. On the other end, some smaller issuers likely view the additional proceeds management and reporting commitments expected by the sustainable debt market as financially burdensome or challenging to satisfy on a reoccurring basis. Finally, for many issuers considering entering this space, the lack of a clear pricing advantage may lead them to conclude there is no benefit to adding a green or other label.

If more smaller issuers continue to enter this market segment in the coming years, we expect the gap in average issuance size between sustainable debt and standard municipal debt to narrow further. However, a return of mega-issuers in 2022 could widen the gap back to the 2018-2020 average.

Chart 11

The Future Is Green

Looking ahead, we believe sustainable debt will continue to accumulate a larger share of the municipal market in 2022 and beyond, with issuance further diversifying as more issuers embrace green, social, and sustainability debt labels. Factors such as external review, how certain subsectors react and recover from the pandemic, and whether issuers utilize or find a pricing advantage for labeled debt will all contribute to the segment's maturation and growth.

Appendix: Municipal Sustainable Debt Market Trends By Label, Historic And Emerging

The use of social and sustainability labels continues to grow, driven by affordable housing

Massive growth in labeled bonds issued to finance affordable housing projects propelled social and sustainability bonds forward in 2021. Social bond issuance increased 148% to $16.9 billion, while sustainability bond issuance increased 81% to $7.3 billion. The top 10 social bond issuers have issued 55.2% of all bonds carrying that label since the first municipal social bond was issued in 2018 (Table 3). The CSCDA CIA only began using the label in 2021 but it accounts for 17.1% of all municipal social bonds ever issued. With continued influence of mega-issuers, we expect to see volatility in annual social bond figures, though we believe total issuance will likely continue to rise.

The social label

Going forward, we expect social issuance will continue to grow in the municipal market, driven by the natural overlap between social projects and the public mission of many municipal entities; the continued need for investment to develop and rehabilitate facilities in sectors such as affordable housing, education, and health care; and broader social trends such as migration and persistent wealth and income inequality.

Table 3

Charts 12 and 13 illustrate the social label's increasing tilt toward affordable housing in 2021, heavily influenced by the entry of the CSCDA CIA to the market segment. The affordable housing sector accounted for 88% of social labeled issuance in 2021, raising the sector's cumulative share for the label to 70%, from just 30% from 2018 through 2020.

Chart 12

Chart 13

In our 2021 outlook, we noted the clear influence of the COVID-19 pandemic on the social bond market, particularly through issuances by five national nonprofit foundations in 2020, each entering the municipal market to amplify grant-making efforts and to provide financial support for organizations whose finances and operations were strained by the pandemic and its effects. Somewhat surprisingly, given the persistence of the pandemic, just two foundations issued social bonds in the municipal market in 2021: the Mather Foundation and the California Endowment, with only the latter explicitly citing an effort to mitigate the pandemic's influence on grantees within the use of proceeds description.

The sustainability label

As with social bonds, affordable housing dominates all-time sustainability labeled issuance, accounting for 76% of sustainability bonds issued through 2021 (chart 14). Interestingly, 2021 saw 11 sustainability-labeled bonds issued primarily for green building projects, the first such issuances for that purpose to date. Four different issuers used the sustainability label for a total of $895 million in bonds issued primarily for green building projects. This somewhat diversified the use of proceeds mix for the sustainability label in 2021 (chart 15), however we note this is not entirely new, as prior years had also seen bonds issued with primary purposes such as funding affordable housing while including green building characteristics.

As expected with the sustainability label, more issues are for mixed purposes, such as affordable housing combined with green buildings. In our tracking, we have classified issuances within a given sector if it is clearly identifiable as the primary use of proceeds. For those we have designated as mixed, the use of proceeds is more clearly divided between multiple distinct sectors or project categories.

Chart 14

Chart 15

In the smaller sustainability bond subsegment, the top five issuers have accounted for 75% of issuance since the label was first used in the municipal market in 2017 (table 4). The list is led by the New York City Housing Development Corporation, which has issued a staggering 56 series of sustainability bonds and accounts for 44% of all issuance bearing the label.

Table 4

Given the nimbleness of the sustainability label, we expect some fluctuations in the primary sector for use of proceeds from year-to-year. The mixed category will likely continue to be prominent. For example, many projects for upgrading existing housing or education facilities will very likely include energy efficiency upgrades, given the inherent cost savings and shortening payback periods for such investments. As such, issuers may opt to use the sustainability label in some cases, rather than the social label, for an affordable housing or education-centric project that includes substantial energy efficiency or green building project components to highlight the project's broader and diverse sustainability-related benefits.

Green bond subsegment is diversifying, less reliant on largest historical issuer

Robust issuance by several large issuers propelled the green label forward in 2021, with somewhat less concentration than in recent years, despite the absence of NYMTA on the list of the largest green bond issuers (table 5) for the first time since issuing its first green bond in 2016. For green-labeled debt in 2021, three of the top six issuers--the California Community Choice Financing Authority, the New York Liberty Development Corporation, and the Regional Transportation District of Colorado--were first-time issuers using the label. This demonstrates the strong influence new entrants to the market segment can have in driving segment growth.

In a first, 2021 included a public school district in the top 10 green bond issuers, as the San Diego Unified School District, Calif., issued a total of $976.4 million in green bonds to fund projects related to its goal to achieve zero net energy by 2035. The district first issued green bonds to further this and other goals under its Climate Action Plan in 2016. The district's issuance included energy efficiency and renewable energy project components as part of an overall plan to reduce energy consumption and generate clean energy to power its facilities.

Table 5

Table 6

For the second time ever (and for the first time since 2018), green buildings was the primary sector for green bond issuance, accounting for 33% of the total (chart 16). Water, wastewater, and stormwater improvements were a close second ("water" in our data). Issuance for water and related utilities account for the largest share of all-time municipal green bond issuance (chart 17). Water and related utilities have been either first or second in annual green bond issuance since 2014, reflecting the natural overlap between green considerations and the sector, the sector's early adoption of the green label, and its significant ongoing capital needs.

Chart 16

Chart 17

Transportation was the third-largest sector for green bonds in 2021. The sector was at the top of the list in 2020 and 2017, though it has shown a high degree of variability due to the outsized influence of NYMTA and other large issuers. We expect the transportation sector to remain a driver for green-labeled issuance, given mass transit's likely ongoing role to mitigate climate change and carbon emissions produced by the transportation sector. That said, unresolved questions remain regarding how transit ridership will recover from a pandemic-induced depression, and transit operators may pause or curtail capital programs as they navigate such uncertainty. (For more on our view of the mass transit sector and these challenges, see "What Is The Next Stop For U.S. Mass Transit In A Post-COVID Era?" published July 1, 2021.)

Related Research

• Global Sustainable Bond Issuance To Surpass $1.5 Trillion In 2022, Feb. 7, 2022
• Navigating The Strengths, Challenges, And Best Practices In Sustainable Finance Frameworks And Transaction Documentation, Jan. 18, 2022
• Global Financing Conditions: Bond Issuance Looks Set To Contract 2% This Year As Monetary Policy Tightens, Jan. 31, 2022
• Credit Outlook For U.S. Public Finance: Positive Momentum Continues, Jan. 26, 2022
• Economic Outlook U.S. Q1 2022: Cruising At A Lower Altitude, Nov. 29, 2021
• Mind The Gap: Pledges At COP26 Give Hope But Significant Shortfall Still Exists, Nov. 18, 2021
• Sustainable Financing Opinions Analytical Approach, Aug. 25, 2021
• Sustainable Financing Opinions Analytical Supplement, Aug. 25, 2021
• The Fear Of Greenwashing May Be Greater Than The Reality Across The Global Financial Markets, Aug. 23, 2021
• Green Liquidity Moves Mainstream, July 8, 2021