Muni Bonds as an ESG Strategy

Impact investing, socially responsible investing (SRI),  socially conscious, and ethical investing are  investment strategies which seek to consider both financial return and social good to bring about a social change.

A recent survey by Allianz Global Investors found that 68% of respondents aged 65 and over had a favorable view of ESG investing but that two-thirds of investors were unaware of ESG as an investment strategy. Further, only 14% of investors has discussed ESG as an investment strategy with their financial advisors.

 Throughout my tenure of over 20 years in impact investing, “I didn’t know you could do that” has been a common refrain.  As a fixed income impact advisor, I deployed over $6 billion in high credit quality bonds that enabled investors to direct their capital to people and places with purpose.  Community development finance, and the municipal market specifically, allows investors the opportunity to invest in bonds that pair mission with market rates of return.  Municipal bonds finance projects and communities that support affordable housing, provide economic revitalization to urban and rural communities, offer job opportunities in underserved neighborhoods, and finance environmentally sustainable development at the state and local level. 

 To pursue these impactful investment opportunities, investors merely need to follow the money.  For municipal financing, use of bond proceeds demonstrates how the funds raised from the bond issue should be allocated.  Investors should thoroughly analyze the intent of the financing and the bond’s flow of funds to ensure that the use of proceeds goes to the intended beneficiaries. Broad scope or general obligation financings can be fungible, and the intended beneficiary may not be the ultimate recipient of use of proceeds.  Revenue or project-based financing typically have more defined sources and uses of proceeds, but often carry greater credit risk than GOs.

Strategic impact investing requires additional research and due diligence to appropriately select investments that match investors’ financial and social objectives.  In-depth social and financial analysis is critical to creating and managing an impact-aligned strategy with a dual mandate of generating financial and social returns. To ensure appropriate allocation of resources, investors should be able to directly track the sources and uses of bond proceeds. 

Transparency and disclosure are paramount to ensure financial and social objectives are met. Just as financial research does not conclude after a bond purchase, social research must be on-going.  Continued monitoring is key to ensure that bond proceeds reach the intended beneficiaries upon issuance.  Thereafter, monitoring is important as economic, political and demographic influences can alter the desired outcomes of an issue.  On-going monitoring ensures continued mission alignment.

Fortunately, technology has enabled investors to access initial and on-going disclosure through sources such as the MSRB website, Electronic Municipal Market Access, and issuers’ websites. News sites, public records, and community input provide additional layers of transparency to help evaluate projects’ successes and failures, all of which accelerate learning opportunities for the field of impact investing.

 In return for additional research and due diligence, investors are rewarded with demonstrable narratives of how their capital can influence economic and social change.  With impact investing, consumers can “vote with their pocketbooks” through their investment portfolios.  Investors can address social issues such as climate change, homelessness, healthcare and education. 

 Municipal finance offers investors the opportunity to participate in tangible, high-credit quality investments.  Recent financings include:

  • A refunding issue to Boys Town, an internationally recognized youth treatment provider that provides housing, care, treatment and educational services for youths who are at-risk, wayward, troubled or disadvantaged. 
  • A Homeless Opportunity Project in Atlanta that will acquire and rehabilitate homeless emergency shelters, construct or rehabilitation over 500 permanent supportive housing units, and the acquire four accessible vans. 
  • A refunding issue for Martha’s Vineyard Land Bank.  The Land Bank is empowered to acquire interests in land that protect aquifers, forests, marshes and wetlands, beaches and dunes, and land for nature or wildlife preserve. 
  • To finance a portion of building costs at the Museum of Modern Art that will create 50,000 square feet of new gallery space for Moma’s collections and exhibitions, increasing overall gallery space by 30%.

 Additionally, innovative financing often offers a combination of ESG and impact related activities.  New York City Housing Development Corporation (NYCHDC) regularly issues Sustainable Neighborhood Bonds, a holistic approach to increasing the City’s supply of affordable multi-family housing while simultaneously stimulating economic growth to and revitalization of diverse neighborhoods.  Sustainable Neighborhoods Bonds typically finance green properties with energy-efficient and resilient features including renewable energy sources, rooftop gardens, and health and wellness centers.  For example, recent NYCHDC issues included financing for Serviam Heights, the third phase in affordable rental complex for the elderly in the Bronx.  Upon completion, Serviam Heights will provide 197 sustainable, affordable homes for low-income and formerly homeless seniors.  The project includes the rehabilitation and conversion of a four-story convent building into 57 apartments, new construction of 140 apartment units, and the conversion of a two-story chapel into senior community life space.  In addition to its adaptive reuse, renovations at Serviam Heights will include energy efficient upgrades and green plumbing.  Serviam Heights expands the affordable housing development that originated with the construction of Serviam Gardens and Serviam Towers on underutilized land leased from the Order of the Ursulines, the sisterhood that operates the Academy of Mount Saint Ursula High School, the oldest Catholic all-girls school in New York state. Additional amenities include an intergenerational garden that preserves the campus’ green space and allows residents to grow their own food while encouraging interaction between the senior residents and the students at the Academy of Mount St. Ursula.

 The demand for mission-aligned investments is increasing, and issuers have responded accordingly.  According to Bloomberg, long-term and short-term green municipal bond sales reached about $1.5 billion in 1Q17, a 42% increase, year over year, even as long-term and short-term municipal volume overall declined 11% during the period.  Retail investors seeking ESG are driving the heightened demand for green muni bonds.   The overall market of sustainable investing grew by 33% in the period from 2014 to 2016 to a total of  $8.72 trillion.  Impact investing is a viable long-term investment strategy that reaps benefits far beyond financial returns.  Investors should utilize the municipal bond market to build robust, meaningful portfolios that truly optimize impact investing.