Expanding the U.S. Municipal Market for Sustainable Bonds

Sustainable bonds represent a fraction of muni issuance, yet many projects could be green-eligible, presenting an avenue for market growth and progress toward climate goals.

As the U.S. works to foster renewable power sources and energy efficiency, state and local government capital spending – often funded by municipal bonds – offers a significant pathway for progress toward net-zero emissions targets and energy savings for issuers.

State and local governments fund the bulk of public infrastructure in the U.S., fulfilling an estimated 75% of capital needs in the country. U.S. municipal issuers sold $25.3 billion in sustainable bonds in 2021, a 60% increase from 2019, yet that still represents only 5.3% of municipal debt issued last year. Although the U.S. corporate market was not much higher, at 8%, the European corporate market is significantly greater, with 27% of bond issuance in 2021 having a Green, Social, or Sustainability (GSS) bond label or sustainability-linked loan. This leaves a lot of room for growth in sustainable bond issuance in the U.S. and an opportunity to expand market access.

A significant portion of municipal bond proceeds is used to construct or renovate buildings, such as elementary schools, city halls, libraries, public works buildings, fire stations, hospitals, and airports. All of these have the potential to be green-eligible projects if they include certain characteristics, such as improved energy efficiency, solar panels on rooftops, and meeting specific sustainable building standards set out by the Leadership in Energy and Environmental Design (LEED) or other certification programs. Projects like upgrading a city’s bus or police car fleet to be electric, installing electric vehicle (EV) charging stations, and adapting water and sewer infrastructure to reduce water loss or mitigate storm runoff, could also qualify.

Seizing opportunities to improve sustainability

Buildings account for about 29% of U.S. energy-related carbon dioxide (CO2) emissions, so focusing efforts here has the potential to substantially reduce carbon emissions while also saving issuers on energy costs. Although using more sustainable measures today could increase the up-front cost of a new building or renovation project, the investment can pay off over time – not just in lifetime energy savings and averting future retrofit costs, but also in public health, employee satisfaction, and lower greenhouse gas emissions.

With the useful life of a building estimated at 40 years, new buildings constructed today are expected to last until at least 2060. That’s a decade beyond 2050, the science-based target to reach net zero, which refers to the point when the amount of greenhouse gases produced is fully offset by the amount removed from the atmosphere. In order to reach this target, buildings constructed today that do not incorporate up-to-date sustainable methods will likely need energy retrofitting at a future date. Bonds funding maintenance and improvement projects also represent important opportunities to undertake energy efficiencies – architects have identified renovations as a natural “intervention point,” when energy improvements can be undertaken with less disruption.

Transportation was responsible for 29% of U.S. greenhouse gas emissions in 2019 and represents another area where municipal issuers can take advantage of opportunities to invest more sustainably. Opportunities could include public transit agencies or school districts procuring electric buses to replace older vehicles, or cities investing in electric police cars, dedicated bus lanes, or EV charging infrastructure.

Changing the focus from green bonds to green-eligible projects

Guidance to municipalities on issuing green, social, or sustainability (GSS) bonds often focuses on the notion that muni issuers are already undertaking eligible projects and should seek a GSS label and alert investors to the projects. While this practice may help moderately grow the GSS bond market, which could have positive knock-on effects, to truly expand the market and improve the sustainability of public capital projects, much of the work needs to start further upstream in the process.

Real growth comes from a move toward expanding the focus for municipal issuers to include not only the case for why to issue a green bond, but also the importance of funding and building credible sustainable projects. Green bonds will become the norm when green-eligible projects have become the norm.

This shift requires an enhancement in how municipal entities approach capital planning, so that energy efficiency, low-carbon/carbon-neutral alternatives, and the impact of climate projections are added to the planning process. Including and weighting these criteria would allow them to be considered alongside cost-effectiveness and an issuer’s overall needs and constraints for the project.

The University of Michigan issued green bonds this year in a deal that represents a helpful example of this shift in focus. The bonds are funding multiple innovative green-eligible projects, cutting across the institution’s buildings and services, in support of its university-wide commitment to sustainability and to reaching a 2040 net-zero target for Scope 1 emissions (which measure direct greenhouse gas emissions that are under an organization’s control, such as on-site use of fossil fuels). Projects included a revolving energy fund to support campus retrofits, installation of a geothermal heating/cooling system, purchasing electric buses, and ensuring that new buildings funded by bond proceeds were constructed to achieve at least LEED silver designations.

Using green bonds as a tool

Green bonds can be a tool for issuers to achieve their sustainability and capital budgeting goals – while also connecting them to investors who have a specific interest in funding these types of initiatives. Although widespread pricing benefits have not yet been seen, issuers have reported benefits such as a small premium for taxable GSS-labeled bonds, expanding the investor base, aligning with an issuer’s overall sustainability mission, and changing public and internal perception of the issuer and its projects.

At PIMCO, we view an independent review for labeled bonds as a best practice (see our best practice guidance for muni GSS bond issuance) due to the increased transparency and diligence it can provide. At the same time, we recognize that some muni issuers may start out by self-designating their bonds to call attention to green or social characteristics of the securities or the issuer and could build upon their labeled bond program from there.

Additionally, it is important not to lose sight of the forest for the trees. The most important shift toward increased sustainability in capital projects is in recognizing the opportunity every new building, new renovation project, new vehicle, or other municipal investment provides in moving the U.S. either closer to the net zero goal or further away. Labeling those projects as green, social, or sustainable is principally a tool to alert investors to the important work that issuers are doing and to connect interested investors with these sustainable projects.

Visit Municipal Bonds at PIMCO, our central hub for muni content and investments.

McNichol, Elizabeth. Center on Budget and Policy Priorities. It’s Time for States to Invest in Infrastructure. March 19, 2019.


Total municipal debt issuance figures from U.S. Municipal Bonds: Issuance, Trading Volume, Outstanding, Holders. August 1, 2022.

Barclays. Corporate ESG Bond Issuance: Q2 2022 Update. July 8, 2022.

Additional projects deemed eligible by the International Capital Markets Association (ICMA) can be found in the ICMA’s Green Bond Principles: Projects meeting the Climate Bond Standard can be found in the Climate Bonds Initiative’s Green Muni Bonds Playbook:

Leung, Jessica. Center for Climate and Energy Solutions. Decarbonizing U.S. Buildings. July 2018.

Palacios J, Eichholtz P, Kok N (2020). Moving to productivity: The benefits of healthy buildings. PLoS ONE 15(8): e0236029.

US EPA. Sources of Greenhouse Gas Emissions.

10 Whittington, Jan and Lynch, Catherine, Climate-Informed Decisions: The Capital Investment Plan as a Mechanism for Lowering Carbon Emissions (July 29, 2015). World Bank Policy Research Working Paper No. 7381, Available at SSRN:


12 Climate Bonds Initiative. Green Muni Bonds Playbook. Association of Metropolitan Water Agencies. 2021. Revisiting the Growing Green Bond Market: AMWA Member Perspectives.

The Author

Emily Robare

Municipal Credit Research Analyst

Grover Burthey

Portfolio Manager, ESG



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