Local Climate Bonds: A proven and community-shaped solution

A year ago, the Green Finance Institute and Abundance Investment partnered to launch a national campaign to drive awareness and use of Local Climate Bonds (LCBs), a type of Community Municipal Investment (CMI) that uses a crowdfunding model to raise funding for place-based green projects.

A year on from the first councils joining the Local Climate Bond Campaign, the market has evolved rapidly: there is increasing concern about the effects of climate change among British communities, especially in the context of the COP26 UN Climate conference in Glasgow; a growing awareness that local authorities have untapped power to make places greener and more climate-resilient; and, challengingly, a cost of living crisis and an inflationary environment reshaping both borrowing and saving trends.

According to the UK‘s Net Zero Strategy[1], 82% of all UK greenhouse gas emissions are within the scope of influence of local authorities, and since 2019, over 300 councils in the UK have declared a climate emergency, many working with their residents to shape plans of action – but access to attractive and diverse sources of funding is still a barrier to action.

Despite this challenge, local government is showing leadership: since the campaign launch, six councils – including Islington and Camden, two of London’s largest – have issued LCBs, funding a wide variety of projects, from EV installation to public building energy-efficiency upgrade work, solar farm seed investment, and biodiversity schemes.

Main founding partners, supporters and interested local authorities gathered during a dedicated roundtable to discuss the key developments in the LCB market over the past year.

[1] https://www.gov.uk/government/publications/net-zero-strategy

1. LCBs have matured and standardised

By choosing to issue these instruments in the form of peer-to-peer loans (rather than bonds), local authorities can now issue instruments that are ISA-eligible, offering a way for investors to earn tax-free returns.

“This is exciting progress towards scaling LCBs: all types of community municipal investments should be made ISA-eligible, to allow investors to be able to choose a safer form of investment.”
Councillor Ryan Jude, Westminster City Council

Councils are launching smaller bonds in a ‘series’ of issuances – for example, £500,000 – allowing Councils to test investor appetite and prove the concept to internal stakeholders. This type of finance raise, with rates set by individual councils, allow flexibility and control as the market enters a more uncertain inflationary environment, and as the Public Work Loans Board rates begin to rise.

Karl Harder, Co-founder and Managing Director at Abundance Investment is leading the development of a Green Finance Framework (utilising Local Climate Bonds), via a process that complies with the Green Loan Principles as set out by the Loan Market Association. According to Matt Hopson, Strategic Investment Manager, Westminster City Council, “This development will make the product even more marketable”.

2. LCBs are funding a broader mix of green projects, while maintaining the financial benefit for councils

LCBs typically fund projects already identified in a capital programme, however recent issuances have explored the opportunity to fund a mix of ‘visible’ projects – like solar panels and Electric Vehicle Charging – and those less obvious to residents, such as energy improvements in council’s headquarters.

“[LCBs] have the advantage of also servicing initiatives less ‘typical’ for traditional private finance to fund.”
Polly Billington, Chief Executive, UK100

Also the financial saving aspect keeps on being a strong reason to issue an LCB for councils in the UK, especially when local residents decide to donate all or part of their investment back: this action creates “additional value for the council” and can be driven even higher when the engagement between the citizens and the councils is strengthened”, says Karl Harder at Abundance Investment.

Mark Davis, Professor of Economic Sociology at Leeds University, and a leading CMI researcher, calls the current investor trend towards hyper-localism a further argument for LCBs, saying:

“Investors have told us they want Electric Vehicles at the end of their street, solar panels on their child’s school.”
Mark Davis, Professor of Economic Sociology, Leeds University

Investor willingness to donate their interest payments back to the council is a strong indicator of the wider social value benefit from CMIs.

LCBs have also been recognised as a way to inspire action among local citizens, by encouraging local residents to bring new ideas for projects to the attention of their councils.

3. LCBs drive lasting engagement with a surprisingly diverse investor base

Owen Darracott, Finance Manager at Islington Council, recommends a sustained comms approach:

“You launch, but arguably that’s when the work starts – particularly for the comms team. Together with Abundance Investment we did a big media push over the three months of the raise.”
Owen Darracott, Finance Manager, Islington Council

The Islington Green Futures CMI now has 661 investors keen to see the impact of their money as funded projects come to completion. Polly Billington agrees:

“A willingness of local people to invest shouldn’t be assumed – we need to understand what they want to invest in and by how much.”
Polly Billington, Chief Executive, UK100

Professor Mark Davis’ research on the social value created by CMIs finds that people “want to see…changes in their locality” – and that it’s important to remember that ‘local’ can be quite a fluid term:

“People born in, or identifying with, a particular council area may no longer reside locally, but they still want to invest in ‘their’ area. One wealthy investor I interviewed now based in London loved the concept but she won’t move her money into an LCB ‘until there’s one issued back home in Yorkshire’.”
Mark Davis, Professor of Economic Sociology, Leeds University

Many councils have seen an unexpectedly diverse geographical spread of investors in their LCB group; for example, only 8% of Islington’s investors were living in the borough, but they invested 20% of the Bond’s total.

Local businesses have become a key stakeholder group, showing a real appetite for LCBs. Rebecca Mills, Finance Business Partner at Camden Council who were the first to see business organisations investing, states that:

“Our business engagement plan focused on targeting of businesses through existing relationships, which is enabled by the council’s approach to collaboration with external stakeholders. We approached businesses we know have climate as a priority, leaning on the alignment of objectives and the clear reputational benefit this investment will bring.”
Rebecca Mills, Finance Business Partner, Camden Council

Finally, internal engagement. Joseph Holmes, Executive Director of Resources at West Berkshire Council, highlights that aligning and mobilising council stakeholders at the start of the LCB journey makes for a smoother path to issuance:

“There was widespread political support from across the Chamber because we articulated what we thought was important and deliverable.”
Joseph Holmes, Executive Director of Resources, West Berkshire Council

Polly Billington confirms this, saying, “It is vital to create space for council leaders of all types of local and combined authority across the UK to come together on green finance, and in parallel, that partners support officers to investigate LCBs and share key learnings.”
Polly Billington, Chief Executive, UK100

LCBs are powerful instruments that can help councils achieve their net zero ambitions by offering an alternative and proven form of financing that sits alongside more traditional and widely used methods, and does so while significantly improving the engagement of the individual with its local government.

Please do contact the Green Finance Institute if you are interested in learning more, and in joining the Campaign.

Join our Local Climate Bond Campaign

Join the growing list of Local Authorities committed to launching a Local Climate Bond, or related municipal climate investment by signing the Local Climate Bond pledge
Efficiently finance Net Zero projects in your local area, while communicating action, demonstrating leadership and engaging your residents with your climate emergency plans.
Work with us to find joint opportunities to showcase the impact of the Local Climate Bonds Campaign in the run up to and during COP26.

Get in touch to know more

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