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Global Capital IMF editions, October 2015

Gothenburg sits on Sweden’s southwest coast, served by the Gotä älv river which sweeps into it from the north. By the time that river system gets to Gothenburg it has traversed 750 kilometres, through dams, canal locks, a hydropower station and a host of industrial and shipping uses. And it’s from this river, upstream of the city, that Gothenburg gets its drinking water.

Gothenburg has two water filtration plants, dating from the 1960s and 70s, and in recent years concerns had been growing about their effectiveness. It wasn’t just the upriver industry; climate change was also having an impact. “We can see now that climate change is affecting our water quality,” says Sara Pettersson, urban development officer in City Hall at the City of Gothenburg. “We can forecast that, even in this wet part of the world, we are going to experience more flooding and more rainfall. There will be more water from the ocean pushing in, and more water falling as rain.” With that comes other challenges. “It can increase the levels of bacteria, viruses and parasites in our waterways,” adds Claes Wangsell, director of drinking water production for the city.

While Gothenburg was studying its options, another Swedish city, Östersund, experienced a huge outbreak from bacteria or a virus in the drinking water. Gothenburg commissioned a project looking into the economic and social effects of building a new method of purification, and the consequences of not doing so. “We could see that the risks were high enough that this would be a good use of money for our city,” Pettersson says.

Purifying water is not cheap. Putting in the ultra filters, as the technology is called, at the Lackarebäck filtration plant just south of the city, cost SEK700 million (alongside an increase in capacity). It’s called a microbiological barrier: it filters out a far greater proportion of waterborne unpleasantness than previous technology. “We were the first in Sweden to install it,” Pettersson says. “There is a lot of testing along the way. An ultra filter is like a huge amount of very tiny straws within a tube that you push the water through, small enough to stop the bacteria and viruses.”

The project is now coming onstream in phases, and the result from the tap, they say, is quite something. “One of my most beautiful moments in finance was in Gothenburg,” recalls Christopher Flensborg, head of sustainable products and product development, fixed income and DCM, at SEB. “Last time I went there the head of funding for Gothenburg came over to me with a glass of water in his hand. He said: you like it? Your clients have been financing this water. We really enjoy it.”


And he was right, for Gothenburg has been one of the most successful municipalities to take the green bond route to financing its infrastructure. Gothenburg was the first Nordic group, and the first city worldwide, to issue a green bond, in September 2013, raising SEK500 million; a second issue of SEK1.8 billion followed in June 2014, and a third in June 2015 raised SEK1 billion.

Being a pioneer has its downside. “Our financial department, and Magnus [Borelius, Head of Treasury] in particular, are very daring,” Pettersson says. “Let’s do this! And solve the problems as we go! And that’s the only way you can do it, when you are at a very early stage. What we knew even a year ago is nothing compared to what we know now.”


The first thing we can learn from the Gothenberg issues is that, for the moment, it’s best to be able to show a pool of projects the funds will go towards than to try to link a bond to a single one. The water plant and purification filter was only one of three which took funds from the first bond; in fact, the bulk actually went to a project called GoBiGas, a plant to draw biogas from wood raw material to go into an existing gas grid. A slice more went into an electric car programme. The second bond, which provided more funds to the car programme and the water filter, also went into a denitrification project in the Baltic Sea, investments in district heating, sustainable housing and tree planting. “I have heard of other municipalities that have done one bond for one project, but we don’t have any one project that is big enough,” Pettersson says. “It’s definitely possible. But we think it’s a strength to show investors a broad project base.”


It all presents a picture of a highly environmentally aware city, and indeed it is. “The City of Gothenburg has developed an ambitious and comprehensive environmental programme until 2020 with targets related to climate, sustainable transport, waste management, reduced pollution and health impacts, as well as improved environmental protection and increased biodiversity,” says Cicero (Center for International Climate and Environmental Research – Oslo), an independent non-profit research institute which provides second opinions on institutions’ processes for selecting green bond underlying projects, and so provides a form of ratification for investors. The city has a clear climate strategy running to 2050, has pledged to reduce the energy use in industry, public buildings and dwellings by 10% between 2011 and 2030, and to reduce carbon dioxide emissions from road transportation by at least 80% over roughly the same period. By 2030, all Gothenberg’s district heating must be based on renewable energy, waste incineration and surplus heat from industry.


It is, therefore, a natural candidate to issue green bonds: something investors can visualise and believe in. But even for a place like this, it’s not straightforward. “The finance and environmental parts of the city had not had any reason to work closely together before we had these green bonds,” says Pettersson. “We had to make adjustments in the way way we work internally, because in the long run it is important that these two start working closely together. We are a big organization, we have 50,000 employees, with so many departments and committees that are functioning on their own, very decentralized. So much of the work has been about organizing internal processes, about finding the right people to talk to and make a centralized report. A lot of it is about selling the idea, and it’s not hard once we find the right person to talk to.”


Also, it requires getting an entire population and its commercial sector onside. How does one get everyone to work together to achieve that environmental goal? “That’s the million dollar question. We have set goals and we are working hard to get there. But a lot of this is about politics too. Gothenburg is not an island and we could not move in this direction without the EU and the national level setting environmental goals for many years now.” The city uses everything from the schools to social media to try to get its message across to the population. “We are struggling as hard as any other municipality with the question of how we can have a good dialogue with civil society and out population, and reach the people we don’t usually reach.”


And that story has proven to be compelling. The bonds have generally been oversubscribed and brought a broader investor base to the municipality. While that doesn’t mean the projects wouldn’t have been funded without it, it’s never a bad idea to have a lot of investors who know you. “In Gothenburg we’re financially stable, but you don’t know when you might wake up and be very happy for that investor base,” Pettersson says.


With that investor community established, a natural question is what else can be funded in this way. “In the beginning, we have tried to stay on the safe side and look at the deep green projects, but now as we’re learning more… I’m not saying we are going to go over to the light green side, but there are some flagships we can easily pick out and they’re really good projects.”

Chris Wright
Chris Wright
Chris is a journalist specialising in business and financial journalism across Asia, Australia and the Middle East. He is Asia editor for Euromoney magazine and has written for publications including the Financial Times, Institutional Investor, Forbes, Asiamoney, the Australian Financial Review, Discovery Channel Magazine, Qantas: The Australian Way and BRW. He is the author of No More Worlds to Conquer, published by HarperCollins.

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