The Fallacy of Green Municipal Bonds in Developing Countries

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.