The Fallacy of Green Municipal Bonds in Developing Countries

Abstract

Sub-national governments (SNGs) in developing countries have increasingly explored green municipal bonds as a financing tool, driven by promises of lower borrowing costs, enhanced reputation, and support for sustainable economic development. This study aims to critically examine these claims by analysing the actual costs and complexities associated with green municipal bonds (GMBs). The research involves a comparative analysis of traditional municipal bonds and GMBs, focusing on the financial and operational challenges faced by SNGs. Detailed case studies from Mexico City and Cape Town are used to illustrate the practical implications of issuing GMBs. The findings reveal that, despite similar or slightly lower interest rates, GMBs often entail higher issuance costs due to the need for certification, monitoring, and reporting of green projects. These additional costs, coupled with the necessity of hiring external consultants, make GMBs more expensive and difficult to replicate after initial transactions. Furthermore, the study highlights that the demand from investors has not met initial expectations. While green-aligned investors show a higher appetite for GMBs, they constitute only a small portion of the finance market. Traditional investors, primarily focused on financial returns, are less inclined to invest in GMBs solely based on their green label. Consequently, many SNGs are increasingly turning to traditional “vanilla” municipal bonds as a more viable option for financing green initiatives. This shift underscores the practical challenges of GMB issuance in developing countries and calls for a strategic approach to balance the use of GMBs with other financing options to promote sustainable economic development.

1. Introduction

Climate change has caused a detrimental impact on the environment, which has influenced the economy, leading to efforts to transition to sustainable development. As such, Socially Responsible Investing (SRI) is important to reverse these effects with a rise in interest in green finance among several players. Green bonds are one of the innovations in the finance industry for SRI. Over the past two decades, green municipal bonds have experienced remarkable growth, emerging as a pivotal instrument for financing green and climate-related projects and infrastructure. This traction can be attributed to the fact that they are cheaper, enhance the reputation of the issuers and investors, and achieve overall societal benefit. By 2020, the green bond market had expanded to approximately USD 1 trillion.

Despite this growth, green municipal bonds (GMBs) represent only a small fraction of the overall finance market, primarily due to their appeal among green-aligned investors. Current green bond issuances indicate that while GMBs are gaining traction among green-focused investors, they often come with higher costs compared to traditional municipal bonds. Although the interest rates may be similar or slightly lower, GMBs typically incur increased costs due to additional certification requirements and the need for comprehensive reporting standards. These bonds are evaluated based on their use of proceeds and adherence to environmental standards set by organisations like the Climate Bonds Initiative (CBI), aligned to the Paris Climate Agreement goals.

This situation highlights a significant research gap: the need to understand the balance between the benefits of GMBs and their financial implications compared to traditional bonds. This article seeks to demystify some of the nuances around green bonds and how they impact their long-term viability and effectiveness in promoting sustainable development, as well as how sub-national governments (SNGs) can optimise their financing strategies for green projects. The article draws its findings and lessons from case studies on the implementation of these bonds in cities such as Dakar, Mexico, and Cape Town. Addressing this gap is crucial for informing SNGs’ financing decisions. By exploring the cost–benefit dynamics of green municipal bonds and their role in achieving sustainable growth goals, this study aims to provide insights that will assist SNGs in navigating the complexities of green finance. The objectives of this research are to evaluate the financial and environmental performance of GMBs, understand their impact on sustainable growth, and offer recommendations for aligning green financing strategies with long-term economic development and environmental goals. In this research article, we hypothesise that green bonds, often thought to be cost-effective, might be more expensive than traditional bonds when considering the costs pre- and post-issuance. To understand this, we examine how different types of capital are used to fund green projects in SNGs and developed countries. We also review the financial tools available for these projects and then compare municipal bonds with green municipal bonds using case studies to inform our conclusion.

2. Sources of Capital for SNGs

Before delving into municipal bonds, it is essential to explore the array of sources of capital that SNGs rely on to fund their development initiatives, each offering unique benefits and challenges.

2.1. Public Sources of Funding

Several national and international public sources are potentially available for SNGs to finance their climate action projects, and these are outlined in the following subsections [1].

2.1.1. SNGs’ Own Resources

For most SNGs, budgets are the primary source of finance for climate action, funded through intergovernmental transfers, subsidies, tax revenues, user fees, and property income. SNG budgets vary, but typically account for about 9% of GDP and 23.9% of public spending on average [2]. Therefore, the adequate mobilisation of own source revenues is key to improved service delivery and the achievement of development goals. An effective approach is “climate smart” budgeting, integrating climate action into broader SNG activities. Despite its complexity and the need for cross-departmental collaboration, a few cities like Kampala (Uganda), Arusha and Dar es Salaam (Tanzania), Durban/eThekwini (South Africa), Mumbai (India), and Rio de Janeiro have attempted it. As tools and techniques for climate-smart budgeting become more available and affordable, more SNGs are likely to adopt this approach.

However, SNGs in developing countries often lack the required capacity or financial resources, making implementation challenging. Many of these SNGs face immense budget pressures due to existing commitments and public services. Growing populations and increasing demands on basic services often outstrip municipal budget growth, leaving few SNGs able to invest in new projects from their budgets alone. Integrating climate change considerations into “climate smart” budgets can address these challenges, but requires considerable capacity, expertise, and cross-departmental collaboration [3].

2.1.2. National Government Transfer

In most developing countries, national government funding comprises over 50% of revenue for SNGs. The allocation mechanism of funds from national to subnational governments can be discretionary or formula based. The allocation varies significantly between and within countries. Additionally, governments can offer grants and subsidies to local governments. Such funds can either be earmarked for projects or non-conditional. However, it can be noted that national governments maintain strong control over municipal budgets and spending. This control is due to weak capacity and fiscal management systems at the sub-national level and aims to reduce the risk of sub-national debt crises and defaults. However, SNGs with strong fiscal management systems, good governance, and a track record of responsibly managing project funding and debt to achieve improvement in social gains may be able to secure a larger proportion of funding from the national government [4].

Since 2008, with World Bank support, the Government of Ethiopia has been using performance-based fiscal transfers to 117 SNGs to improve institutional performance and achieve climate and sustainable urban development objectives. This programme incentivises SNGs to enhance their capacity and efforts in these areas in exchange for additional funds and resources. A similar programme in Kenya, supporting the Kenya Devolution Support Program, is co-funded by the Kenyan Government and the World Bank [5].

2.1.3. DFIs

A Development Finance Institution (DFI) is a specialised financial organisation set up to develop the private sector. They are often owned and funded by national and international governments. DFIs are increasingly supporting SNGs in developing countries by offering a variety of financial instruments, including grants, concessional loans, mezzanine finance, guarantees, and technical assistance (TA), with a growing focus on climate-smart and sustainable infrastructure. These institutions play a critical role in financing climate action initiatives for SNGs, focusing primarily on private sector development as a catalyst for economic development and sustainability. While DFIs seek projects with commercial viability, their investment criteria extend beyond financial returns, aiming for broader developmental impacts, such as social, environmental, and economic benefits. They often channel their support to projects associated with SNGs rather than directly funding the SNGs to ensure effective utilisation of funds and achievement of developmental outcomes. For example, in 2023, the UK’s DFI, British International Investment (BII), invested EUR 20 million in The Urban Resilience Fund (TURF) in partnership with the private sector infrastructure investor Meridiam for decarbonisation projects in SNGs in sub-Saharan Africa [6].

However, SNG projects frequently face challenges in attracting DFI financing due to issues like underdevelopment and a lack of investment readiness, which can overshadow their potential to meet stringent investment criteria. Additionally, many SNGs lack the resources and skills to access funding or identify relevant programmes. The competitive nature of grants and the scarcity of concessional loans further disadvantage SNGs with limited capacity to submit successful applications. Despite these challenges, DFIs invest in projects that may not yield direct commercial returns but are essential for economic development, such as infrastructure projects critical for private sector growth. This approach underscores the DFIs’ commitment to balancing financial viability with broader developmental goals, effectively contributing to climate action and sustainable growth initiatives.

2.1.4. Aid Agencies

Aid agencies, such as the United States Agency for International Development (USAID), play a role in supporting SNGs through technical assistance, capital facilitation (grants and other viability gap funding), and credit guarantees. These agencies primarily offer technical support to SNGs, helping them build capacity and improve project readiness. In certain cases, aid agencies also make investments in projects that align with their goals or mandate. These agencies typically require detailed project proposals and may prioritise projects based on their alignment with the agency’s objectives. While the support from aid agencies is valuable, it often comes with conditions and requirements that SNGs must meet. This can include demonstrating the project’s potential impact, sustainability, and alignment with broader development goals. The availability of funds and the specific criteria for support can vary, making it essential for SNGs to carefully navigate the application process.

2.2. Private Sources of Funding

In addition, SNGs also have access to private sources to meet their investment needs, fostering economic development. These sources are described in the following subsections.

2.2.1. Commercial Banks

Commercial banks continue to be major investors in SNGs, particularly in infrastructure, and have access to considerable capital, with an increasing focus on sustainable development. For many SNGs, commercial banks are the first choice for securing loans and investments. However, commercial banks are driven by business considerations, with their willingness to lend depending on several factors. To begin with, according to the World Bank, only 20% of SNGs can be deemed creditworthy [7]. In some countries, sub-national governments are restricted from borrowing without authorisation from central governments. This hinders financial institutions from assessing their repayment history to establishing a creditworthiness rating required in determining lending risks. Secondly, while many SNGs have successfully rolled out commercially viable projects, challenges exist in demonstrating their ability to generate sufficient revenue to cover costs and repay debt instruments. SNG projects are meant for societal good with returns expected in the long run, and therefore require affordable long-term patient financing. Also, in some countries, sub-national governments have debt limits. In Indonesia, for example, debt stock may not exceed 75% of the previous year’s general revenues. Similar laws exist in Mexico where, in 2016, the Mexican government enacted the law of financial discipline to states and municipalities setting the limit of debt. Ultimately, the adequate financial management of the SNG, including budgeting, financial controls, and reporting mechanisms, is considered by commercial lenders.

2.2.2. Institutional Investors

An institutional investor is an entity that invests funds on behalf of others, seeking long-term investments with minimal risk and stable returns. Examples include pension funds, insurance companies, and mutual funds. Municipal bonds are a common method for SNGs to secure financing from institutional investors for their projects due to their long tenure, stable returns, and minimal risk profile. While the largest municipal bond markets are currently in the USA, China, and Japan, municipal bonds are becoming increasingly utilised in developing countries [8]. Some examples of municipal bonds include the Mexico City Green Bond for USD 50 million issued in 2016. In India, from 2016–2017 to 2020–2021, nine municipal bodies raised INR 38.4 billion through bonds [9].

Institutional investors tend to finance projects directly, with public entities (such as DFIs or government agencies) stepping in to “de-risk” the projects to a suitable level. As a result, they do not tend to finance SNGs directly, except through bonds. For investments by institutional investors, SNGs will be required to demonstrate suitable projects with low-risk profiles and stable anticipated returns. Such investment may also be required to be credit-rated. However, as discussed earlier, many SNGs are forbidden from issuing debt by their central governments due to the risk of default and, in many cases, do not have the capacity or creditworthiness to do so anyway.

2.2.3. Corporate Buyers

Many companies worldwide are increasingly purchasing carbon credits to fulfil their corporate climate targets and commitments through global carbon markets, estimated at EUR 865 billion in 2022 [10]. Ho Chi Minh City (HCMC) in Vietnam has initiated a pilot Carbon Credit Exchange and Clearing House to sell carbon credits generated from local projects like rooftop solar in domestic and international markets. The revenue generated is intended to fund additional climate-related initiatives. Carbon credits can serve as a valuable revenue source for SNGs, but projects must be sufficiently large or pooled to cover transaction costs. The revenue generated from selling these credits on voluntary carbon markets (VCMs) can offset investment costs for projects such as urban reforestation or rooftop solar, making these initiatives more economically viable. However, carbon credits have drawn criticism for potentially allowing affluent entities to continue emissions by offsetting rather than transitioning to sustainable practices, which could undermine emission reduction goals [11].

2.2.4. Private Companies

Private companies play a significant role in financing projects for SNGs through mechanisms such as project finance and balance sheet financing. Although these companies may not have the licencing to provide loans directly, they can partner with SNGs on various projects. This collaboration often takes the form of public–private partnerships (PPPs) and contributions through corporate social responsibility (CSR) initiatives. Such partnerships and initiatives support the financial and developmental needs of SNGs, providing essential resources and expertise. The risk appetite of private companies in these ventures typically ranges from low to medium, depending on the project’s nature and potential returns.

2.2.5. Households

In addition, households/citizens also contribute to the financing landscape through direct investments, such as consumer loans, and crowd-based financing. This type of financing is particularly relevant for smaller projects, typically requiring funding between USD 1–3 million. While households and citizens may not have the capacity to raise funds for larger projects, their contributions can be significant for smaller-scale initiatives. The risk appetite in this context can vary widely, ranging from low to high, depending on the specific circumstances and the perceived risks and benefits of the investment.

2.2.6. Private Sources of Finance Recap

Many SNGs in emerging markets face difficulties in tapping private sources due to their low-risk appetite or expectations for higher returns. Other SNGs are not legally permitted to receive funding from international and/or commercial funding sources. To counter this, some SNGs could consider the usage of financial instruments that aim to leverage private funding. These include the issuance of green bonds and sustainability-linked bonds. Additionally, SNGs that do not have the powers or necessary credit rating to issue these bonds could evaluate whether they could partner with affiliated municipal organisations, for example, utilities or development banks. SNGs could also explore applying for guarantees, if available to them. Guarantees can mitigate investor risk and potentially lower borrowing costs, making funding more accessible for developmental projects.

3. Sources of Funding in Developed Countries

In developed countries, a range of financial institutions play vital roles in financing sustainable growth initiatives, leveraging a combination of public and private funding sources, as described in the following subsections.

3.1. United States

3.1.1. Green Banks

Green banks are public or quasi-public financial institutions dedicated to financing clean energy and sustainable projects. They provide low-cost financing, incentives, and technical assistance to accelerate the adoption of renewable energy, energy efficiency improvements, and green infrastructure [12].

Connecticut Green Bank

The Connecticut Green Bank, established in 2011, was the first green bank in the United States. It was capitalised through a combination of public funds and private investments. Initially, the bank leveraged USD 362.7 million in public funds to attract USD 2.06 billion in private investment, achieving a leverage ratio of USD 6.70 for every USD 1 of public funds. Notably, Connecticut Green Bank financed the Solar for All programme, which aims to make solar energy accessible to low- and moderate-income households [13].

The bank has significantly impacted economic development by creating over 27,113 job years and generating approximately USD 129.6 million in state tax revenues. It has accelerated renewable energy growth by deploying over 571.8 MW and achieving lifetime savings of over 68.6 million MMBTUs through energy efficiency projects. Environmentally, the bank’s initiatives have reduced emissions by 11 million tons of CO₂, equivalent to removing 2.2 million passenger vehicles from the road for one year, thereby fostering a green economy and contributing to long-term sustainable growth. To increase community involvement, the bank has set goals to invest 40% of its funds in vulnerable communities, ensuring that low- and moderate-income households benefit from clean energy projects.

New York Green Bank

The New York Green Bank, launched in 2014, was initially capitalised with USD 1 billion from the state of New York. It has since reinvested its initial capitalisation to result in over USD 2 billion of capital commitments [14].

The New York Green Bank provided funding for the Community Solar NY initiative, which supports the development of community solar projects across the state [12]. Some of the bank’s noteworthy contributions to date include the capital mobilisation of over USD 5.5 billion in private capital for clean energy projects across New York. It has also financed a wide range of projects, including community solar, energy efficiency, and sustainable infrastructure, with a typical investment size of USD 10–50 million, contributing to economic activity by supporting businesses, creating jobs, and fostering innovation in the clean energy sector.

Additionally, the bank’s investments have helped define the path to a cleaner future, benefiting New York State residents and businesses. The bank has strongly emphasised ensuring that all New Yorkers, including those in historically marginalised communities, benefit from the clean energy transition. This focus on inclusivity not only addresses social and economic disparities, but also supports sustainable growth by enhancing community resilience and engagement in the green economy.

3.2. United Kingdom

3.2.1. Public Works Loan Board (PWLB)

The PWLB provides low-cost loans to UK local authorities and certain other bodies for capital projects, including infrastructure and green initiatives [15]. The PWLB provided funding for the Greater Manchester Combined Authority to invest in energy efficiency projects across public buildings, reducing carbon emissions and energy costs.

3.2.2. London Green Finance Fund (LGFF)

The London Green Finance Fund was launched in the summer of 2023 during London Climate Action Week. It aims to support London councils and anchor institutions in financing their climate projects by making GBP 500 million available. The fund offers concessional financing, which is cheaper than the Public Works Loan Board (PWLB) rates, achieved by using the Greater London Authority’s (GLA) balance sheet funding to subsidise PWLB funding. In its initial phase, the LGFF is fully capitalised using public funding from the GLA balance sheet and PWLB. However, as the fund demonstrates proof of concept, there is an ambition to attract private investment in later stages, potentially unlocking several billions of pounds for investment into local climate solutions.

The LGFF provides loans with flexible terms at interest rates agreed on a project-by-project basis, at or below PWLB prevailing rates. Eligible organisations include the GLA Group, local authorities, social housing providers, NHS bodies, universities, colleges, and accredited museums. Projects must deliver benefits in energy efficiency, clean transportation, or renewable energy and meet specific carbon savings and climate impact criteria. This fund is part of a broader strategy to mobilise both public and private capital to achieve London’s ambitious net-zero targets by 2030. The LGFF is designed to accelerate decarbonisation by lowering the cost of borrowing for eligible organisations, thereby making it easier for them to invest in sustainable growth initiatives/infrastructure. This strategy is expected to play a crucial role in addressing the triple challenges of toxic air pollution, climate change, and congestion, enhancing London’s economic resilience. Additionally, the LGFF is complemented by other programmes such as the Mayor’s Energy Efficiency Fund (MEEF) and the Retrofit Accelerator, which provide technical support and additional funding for energy efficiency projects. It also aims to build on London’s existing financing capabilities to secure investment and strengthen its competitiveness as a global leader in green finance [16].

3.2.3. UK Infrastructure Bank (UKIB)

The UK Infrastructure Bank is a government-backed institution established in June 2021. Its primary mission is to support infrastructure projects across the UK, with a strong emphasis on tackling climate change and promoting economic development in regional and local sectors. Owned by HM Treasury but operating independently, UKIB aims to help the UK achieve its net-zero carbon emissions target by 2050. UKIB provides financing to both the private sector and local governments for various infrastructure initiatives, including renewable energy projects like the development of offshore wind farms. It has GBP 4 billion available for local authority lending. This funding is intended to support local governments in implementing sustainable and climate-resilient infrastructure projects [17]. Notably, it has funded the Tees Valley Combined Authority with funding for renewable energy projects, including the development of offshore wind farms.

4. Financial Instruments

The public and private funders discussed above offer investments through various financial instruments, such as those outlined below.

4.1. Concessionary Loans

Concessional finance, provided by institutions like development banks and multilateral funds, offers below-market-rate loans to developing countries to support economic development goals. While typically available to sovereign governments, some SNGs are now also eligible. The primary benefit of concessional loans is their affordability, enabled by public funding from Development Finance Institutions (DFIs). Although concessional loans alone do not attract private investment, blended finance facilities that use public funding to reduce the cost of private finance can. In 2022, approximately USD 61 billion in concessional finance for climate projects was provided by national governments and DFIs [18].

Concessional finance is increasingly being used to drive climate action at the sub-national level, but there are often barriers to SNGs access. Such barriers include the need for fiscal autonomy and strong financial management systems by SNGs as central governments still control their budgets and spending. Moreover, SNGs require permission and guarantees provided by sovereign governments, especially where SNGs are not allowed to borrow from foreign lenders. On the supply side, restrictions set by the provider, e.g., the creditworthiness of the borrower and investment credit rating of projects, and the fiscal capacity of the SNG, assessing whether it has reached its debt ceiling, can limit its ability to take on additional debt.

In 2009, the city of Dakar in Senegal secured a 20-year concessionary loan from the African Development Bank (AfDB) of USD 12 M on highly favourable terms to invest in solar-powered street lighting throughout the city. In the process, the city strengthened its expertise and track record in managing loans, building its creditworthiness and capacity. Another example is the Subnational Climate Fund, a global blended finance initiative partners with subnational authorities to implement projects financed with concessional capital. Additionally, they also offer technical assistance grants that aid in mitigating the risks and ensure financial and environmental goals are achieved. This fund deploys capital in mid-sized infrastructure projects of between USD 5 and 75 M.

4.2. Market-Rate Loans

In 2022, market-rate loans for climate projects totalled approximately USD 236 billion, making them the largest source of climate finance. Market-rate loans are provided by the private sector and are crucial for financing climate projects with clear financial returns, such as renewable energy and building retrofits. Though more expensive than concessional loans, they are more readily available, with commercial lenders increasingly interested in climate-focused investments due to rising investor commitments to climate goals.

Many SNGs struggle to attract private finance due to inadequate risk–reward profiles and creditworthiness. For example, Lima in Peru had to improve its credit rating through better financial management increasing its own source revenue. As a result, it secured USD 190 M in commercial bank loans for a light rail and BRT system. Market-rate loans are pivotal for climate finance, especially for larger, creditworthy SNGs in developed countries, who frequently use these loans. However, smaller SNGs in developing countries face barriers such as a lack of fiscal autonomy, fiscal capacity, and the need for sovereign debt guarantees. Additionally, the requirement for revenue-generating projects to service debt hinders access to these loans. The risk of default due to underdeveloped projects and other factors, such as lack of political championing, corruption, and the insufficiently large ticket sizes due to small projects, which are unattractive to investors, also limits access to market loans.

4.3. Carbon Credit

Carbon credits are generated by certified mitigation projects like renewable energy or tree planting, which can be sold in international carbon markets. These credits can offset project costs and provide future revenue streams, though upfront investment is required. These credits are traded through “compliance” and “voluntary” markets. High-emitting industries are obligated to trade in the compliance market with the voluntary market being open to individuals and organisations seeking to offset their emissions. By providing a steady revenue stream for decarbonisation projects, carbon credits not only help to offset their costs, but also contribute to economic development by fostering innovation and attracting investment in sustainable infrastructure. However, they require large enough projects to offset transaction costs, certified third-party monitoring and verification, and upfront investment [19].

In 2021, compliance carbon markets reached USD 850 billion, and voluntary markets USD 2 billion, with rapid growth expected. These markets could be a significant revenue source for local governments developing credit-generating projects [10]. There is an ongoing debate about whether carbon credits truly address climate change. Critics argue that these credits may let companies buy their way out of making substantial emissions. Proponents believe that when properly managed and verified, carbon credits can promote investment in sustainable initiatives and support the transition to a low-carbon economy [20]. Among the notable carbon credit transactions so far include transactions in Salta, Argentina, which captures methane from its landfill, generating revenue by selling carbon credits, and in Moldova, where the government helped 13 SNGs invest in energy efficiency for public buildings, offsetting costs by selling the generated credits.

5. Municipal Bonds

Over the years, various SNGs across the world have issued bonds to finance key projects, particularly infrastructure, with investors benefitting from stable yields and limited risk. As discussed earlier, SNGs require some constitutional authority or legal authorisation to issue such bonds and therefore must fulfil these requirements, as failure to do so could render the issuance invalid [21]. Figure 1 shows the municipal bonds issuance process and how the funds are deployed to projects from which investors then receive the principal and interest from project revenues and in some instances the municipal revenues.

5.1. Constitutional Issues

Some constitutional issues influencing SNGs’ issuance of municipal bonds include those outlined in

Table 1. Legal framework governing SNG bond issuance.

Legal Authority	SNGs derive their power to issue bonds from laws and statutes, which must be strictly followed to ensure the bonds’ legality. This authority is often outlined in state constitutions or legislative acts, providing a clear mandate for bond issuance and the specific purposes for which these funds can be raised
Adherence to Debt Limits	Constitutional debt limits are set to prevent excessive borrowing that could jeopardise the financial stability of the SNG. Bonds issued in contravention of these limits face legal challenges and may be deemed invalid, leading to disputes that can undermine the credibility of the SNG and its future endeavours to raise capital
Ultra Vires Doctrine	The principle of “ultra vires” acts as a safeguard against SNGs exceeding their authority. If bonds are issued beyond the scope of the legal power granted to the SNG, they can be declared void. This doctrine emphasises the importance of operating within the legal confines to maintain the enforceability of bond obligations

[22].

5.2. Case Study: Dakar’s Municipal Bond Issue

While SNGs globally utilise bond issuances for financing, Dakar’s case presents a unique set of challenges and learnings. Dakar aimed to issue a USD 40 million bond to fund infrastructure for informal traders, marking a significant step for urban development in Senegal. This bond was set to be the first in the WAEMU region, potentially setting a precedent for municipal financing in West Africa [23].

Dakar received technical assistance from international partners, including the World Bank’s Public–Private Infrastructure Advisory Facility (PPIAF) and Sub-national Technical Assistance (SNTA) programme, to strengthen its fiscal management and creditworthiness. The initiative was part of a broader strategy to enhance Dakar’s financial autonomy and reduce reliance on central government transfers. Despite meeting the technical requirements and improving fiscal management, the bond issuance was abruptly halted by the central government, citing debt sustainability concerns. The Dakar municipal bond case brought to light the intricate balance between local governance initiatives and national fiscal oversight, challenging the autonomy of city authorities in the face of central government intervention [24].

Key Insights from Dakar’s Bond Issuance

• Legal frameworks for fiscal decentralisation: The Dakar case highlights the imperative for clear legal frameworks that empower local governments to finance their initiatives autonomously. Well-defined laws must facilitate local borrowing while ensuring alignment with national fiscal policies to prevent conflicts and ensure smooth bond issuance processes.
• Financial management and transparency: This includes clear accounting, consistent reporting practices, and a solid plan for revenue generation. Demonstrating creditworthiness is a key aspect of financial transparency, as it assures investors of the city’s ability to manage debt and fulfil financial obligations.
• Market confidence: Cultivating market confidence validates a city’s track record of fiscal responsibility and viable project planning. This helps in attracting investment and securing favourable terms for municipal bonds.
• Inter-governmental collaboration: It is important to foster collaboration between local and central governments. Establishing a cooperative approach can facilitate the understanding and support needed for municipal bond initiatives, ensuring that local development goals are not hindered by national-level constraints.

6. Green Municipal Bonds (GMBs)

Alternatively, SNGs can issue GMBs, which are a specialised subset of municipal bonds that finance projects which promote environmental sustainability. These projects may include renewable energy installations, pollution control measures, and sustainable water management systems, all of which play a critical role in advancing economic sustainability and development.

6.1. The Argument for Green Municipal Bonds

As mentioned earlier and given the USD 1 trillion growth in the green bonds market in 2020, there is a growing recognition of the importance of integrating environmental considerations into financial decision-making and the increasing demand for investments that support sustainable development goals. The ability to access debt financing for green projects has driven the issuance of green municipal bonds. Investors are willing to pay a green premium, also known as a “greenium”, for societal benefits as green bonds are conditional on the use of proceeds. This allows issuers to access funding at a slightly lower cost, as observed in some markets such as the European market [25].

On the other hand, socially responsible investors are more willing to fund projects that benefit society, which has driven the adoption of Environmental, Social, and Governance (ESG) metrics. Green bonds guarantee investors that their funding will be used for specific environmental projects, making them attractive to investors aiming to achieve their ESG goals. In some countries such as the United States, traction for green bonds can be attributed to incentives such as tax exemptions. To allow for lower interest rates, bond investors are not required to pay tax on interest from the green municipal bonds they hold. A similar case is observed in Brazil for green bonds used to finance wind projects.

Ultimately, green projects have contributed to significant milestones in the reduction of emissions and access to critical amenities. In Mexico, for example, through the Mexico City green bond, there has been an annual reduction of emissions though financing mobility and LED lighting projects. This translates to 7352 MWh of annual energy savings. Additionally, more than 650,000 people have benefitted from the upgrade of the municipal water distribution network.

6.2. Comparative Analysis between Traditional Municipal Bonds and GMBs

As opposed to traditional municipal bonds, GMBs finance eco-friendly projects with added transparency and impact reporting. However, across different attributes, they share much in common, as seen in

Table 2. Comparison of vanilla and green municipal bonds.

Attribute	Vanilla Municipal Bonds	Green Municipal Bonds
Purpose	Finances a broad spectrum of municipal projects, including some with environmental benefits	Exclusively earmarked for projects with environmental benefits, like renewable energy or efficient waste management
Investor base	Attracts a diverse range of investors, including institutional and individual bondholders	Draws a similar investor base, with a notable appeal to those prioritising environmental, social, and governance (ESG) criteria
Risk	Credit risk is tied to the financial health of the issuing SNG	Shares a similar credit risk profile, with additional scrutiny related to ESG risk. The risk profile, however, is not inherently higher or lower than traditional municipal bonds
Return profile	Offers returns based on market conditions and the issuer’s creditworthiness	May offer slightly lower yields, reflecting premium investors are willing to pay for contributing to environmental sustainability
Certification and standards	Standard municipal bonds without specific environmental certifications	Often come with green certifications, ensuring the funds are utilised for qualifying environmental projects
Tax treatment	Generally, enjoy tax-exempt status, making them attractive to tax-sensitive investors	Typically share the same tax benefits, aligning with the tax treatment of traditional municipal bonds
Bond structure	Can be general obligation or revenue bonds, with terms and repayment structured according to the project’s needs and the issuer’s capabilities	Structured similarly to vanilla bonds, but with the stipulation that funded projects must meet environmental criteria, which may influence terms and repayment options

below [26].

6.3. Eligibility on GMBs

Eligibility is determined by their use of proceeds, reporting standards, and impact measurement.

Table 3. Key requirements for GMBs.

Use of Proceeds	The funds raised by green municipal bonds must be allocated to projects with clear environmental benefits, such as renewable energy, pollution prevention, sustainable water management, and climate change adaptation [19]
Reporting Standards	Issuers of green municipal bonds are required to adhere to internationally recognised reporting standards, such as the Green Bond Principles (GBPs), which promote transparency and disclosure of how the bond proceeds are used [27]
Impact Measurement	The impact of the financed projects must be measured and reported to demonstrate the environmental benefits achieved. This often involves quantifying outcomes such as reduced carbon emissions or improved energy efficiency

shows some of the key requirements for green municipal bonds.

6.4. Certification and Pricing Overview of GMBs

GMBs can be certified by independent bodies like the CBI, which ensures they meet strict environmental standards and align with the Paris Climate Agreement goals. Certification increases investor confidence by preventing greenwashing and assuring the funds’ genuine environmental impact. Certified bonds typically have more favourable pricing, often yielding 24–36 basis points lower than uncertified bonds due to this added assurance [28].

Cape Town issued Africa’s first municipal green bond in 2017, receiving accreditation from the Climate Bonds Initiative (CBI) for meeting stringent environmental standards. Initial guidance suggested a spread of 140–160 basis points over comparable local-currency government bonds [29].

Johannesburg’s green bonds lack formal certification by independent bodies like the CBI. However, Johannesburg also issued green bonds in 2014, contributing to South Africa’s total green bond issuances. Non-certified bonds may face different pricing dynamics due to investor confidence and certification status.

6.5. GMB Pricing Overview

There are different pricing strategies for green bonds. On average, green bonds experience a statistically significant positive premium as investors are willing to accept slightly lower yields for green bonds compared to their non-green counterparts. This premium, known as the green bond premium or “greenium”, is estimated by comparing the yields of similar bonds—one labelled green and the other conventional. This premium tends to increase when green bonds undergo external evaluations, such as certification by independent bodies like the CBI [30]. Overall, investors recognise the value of financing projects that contribute to climate change adaptation and mitigation, which also contributes to favourable pricing whether through green bonds or traditional bonds.

As such, sometimes, green bonds may be priced similarly to traditional bonds as their credit profiles are typically like vanilla municipal bonds, making them equal in terms of risk and return profiles. Apart from the green premium, stronger environmental credentials can result in pricing advantages, with some investors accepting up to five basis point premiums for highly rated green bonds. From an issuer perspective, green bond issuance incurs higher costs due to external reviews and impact assessments, influencing overall pricing dynamics.

7. Case Studies

Experiences of launching municipal bonds across sub-Saharan Africa have shown varying outcomes, underscoring significant challenges that provide valuable insights for other SNGs considering GMBs. This article delves deeper into these issues, with a specific focus on Cape Town and Mexico, offering lessons learned and strategic considerations for future issuances.

7.1. Case Study 1: Cape Town

7.1.1. Cape Town Context

Climate change has had a significant impact, with the city experiencing an unprecedented water crisis after a severe drought experienced between 2016 and 2017. To finance green projects, such as financing water resilience, the city rolled out a green bond accredited by the CBI. The city’s issuance of green bonds was driven by its commitment to environmental sustainability and climate change mitigation. The city’s strategic climate action plan (Cape Town’s Climate Change Strategy and Resilience Strategy) aimed to align financial strategies with these environmental objectives, directing funds towards projects that enhance climate resilience and sustainable development. Before green bonds, Cape Town had a history of issuing traditional bonds for municipal projects. The shift to green bonds was motivated by the growing sustainable finance market and the city’s intent to attract environmentally conscious investors.

The funds from Cape Town’s green bonds were allocated to projects such as water infrastructure enhancement and climate resilience measures, including water treatment facility upgrades and water supply security [31]. Cape Town adhered to the Climate Bonds standard for impact reporting, providing transparency and accountability through annual reports detailing the environmental impact of funded projects. The city implemented a robust reporting framework to track the environmental benefits of the funded projects. This involved annual reporting on various metrics, including expected carbon reduction and improvements in water management. These reports were incorporated into the city’s financial statements, ensuring transparency and accountability in the use of green bond proceeds [32].

The market reception for Cape Town’s green bond was positive, with a significant fourfold oversubscription indicating strong investor interest [33]. However, it is important to note that the actual financial benefit of issuing the green bond was questioned, as the city did not observe a substantial difference in investor behaviour compared to traditional bonds [34]. While competitively priced, the green bond’s issuance costs were higher due to the rigorous pre-issuance assessments and compliance with green bond standards. The city leveraged the expertise of firms like KPMG to ensure compliance with necessary certifications and criteria, which, although resource-intensive, helped secure a competitive rate for the bond.

7.1.2. Steps Taken to Issue the GMB

The issuance of the Cape Town green municipal bond was a joint effort among city departments. Before the issue of the GMB, several issuance steps were followed [35].

• Pre-issuance: The city formulated a green bond framework situated in the existing climate change strategy and plans, linked to the city’s existing procedures and especially the financial management and treasury procedures. Viable projects and their associated budgets were selected. To obtain the CBI’s certification, independent verifiers accredited by the CBI evaluated the plans and frameworks. Finally, a marketing roadshow to reach a wide pool of potential investors was conducted.
• Issuance: The city received a bond credit rating from Moody’s, scoring a GB1 “excellent” score based on their governing processes and planned use of proceeds and M&E processes. They also undertook continuous reporting to bondholders to inform them of the application of proceeds.
• Reception: The bond was well received in the market with an oversubscription, with 29 investors participating in the bidding process. The bond was termed the “Green Bond of the Year for 2018” by both the CBI and Environmental Finance.
• Post issuance: This step focused on the allocation of funds, tracking of project performance, and reporting on the use of funds to stakeholders adhering to the Climate Bond Standards. In 2019, Moody’s green bond assessment rating was updated with a maintained score of GB1 rating.

7.1.3. Challenges

The issuance of the green municipal bond in Cape Town faced the challenges outlined in

Table 4. Challenges faced in the green municipal bond issuance.

Challenge	Description
High costs	The issuance process incurred substantial costs for certifications and compliance with reporting standards, which, coupled with the lack of observed financial benefits, presented a challenge, particularly given the questionable financial benefits derived from the green bond compared to traditional bonds
Lack of financial incentive	Investors showed interest in the green bond for its propaganda (PR) value, but were not willing to accept lower returns for the sake of environmental benefits. This lack of financial incentive made the green bond less attractive from a purely financial perspective, leading to scepticism about its overall benefit
No subsequent issuances	The absence of further bond issuances following the green bond suggests that the experience did not fully meet the city’s expectations, highlighting the need for careful evaluation of future issuances

below.

7.1.4. Outcome: What Does the Future Look Like?

• Cape Town continues to explore sustainable finance options, but the experience with the green bond has led to a more cautious approach. The city will likely weigh the benefits of green bonds against the practical considerations of cost and administrative burden. Future bond issuances will be evaluated on a case-by-case basis, with a focus on achieving the lowest cost of finance to support green projects.
• Investor sentiment towards green bonds remains generally positive, driven by the growing emphasis on ESG criteria in investment decisions. This continues to shape the city’s approach to future issuances, ensuring that any green bonds offered must also meet stringent financial criteria to attract investment [36].
• While the green bond issuance positioned the city as a leader in sustainable finance, it also highlighted the significant costs and questionable financial benefits associated with such instruments. As Cape Town navigates the evolving landscape of municipal finance, there is need to prioritise strategies that balance environmental goals with economic viability, ensuring future bond issuances are both sustainable and fiscally responsible.

7.1.5. Comparison of Cape Town’s GMBs and Traditional Municipal Bonds

Cape Town has previously issued traditional municipal bonds and, more recently, a GMB [37]. As shown in

Table 5. Comparison of bond issuances in Cape Town.

	Green Municipal Bond		Municipal Bonds
	CCT04	CCTO1		CCTO2
Issued date	2017	2008		2009
Bond amount	ZAR 1 billion	ZAR 1 billion		ZAR 1.2 billion
Status	Ongoing	Redeemed		Redeemed
Tenure	10 years	15 years		15 years
Coupon rate	10.17%	11.6%		12.6%
Costs	Associated costs include certification costs by CBI, hiring costs of independent evaluators certified by CBI, interest rates	Costs of certification and evaluation are not incurred		Costs of certification and evaluation are not incurred
Use of proceeds	Green projects in – Reduction of water losses – Resource efficiency—energy/carbon savings – Low-carbon transportation – Flood defence and coastal structures	External finance—Specific details for the issuance not clear		External finance—Specific details for the issuance not clear

, the interest rate for the green municipal bond was lower than that of the traditional bonds, largely due to the strong demand for the green bond, which led to an oversubscription. This high demand allowed the city to offer lower coupon rates, as investors were willing to accept a reduced return in exchange for supporting environmentally focused projects. The traditional municipal bonds did not specify the use of proceeds, reflecting a broader application of funds across various projects, as opposed to the targeted focus on sustainability seen with GMB.

7.1.6. Policy Implications and Lessons Learnt from the Cape Town GMB Issuance

Cape Town’s experience with the green bond issuance highlights several key policy considerations for other municipalities:

• Fiscal decentralisation and governance: Decentralising financing responsibilities requires robust financial management and accountability. Cape Town’s rigorous governance and reporting standards not only secured investor confidence, but also emphasised the need for municipalities to have strong governance frameworks to avoid fiscal mismanagement or inefficiencies in bond proceeds allocation. As highlighted by Nakatani et al. [4], countries can only reap the benefits of fiscal decentralisation when they have high-quality governance.
• Financial management: The city’s successful issuance was underpinned by its adherence to rigorous governance standards and transparent reporting practices. Cape Town implemented a robust framework aligned with its existing climate strategies, which included regular impact assessments and compliance with the Climate Bonds Initiative standards. These measures not only secured the necessary accreditation and investor confidence, but also ensured that funds were effectively allocated to projects aimed at enhancing water resilience and sustainability. Cape Town’s approach demonstrated that local governments must be prepared for transparent reporting and efficient management of bond proceeds to achieve the intended outcomes of green bond programmes.
• Fiscal sustainability and risk mitigation: Cape Town’s cautious approach to future bond issuances reflects a broader policy issue: the risk of fiscal unsustainability at the municipal level. Fiscal decentralisation without proper safeguards can lead to moral hazard, where SNGs expect central government bailouts if they overborrow. Policymakers need to address this risk by implementing fiscal rules or caps on borrowing, ensuring that municipalities remain fiscally disciplined. At the same time, municipalities must find a balance between environmental objectives and fiscal responsibility. While green bonds provide a means to finance environmentally friendly projects, policymakers must ensure that these initiatives do not compromise the municipality’s overall financial sustainability.
• Integrating green bonds with broader policy frameworks: The alignment of Cape Town’s green bond with its climate resilience strategies illustrates the importance of embedding green bonds within broader fiscal and environmental policy frameworks. Municipalities should view green bonds as part of a larger strategy for sustainable development and fiscal health, rather than as isolated financial instruments.
• Alignment to local plans and priorities: Cape Town’s GMB was aligned to local priorities with community involvement. As demonstrated by other failed bond issuances, alignment and collaboration among key stakeholders are crucial for a successful bond issuance; without this, the projects risk being discontinued.

7.2. Case Study 2: Mexico City

7.2.1. Mexico City Context

Mexico was the first city in Latin America to issue a green bond and has since issued three more. In 2016, Mexico City issued its first municipal green bond, which aimed to finance sustainable urban development projects, aligning with the city’s climate action strategy to reduce carbon emissions and enhance resilience against climate change [38]. The issuance was driven by Mexico City’s commitment to sustainable growth and the need to address pressing environmental challenges, such as air pollution and water management. The green bond was seen as a tool to fund projects that would contribute to the city’s decarbonisation goals and improve the quality of life of its residents [39].

The city raised USD 50 million through the green bond, which was oversubscribed by 2.5 times, indicating strong investor interest. The funds were allocated to projects for water infrastructure (36%), sustainable transportation (58%), and energy efficiency (6%). Proceeds from the green bond were directed towards the development of rapid bus transit lines, the modernisation of the water distribution network and wastewater systems, and the installation of LED streetlights, among other initiatives. Additionally, in 2018, Mexico City became the first city in Latin America to sign the Green Bond Pledge and raised a second GMB for a value of USD 62.7 million, utilising the funds to refinance and fund new water infrastructure projects.

7.2.2. Steps Taken to Issue Green Bonds in Mexico

The issuance of the Mexico City green bond followed four stages [40]:

• Scoping: The city’s Environment Department (ED) held a series of consultations with the CBI aligning on steps of issuance. Thereafter, it facilitated capacity building for local officials to understand projects eligible for green financing. The capacity building was conducted after presentations with the administration and finance department.
• Green bond framework development: A framework was developed by the ED outlining the use of proceeds, process for project evaluation, financial management of proceeds, and reporting measures. The framework was presented to the federal government as cities are not allowed to borrow without a federal guarantee to borrow from capital markets. This phase also included independent consultations for a second opinion.
• Launch: The city hired a financial broker to take the bond to market. The broker was responsible for promoting and negotiating the bond with private investors. The exchange of the bond was then listed in the Mexican Stock Exchange for uptake.
• Post issuance: The city deployed the finances making priority investments in clean transport, water distribution, and energy-efficient LED lighting. For updates to stakeholders, the city publishes a report annually outlining projects financed and the corresponding impacts.

7.2.3. Challenges and Outcomes

The green bond issuance process revealed higher costs due to the need for certifications and compliance with green bond standards. Additionally, the bond faced criticism for not adequately addressing socioeconomic disparities and climate injustices within the city’s infrastructure.

Mexico City’s experience with green municipal bonds has been a learning curve, highlighting the need for a balanced approach to environmental and financial objectives. While green bonds have the potential to support climate action initiatives, traditional bonds remain a practical alternative for funding sustainable projects, especially when considering the administrative burden and costs associated with green labelling.

7.2.4. Comparison of Bond Issuances in Mexico

As shown in

Table 6. Comparison of bond issuances in Mexico.

	Green Municipal Bond	Municipal Bond—Traditional
	Mexico City	Municipality of Tlalnepantla de Baz
Issue date	2017	2003
Bond amount	USD 50 M	USD 9.1 M
Status	Redeemed	Redeemed
Tenure	5 years	10 years
Coupon rate	6.2%	5.5%
Use of proceeds	Green projects in – Clean transport (58%) – Water distribution (36%) – Energy-efficient LED lighting (6%)	Infrastructure investments for water. The funds were used to build the first wastewater treatment and recycling plant in Mexico

, the green bond issued by Mexico City in 2017 had a higher interest rate compared to the traditional municipal bond issued by the Municipality of Tlalnepantla de Baz in 2003 [41]. It is important to note that the bonds were both used to finance green projects with the municipal bond being used for wastewater treatment, while the green bond was used to finance water distribution, clean transport, and efficient LED lighting.

Figure 2 shows the steps followed in the issuance of the green bond in Mexico and some of the projects invested in.

7.2.5. Policy Implications and Lessons Learnt from Mexico’s GMB Issuance

Mexico’s experience with the green bond issuance highlights several key policy considerations for other municipalities:

• Governance and financial management: Mexico City’s green bond issuance process highlighted the need for strong governance frameworks. The city established a robust process by holding consultations with the CBI and facilitating capacity-building workshops for local officials. However, ongoing transparency in financial reporting and effective management of bond proceeds must be prioritised to enhance accountability and ensure successful project outcomes.
• Fiscal sustainability and risk mitigation: Mexico City’s experience with green bond issuance underscores the critical need for fiscal sustainability and effective risk mitigation. The high costs associated with certifications and compliance pose fiscal burdens that could jeopardise the city’s financial health. Policymakers should implement fiscal rules to mitigate the risks of overborrowing and ensure that municipalities maintain fiscal discipline. At the same time, municipalities must find a balance between environmental objectives and fiscal responsibility. While green bonds provide a means to finance environmentally friendly projects, policymakers must ensure that these initiatives do not compromise the municipality’s overall financial sustainability thereby preventing fiscal crises and promoting long-term financial stability.
• Addressing socioeconomic disparities: Although Mexico City aimed to finance projects like sustainable transportation and water infrastructure, the green bond faced criticism for not adequately addressing socioeconomic disparities. Policymakers should integrate equity considerations into future green bond frameworks to ensure that funded projects actively benefit marginalised communities, thus preventing the perpetuation of existing inequities.
• Comprehensive evaluation frameworks and impact assessment: While independent evaluators deemed the green bond solid and credible, they overlooked critical structural challenges related to water distribution and spatial inequalities in Mexico City. Additionally, evaluation reports for the GMBs primarily measured project impacts through quantitative metrics, such as water volume and the number of beneficiaries. However, these assessments fell short in addressing underlying structural issues and the potential for reinforcing existing inequities within the city’s hydro social system. This gap underscores the need for evaluation frameworks that assess not only financial credibility, but also the broader socio-environmental context. Policymakers should develop comprehensive evaluation criteria that incorporate both quantitative impacts, such as water volume and beneficiary numbers, as demonstrated in this case in Mexico, and other qualitative factors that reflect the local context. This approach will ensure that green bond initiatives not only advance economic sustainability, but also actively work to mitigate existing inequalities.
• Integration with broader financial strategies: The success of the green bond issuance in Mexico City demonstrates their potential for funding sustainable projects, but it also highlights the importance of integrating these initiatives with traditional financing mechanisms. While the first Mexico City GMB was used to finance green projects in water, transport, and energy, the municipality of Tlalnepantla de Baz issued a traditional municipal bond to finance wastewater treatment and recycling plant. Policymakers should encourage a diversified approach to municipal finance that includes both green and traditional bonds, optimising resource allocation.

8. Conclusions

8.1. Debunking Myths Surrounding GMBs

In our analysis, we identified several misconceptions that drive the apparent shift to GMBs. However, our findings reveal key insights that challenge these common myths.

• Myth 1: Green bonds always offer better financial terms

While green bonds attract investors with their environmental appeal, they do not necessarily offer better financial terms than traditional bonds. Green municipal bonds are issued at a similar or slightly lower coupon rate compared to traditional bonds. The certification of green bonds leads to bond issuers incurring additional costs not borne by traditional bond issuers. As seen in the case of Cape Town and Mexico City, the issuers involved independent evaluators and consultants incurring pre-issuance costs.

Green bond standards require annual updates to stakeholders on the projects funded and their corresponding impact. Many issuers do not have the technical capacity and expertise to quantify such impact and, hence, must hire externally increasing costs post-issuance. This was the case in Mexico City, where the Carbon Trust was hired to undertake the impact assessment of the projects financed with the bond.

• Myth 2: Green bonds guarantee environmental impact

The environmental impact of green bonds can vary significantly. With many issuers lacking the expertise to quantify the impact, some projects funded under a green bond may not qualify as sustainable investments. Additionally, without proper certification and diligent reporting, there is a risk of “greenwashing”, where projects may not be as environmentally beneficial as claimed.

• Myth 3: Green bonds are the only option for eco-friendly projects

While green bonds are earmarked for eco-friendly projects, they are not the only funding option for green projects. As more investors undertake sustainable investing, they are increasingly open to funding projects that promote their ESG goals.

While the green bond market is still developing, traditional bonds can be used to finance green projects. In Mexico, the municipal bond issued by the municipality of Tlalnepantla de Baz was used to fund a green project in wastewater treatment. Traditional bonds come with lower issuance costs and less complexity compared to green bonds, making them a viable option for sustainable initiatives [42]. Chart 1 illustrates the number of climate related and green bonds issued worldwide showing that climate investments are not limited to green bonds only

• Myth 4: Green bonds are tax-exempt

Tax incentives have played a key role in driving the adoption of green municipal bonds. While municipal bonds, including green bonds, often offer tax advantages such as exemption from federal income tax, they are not universally tax-exempt. A study on several European Union member and non-member states reveals that only a few members have tax incentives for green bonds, with most lacking dedicated incentives for such investments. Moreover, trading with green municipal bonds does not guarantee full tax exemption but may offer partial relief. For example, in South Africa, where a green municipal bond was issued in Cape Town, such incentives may include stamp duty and transfer duty exemptions, but capital gains from the sale on secondary markets are not tax-exempt. Similarly, in other cases, such as with private activity bonds, interest may still be subject to the alternative minimum tax [43].

Table 7. State of tax incentives on select countries [44].

Country	Comment on Tax Incentive
Brazil	Tax incentives exist. Individual income tax is zero-rated instead of the regular range from 15% to 22.5%, while corporate income tax is 15% instead of 25%
Greece	No specific incentives for green investments
Kenya	Pressure to increase government revenues to meet finance gaps has threatened the removal of tax incentives for green municipal bonds
Malaysia	Tax deductions are applied for green bonds, although there are no tax incentives for green bonds from an indirect tax perspective. Regarding a direct tax perspective, a tax deduction may be given for expenditure incurred on the issuance or offering of a sustainable investment such as green bonds
Netherlands	The country has some facilities for green investments for income tax. Participating in a green bank or green fund can provide a tax advantage consisting of an exemption from the capital gains tax

shows tax incentives status in some select countries in line with green bonds issuance.

8.2. Key Takeaway and Recommendations for SNGs

Conclusively, due to the higher costs and complexities associated with GMBs, many SNGs are increasingly turning to traditional bonds as a more viable option for financing green initiatives. However, despite these challenges, GMBs remain crucial for supporting economic development and sustainable growth. It is essential to reassess the value proposition of GMBs in the context of these considerations.

• Cost: Green municipal bonds have proven to be more expensive due to the costs associated with certification, monitoring, and reporting. It is, therefore, important that certifying bodies and authorities work to reduce these costs. This could involve partnering with development institutions to provide SNGs with pre- and post-issuance support.
• Effort and complexity: As seen in the analysis, the additional effort required for green bond issuance is substantial, posing a significant challenge for replication after the first transaction. The process can be time-consuming, which may discourage further issuance. To mitigate this, SNGs can benefit from structured knowledge management strategies. For example, establishing platforms for sharing best practices, creating detailed guidance documents, and organising training workshops can facilitate the transfer of knowledge among SNGs that have successfully issued green bonds. These measures can help streamline the process and make it more feasible for others to replicate.
• Investor demand: Initial enthusiasm has not translated into sustained investor demand. Most traditional investors prioritise financial returns over green labels, often resulting in less favourable terms for green bonds compared to traditional bonds.

To navigate the complexities of financing green projects, SNGs should consider the following strategies:

• Strategic use of traditional bonds: Utilising traditional bonds to finance green projects can offer a simpler and more cost-effective approach. While developments in the green bond market may eventually reduce complexities, SNGs should consider a mixed strategy in the near term. This balanced approach allows for flexibility and can better address immediate financing needs
• Policy reforms: Most SNGs are controlled by the central governments in terms of budgeting and spending. Therefore, policy reforms may be necessary to allow SNGs to enter transactions with less involvement by the central government. Additionally, there should be more advocacy for policy reforms that reduce the administrative burden and costs associated with green bonds, making them more accessible and appealing. This can help mitigate the financial indiscipline often associated with decentralised entities by providing clear, efficient pathways for green financing.
• Technical efficiencies: SNGs should prioritise developing their technical capabilities and internal processes before issuing bonds. This includes optimising financial operations, conducting thorough risk assessments, clearly defining, and identifying eligible green projects, and enhancing reporting mechanisms. By developing these efficiencies, SNGs can better manage the complexities of green bond issuance and make more effective use of their resources.
• Market education: Educating the market on the realities of green bond financing to set realistic expectations and foster a more informed investor base. This builds on the investor confidence and generates interest in green bond issuances.
• Diversification of funding sources: Encouraging SNGs to diversify their funding sources from the various financial instruments available. SNGs should also explore public–private partnerships and grants for green projects.