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San Francisco: Issue an Impact-Rated Muni Bond in Energy Efficiency

By Judi Brown, Paula Escuadra and Juan Norton

The following is part of a collaborative project for Presidio Graduate School's Spring 2013 Capital Markets course.

An Open Letter to the Board of Supervisors of the City and County of San Francisco, Praising Fossil Fuel Divestment and Calling for Further Innovation

Dear Members of the Board:

As MBA and MPA students of sustainable management at Presidio Graduate School in San Francisco, we applaud the unanimous resolution passed last month urging the city’s fund managers to divest upwards of $580 million from the fossil fuel production industry. Once again, you have furthered San Francisco’s reputation as a proactive and forward-thinking city that spurs creative solutions to dynamic challenges. It is becoming clearer in the age of climate disruption that municipalities are going to lead social and economic shifts toward a more sustainable world. Given this and San Francisco’s reputation as a pioneer in sustainability, we urge you to take your innovation a step further – become the first ever U.S. city to issue an impact-rated municipal bond.

San Francisco is uniquely positioned to be at the forefront of continued innovation by issuing a bond that highlights and measures social and environmental benefits to society as well as financial returns. At present, estimates of the U.S. municipal bond market have reached $3.7 trillion, making it a significant asset class. Ratings agencies such as S&P, Moody’s and Fitch rate muni bonds only in terms of their short-term financial cash flows. In this way, the underlying risks and rewards of a city-issued bond are not being assessed correctly because systemic risks are ignored. This makes an increasingly volatile market open to greater vulnerability. However, issuing a bond that is rated by impact metrics that provide a more systemic approach to determining its success could strengthen the market, particularly in a city like San Francisco where savvy individual and institutional investors realize the importance of long-term, multifaceted returns.

Therefore, our recommendation is that the City of San Francisco jumpstarts the movement to generate greater impact with muni bonds by issuing a low-risk bond that prioritizes energy efficiency. It would work just like a regular muni bond but the capital could be dedicated to efficiency and clean energy, where the city defines a certain amount of reductions to pollution and carbon emissions. This could build in measurements such as:

  • amount of clean energy being utilized

  • reductions in carbon emissions

  • investments in solar, wind, and other renewables 

  • green job creation 

  • conversions of waste to energy 

  • other innovations undertaken

A successful example of this was last summer when France issued an environmentally and socially responsible bond within a region that included clean energy, retrofitting schools and low-energy social housing, and biodiversity. Initially valued at €350 million (more than US$500 million), the bond ended up being 175 percent over-subscribed in just 30 minutes. If demand for clean energy by the citizen-taxpayers of San Francisco mimicked that of France, then not only will this issuance be low-risk, it will provide cost-savings generated by and for taxpayers. The higher the demand for the bond, the lower the interest rate required, which saves both the city and citizen-taxpayers money while providing a competitive return to investors. In summation, a win for the city, a win for its citizens and a win for the environment.

San Francisco is becoming an effective, zero-waste city; the issuance of an impact-rated muni bond would not only generate greater efficiency in a time of limited resources, but would do so in a way that aligns with other innovations the city has undertaken. It can be the first in the nation to issue a bond where the investor will get their principal back, plus a return on that investment, and a positive benefit to the environment and society overall.

As part of our Capital Markets class, we are looking at how muni bonds can be rated with these additional metrics. We look forward to discussing our findings and research to date around the tremendous potential of impact-rated muni bonds for the City of San Francisco.


Judi Brown – Presidio MPA, 2013 Paula Escuadra – Presidio MBA/MPA, 2014 Juan Norton – Presidio MBA, 2013


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