Page 35 - A U4SSC deliverable - Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects

are municipal alternative bonds that promote investment in energy efficiency, clean-energy
generation, water conservation, and other such projects. The bonds utilize tax assessment and
enforcement by the government or tax authority to lower risk and, therefore, the costs of capital.
PACE bonds ease traditional funding requirements (e.g. cash, credit and collateral) by increasing
the value of the property as it is enhanced by the PACE improvements. Those with poor credit,
inadequate cash, or owners with high debt ratios can still obtain PACE financing, as the tax
assessment obligation runs with the property, and is not an owner obligation.

As PACE bond portfolios are possible to securitize, they are high-performing, with low default
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rates, and have received AAA ratings from Standard & Poor’s (S&P). They are therefore very
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attractive to private capital, such as pension funds and insurance companies, which seek
predictable, regular and secure returns at favourable interest rates.

2. Conservation easement is a voluntary, legal agreement, generally between a landowner and
a land trust or government agency. It permanently protects land by giving incentives to those
agreeing to conserve it, through activities such as land restoration, reforestation, species
conservation, and maintenance for public use with specific allowed purposes (e.g. hiking,
fishing, hunting, and camping). Incentives can include tax credits, charitable deductions, zoning
variances, permitting, and carbon credits. The land is often maintained in private ownership.
Governments can also suggest easements for projects involving soil remediation, restoration,
and reforestation of degraded polluted lands and restoration of water bodies.
3. Green/climate bonds are a type of debt instrument created to provide financing for environmental
projects. They are issued to raise funds for climate-change solutions, such as greenhouse gas
reduction and other related projects or programmes. The bonds are often linked to the ability
of the projects to make repayments through profits or their generated outcomes, backed by
their balance sheets. Green bonds provide investors with a way to earn tax-exempt income while
supporting positive environmental impact. The issuers of these bonds benefit from attracting
increasing amounts of capital from a growing class of investors who want their money to be
used to make a positive impact on the environment, in addition to providing them with financial
returns.

The first entity to issue green bonds was the World Bank, in 2008; since then, it has issued over
USD 3.5 billion in debt designated for issues related to climate change. In the 10 years until 2018,
the World Bank's green bond programme surpassed USD 10 billion, issuing over 130 bonds
in 18 difference currencies. With governments and financial powerhouses such as Blackrock,
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Van Eck and Allianz SE issuing and/or investing in green bonds, the market for them expanded
significantly from USD 36.6 billion in 2014 to USD 167.0 billion in 2018, and is estimated at USD
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180.0 billion in 2019. 14

4. Hybrid investment instruments (HIIs) utilize a mix of equity, debt and/or royalties with objective
performance metrics and outcomes, in order to provide investors with higher security, greater
diversification, and mechanisms to ensure performance and liquidity. HIIs also provide
entrepreneurs, early-stage companies and project developers with the benefits of lower-cost
capital, reduced time and due diligence needed for receiving investments, and clear deliverables
and performance metrics that, if achieved or exceeded, allow lower dilution and maintenance
of control. HIIs can be arranged to place investors in a secured creditor position, which converts

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