ESG bond framework for UK local authorities gets green light

A benchmark-sized ESG municipal bond is expected to be issued under the framework in the coming months

Local councils in the UK will soon be able to issue ESG bonds to fund community projects under a draft reference framework which was approved for use last week.

The framework, which is aligned to the Green Bond Principles, was developed by the UK Municipal Bond Agency (MBA) and sets out eligibility criteria for the types of activities which can be financed by ESG bond proceeds.

To bring ESG bonds to market, the MBA will assess projects proposed by councils for alignment with the framework, and aggregate standalone bonds from councils with low borrowing requirements into pooled instruments to reduce costs and attract more investors.

The Agency is now working to establish a reporting process for issuing councils and will appoint a third-party to provide independent verification of ESG bonds issued under the framework.

Once completed, the MBA expects a pooled benchmark sized ESG bond – around £250m (€285m) – to be issued jointly by a number of local councils in the coming months. The MBA has entered into talks with a number of institutional investors to drum up interest for the forthcoming maiden issue.

Christian Wall, an external advisor speaking on behalf of the Agency, said to RI: “We have seen a lot of interest from local authorities on ESG, particularly the green element. A lot of them have declared a climate emergency and are retrofitting housing to reduce carbon emissions and increase energy efficiency. We hope that, in time, the UK MBA ESG programme will become the natural home for financing these types of projects.”

According to Wall, strong investor demand for sustainable investment opportunities will allow local authorities to secure cheaper rates through ESG bonds compared to alternative sources of funding.

To prevent conflicts of interest, local council pension funds are not allowed to invest in standalone bonds which they have issued themselves. There are no such restrictions for pooled bonds but the MBA has indicated that it will monitor issuances for governance red flags.

The MBA was established by UK local councils in 2014 to provide access to capital markets as a way of reducing borrowing costs. Under a long-term arrangement, councils are also able to raise funds through the government’s Public Works Loan Board (PWLB), although the interest rates and repayment terms offered by the PWLB have been volatile in recent years.

After a series of delays, the MBA issued its inaugural bond in March 2020 – a £350m (€399m) issue on behalf of Lancashire County Council – at a significant discount to PWLB rates.

Day-to-day operations of the MBA is run by US-based service provider PFM Financial Advisors, which is the largest independent advisor currently operating in the US’s mammoth $3.8trn muni-bond market.