The Need for Sustainability Bonds
Appetite for sustainability bonds has grown over the last five years, among both the investors who purchase these bonds and the companies and municipalities that issue them. For issuers, these bonds can help address both environmental and social issues associated with climate change, mitigate impacts from extreme weather disasters and, in some cases, respond to government-mandated standards for energy usage and carbon emissions.
Investors, meanwhile, are seeking investments that might protect portfolios against climate risks; fund projects that reduce energy consumption and carbon emissions; and capitalize on opportunities from the biggest sustainability challenges.
Based on these trends, the size of the market grew from $17.8 billion in 2018 to a record $191.7 billion in 2021, before declining to $141.6 billion in 2022.2
Within the last year, Morgan Stanley has underwritten sustainability bonds for Battery Park City Authority, New York State Housing Finance Agency, and New York City Housing Development Corporation, among others. The proceeds will support efforts that include climate change resiliency projects and affordable, energy-efficient housing.
“Through bond offerings, increasingly labeled as sustainability bonds, states and cities are able to dedicate the necessary capital to respond to the evolving environmental and social needs of their communities,” says Zachary Solomon, Co-Head of Morgan Stanley’s Public Finance Group. “We are particularly proud of the role Morgan Stanley has played in working with our clients to address these issues in New York and the other communities in which we operate.”
New Infrastructure Helps Adapt to Flooding and Storm Surge
In 2012, Hurricane Sandy ravaged the East Coast. At the southern tip of New York City, the aftermath included lost lives, displaced residents and flooding in homes and public spaces. To ensure that future weather events have less of an impact on the 92-acre area of southern New York City known as Battery Park City, in June 2023, the Battery Park City Authority (BPCA) issued $349 million of municipal bonds designated as sustainability bonds, underwritten by Morgan Stanley, to raise funds that will help fortify the area along the Hudson River against storm surges.
Morgan Stanley had previously underwritten BPCA’s 2019 sustainability municipal bonds focused on climate adaptation. The proceeds from the new bonds will allow the BPCA to continue its efforts, which include raising the landmass for some parks and community centers in Battery Park City, so water does not rush in after storms like it did in 2012.3 Another initiative will manage coastal flooding to protect institutions such as the Museum of Jewish Heritage.4
Earlier this year, Morgan Stanley’s Public Finance team, which underwrote the municipal bonds, visited Battery Park City to see how their financing work will help safeguard residents and visitors. “Battery Park City Authority demonstrated to us how high the water would rise above the current barriers in 100 years, from storms during that period, and they gave us a tour of the developments they are pursuing to protect the community,” says Robert Pattison, an Executive Director in Morgan Stanley’s Public Finance Group. “Seeing the impact of our work and the people interacting with the infrastructure we helped fund really opened our eyes to the efforts being undertaken to respond to climate change.”
Increasing Affordable Housing While Reducing Emissions
In an effort to reduce greenhouse gas emissions, states and cities have new environmental requirements for affordable housing. Sustainability bonds are helping states build new housing that meets these criteria. For example, in 2022, New York State announced proposed legislation to ensure that new building construction reaches net-zero emissions by 2027.5 In June 2023, the New York State Housing Finance Agency (NYSHFA) issued $285 million of sustainability bonds, which were underwritten by Morgan Stanley, to finance the new construction of 797 affordable multifamily housing units located in Brooklyn, the Bronx, Westchester and Suffolk County.
The units will have a positive environmental impact because their building materials and appliances are required to be energy efficient. They also create the significant social benefit of offering low-income residents new developments with rents they can afford and that include amenities such as community rooms, fitness centers, laundry rooms, sports courts and shuttle services to train stations.6
In addition to these efforts at the state level, New York City is also meeting heightened environmental standards in affordable housing. In December 2022, New York City Housing Development Corporation (NYCHDC) issued $495 million of sustainability bonds, underwritten by Morgan Stanley, to finance the new construction of seven multifamily rental developments to create 1,818 new affordable multifamily housing units. The new construction developments are all expected to comply with Enterprise Green Communities standards.
“We’re focused on assisting our housing issuer clients to underscore the positive social impacts of creating new affordable housing, coupled with the environmental benefits of producing high quality, energy-efficient housing,” says Geoff Proulx, a Managing Director based in New York in Morgan Stanley’s Public Finance Group. “Assisting NYSHFA and NYCHDC in telling their stories of improving the quality of life in New York City and throughout New York State continues to make our work really meaningful, particularly when we see the tangible benefits created right here in our local community.”