Chicago is the latest city to issue so-called “social bonds,” which let individual investors buy debt from the city to pay for a range of city-backed projects.

Cities like New York, Philadelphia and Atlanta have all recently boasted financial perks from promoting their bonds to amateurs as feel-good investments. Analysts say the nationwide trend is likely here to stay, even as its benefits in Chicago and elsewhere so far have been tepid — and even as some governments push in the other direction.

For Chicago, early results from the sale this month of Chicago Social Bonds showed that the idea was an unqualified success, according to Chicago Chief Financial Officer Jennie Huang Bennett.

“It’s been pretty overwhelming,” Bennett said in an interview. The bond sale prompted the biggest surge in at least a decade in “retail participation,” meaning individual investors looking to hold pieces of the city’s debt.. The approximately $158 million in loans will help the city pay for affordable housing development, tree-planting, vacant lot cleanups and more.

Bennett and her team are crediting the demand for pushing down the yields on the debt, meaning city taxpayers won’t be on the hook to pay as much interest to bondholders as they would for more typical kinds of borrowing.

What are ‘social bonds?’

American cities have for centuries turned to lenders to help pay for one-and-done capital projects like roads, bridges and other public infrastructure. But local governments have only in the past several years begun to widely market some of their debt as “social bonds,” making it a target for the burgeoning field of so-called ESG (environmental, social, governance) investing.

“Most [municipal bonds] are already intended to pay for good things, like public infrastructure, but these [social bonds] are specifically labeled so that you can be a little more confident in where it’s being spent,” said Matt Fabian, lead analyst at the Massachusetts-based research firm Municipal Market Analytics.

“It’s like when they started labeling yogurt as ‘high-protein,’” Fabian said. “Genius, right? It’s the same product, only now it’s labeled ‘high protein’ and the others aren’t, so people want it more.”

Philadelphia became one of the first major cities to issue social bonds in October 2021, when it sold $100 million in debt to fund affordable housing and home repair programs. The offering attracted more than a dozen new institutional investors, letting the city cut enough interest off the debt to save the city about $650,000, according to a news release sent by Philadelphia officials at the time.

Other cities soon followed suit.

New York City last September announced the sale of $400 million in social bonds designed to help fund the construction of thousands of new units of affordable housing. City officials later credited the designation for shaving one-tenth of a percentage point off the bond yield — enough to save the city millions over the 30-year life of the bond.

Atlanta followed a month later with the sale of about $370 million in social bonds to back transportation-related projects, and its officials similarly touted their ability to attract buyers and save taxpayers money.

“We were able to tap into the growing investor demand for social and sustainable investments, while providing an attractive cost of capital for these vital capital projects,” Atlanta Chief Financial Officer Mohamed Balla wrote in a November 2022 announcement.

That was the backdrop for Chicago leaders’ decision late last year to seek “social bond” status for the first round of debt it has issued to help finance the city’s sweeping $2.7 billion Chicago Recovery Plan.

“We are, in essence, following a market demand for bonds which focus on the impacts created from the investments that the bonds fund,” Bennett said. “We interviewed a number of the top ESG portfolio holders in the country, and they overwhelmingly said to us that they wanted to see projects that weren’t your run-of-the-mill repaving of streets and traffic signals.

“They wanted to see progressive, impactful investments like the ones we have in our social budget,” she said.

Chicago officials have pledged to spend $23.6 million from the social bonds and another approximately $18 million from the city’s five-year capital fund on an effort to replace all the city’s 700-plus “light-duty” vehicles like pickup trucks and SUVs with electric cars by 2035.

The city will join about $17 million in social bond funds with $29 million in American Rescue Plan funds to meet its goal of planting 75,000 trees in the next five years. Another $43 million is set aside for shelter facilities and other anti-homelessness infrastructure, $36 million is earmarked to subsidize mixed-income housing and $12 million is targeted to boost the city’s vacant lot cleanup efforts.

The city’s Program Management Office will track progress on all these goals and report back to bondholders every year, per the terms of the bond deal.

Long-term impacts

Designating the debt as “social bonds” only reduced its interest rate by a few hundredths of a percentage point, Bennett said. But their performance still beat officials’ expectations and will be enough to save taxpayers significant money. She credited the success to her office’s “hyperlocal marketing” campaign that let Chicago residents and then Illinois residents buy the bonds before anyone else was allowed to get in line.

It’s a relatively small benefit, but the far smaller expense of hiring a third party to designate debt as a “social bond” makes it worthwhile for most governments, Fabian said. He added that cities like Chicago are wise to start pivoting to “social bond” designations now, as demand for ESG investments shows no sign of slowing.

“It’s a low-cost investment by a city in a future market where more investors will prefer this,” Fabian said.

But the tool’s growing prominence is quickly turning it into a political football, as some governments openly try to avoid socially targeted spending.

Florida’s chief financial officer last month announced that the state was pulling $2 billion in assets from an investment firm that was active in ESG investing. The official justified the decision by saying the firm has “openly stated they’ve got other goals than producing returns.”

Representatives of the asset management firm and other proponents of ESG countered that the investing practice doesn’t mean turning one’s back on earning potential — it just means thinking longer-term. And by shunning socially responsible investing all together, states like Florida could be laying the groundwork for more hazards down the road, Fabian said.

“Why would you want to be an investor in Florida and not invest with respect to climate change risk?” Fabian said. “That makes no sense.”