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Monetizing Virtue

4 min read

Although virtue may be its own reward, try telling that to a nonprofit’s chief financial officer. But now a new virtue-validated financial product may do for sustainability what green bonds, and the Community Reinvestment Act (CRA) long before them, have done for their respective virtue spaces. In December 2020, BRIDGE Housing issued the country’s first Sustainability Bond of $100 million, followed two months ago with a $100 million bond from National CORE, and last month by a third: $75 million in Sustainability Bonds from Preservation of Affordable Housing (POAH), rated in a March 25, 2022, Second Party Opinion of Standard & Poor’s (S&P), and underwritten by Morgan Stanley.

If the seven steps of Sustainability Bonds’ manufacture and delivery chain have whiffs of theological morality, it is ever thus when good must be transmuted into profitability.

Step 1: Establish a standard of goodness in a conclave. In 2015, the globe’s college of moral cardinals, the United Nations Member States, adopted the “2030 Agenda for Sustainable Development,” the successor to a string of non-binding pronunciamentos dating back to the 1992 Johannesburg Earth Summit.

Step 2: Divide the goal into discrete virtue streams. Following on the conclave, the UN’s modern-day Council of Trent codified sustainability doctrine into 17 Sustainable Development Goals (SDGs) from “Zero Hunger” (SDG 2) to “Peace, Justice and Strong Institutions” (SDG 16). Not content with this, the UN has promulgated doctrine via 169 targets, 3,163 events and 6,036 publications (so far).

Step 3: Customize the virtue streams for the financial domain. The International Capital Market Association (ICMA), a Zurich-headquartered global trade association of the great and the good with roots in the 1960s’ Eurobond markets, extracted a subset of the SDGs into

Sustainability Bond Guidelines. In turn, S&P’s POAH opinion identifies four:

  • Goal 1: No poverty. Affordable housing, socioeconomic advancement and empowerment, access to essential services, and climate change adaptation.
  • Goal 7: Affordable and clean energy. Affordable basic infrastructure, and energy efficiency.
  • Goal 10: Reduced inequalities. Socioeconomic advancement and empowerment, access to essential services.
  • Goal 11: Sustainable cities and communities. Affordable housing, affordable basic infrastructure, socioeconomic advancement and empowerment, and green buildings.

Step 4: Assess each virtue stream on a scale familiar to the congregation. Just as the CRA’s clerisy (Federal Deposit Insurance Corporation, Federal Reserve Board and Office of the Comptroller of the Currency) classify banks’ morality in four ranks (Substantial Noncompliance, Needs to Improve, Satisfactory and Outstanding), S&P uses an analogous four: Not Aligned, Aligned, Strong and Advanced. It rates POAH as Strong on Use of Proceeds, Advanced on Process for Project Evaluation, and so on.

Step 5: Cite evidence in support of each judgment. In support of its gnomic utterances, S&P scried POAH’s Sustainability Bond Preliminary Offering Memorandum (POM), an impressive 496-page compendium that sets forth  POAH’s organizational structure, its acquisition/new construction energy standards, its extensive programmatic commitments and activities, and then a sheaf of aggregated highly granular facts about the people who live in POAH’s 12,276 affordable apartments, such as:

  • Demographics. 60 percent+ Black, Indigenous and people of color (BIPOC), 63 percent female (71 percent female head of household), 38 percent seniors, 17 percent persons with disabilities.
  • Economics. The average household income of residents is $16,500, equal to 23 percent of applicable Area Median Incomes, with $5,224 in average household assets.
  • Energy and environmental. Over 340 discrete water and energy projects since 2010, annually saving over 10 million pounds of CO2, 100 million gallons of water and 60 million kBTUs of energy. 

Step 6: Aggregate the stream scores into an overall virtue rating. Even though “this product is not a credit rating,” S&P opines that the bonds “are aligned with Social Bond Principles, Green Bond Principles and Sustainability Bond Guidelines,” because “we believe POAH’s projects span the social themes of affordable housing and socioeconomic advancement and empowerment, which are two categories identified by the Social Bond Principles…and that POAH’s projects span the themes of energy efficiency and green buildings, which are two categories identified by the Green Bond Principles.”

And on the seventh day …

Step 7: Reward the virtuous. The proceeds flow to POAH’s platform-level optimization:

$mil           Percent      Use of Funds

$14.7      19.6%        Refinance and consolidate existing corporate debt.

$53.5      71.3%        Refinance junior loans on individual properties, including some debt “held by POAH at the corporate level.”

$5.8        7.7%          “Other mission aligned projects, including predevelopment expenses.”

$1.0        1.4%          Transaction costs.

Instead of being project finance hamstrung into specific instruments, uses, covenants and restrictions, this new money is highly flexible enterprise finance (which I first wrote about and wished for in May 2010’s Guru column). It’s not secured by mortgages or collateral liens: “The Bonds constitute unsecured general obligations of POAH, and no specific POAH assets or revenues…are pledged…. POAH may substitute other properties for the refinanced targets described.”

This is new money any nonprofit would crave. And the price? 4.479 percent fixed for ten years.

Virtue is its own reward.

David A. Smith is founder and CEO of the Affordable Housing Institute, a Boston-based global nonprofit consultancy that works around the world (60 countries so far) accelerating affordable housing impact via program design, entity development and financial product innovations. Write him at [email protected].