Too many years ago, I was a senior in college, sitting across the table from an equity analyst at a Boston-based asset management firm, interviewing for my first grown-up job. We were cruising through a litany of standard interview questions when we landed on one that made me pause. It was an inquiry that would unknowingly shape my career. Was I familiar with municipal bonds? What the 21-year-old government major didn’t know then, the mid-career professional knows now. Municipal bonds make the world go round. These altruistic securities are often issued to finance schools, roads, bridges, hospitals, and water treatment facilities, to name a few. For this former credit analyst, municipal bonds couldn’t possibly offer more. Or could they? For the discerning investor, we believe the answer is yes.
The municipal market is comprised of more than 50,000 issuers and 1.5 million CUSIPs. To parse through them all and uncover the ESG-positive gems requires a map – a key issues map, to be specific. We rely on our proprietary key issues map to guide us on our search for better than good securities – securities that we believe are ESG leaders. With this map, we delve into issuers’ Environmental, Social, and Governance factors, and then further into nine themes (e.g., climate change and human capital) and 35 key issues (e.g., greenhouse gas emissions and ethics). Even for seemingly gilt-edged municipal bonds, there can be ESG-related blemishes.
For a moment, consider two different water and sewer bonds, the issuers of which provide essential services. With these bonds, we focus on numerous key issues, such as Waste, Pollution, and Hazardous Management, as well as Oversight and Effectiveness. For the ESG leader, we highlight the system’s prominence in pollution and flood control. We also emphasize its legal separation from the city it serves, which is notable given that city’s financial woes. For the ESG laggard, we concentrate on the system’s service area, which has battled subsidence, or the sinking of earth due to groundwater removal. Further, we underline the system’s role as an intermediary in water contract negotiations and lack of independence. On the surface, both systems exist for the public good. Yet our credit research, which includes an ESG overlay, leads us to believe that one is better than the other.
We don’t always have to work so hard to identify which issuer has the sounder ESG credentials. Sometimes, the issuer just hits us over the head with it. Recently, a prospectus for a regional transportation district deal stated on the front page that they were Green Bonds – Climate Bond Certified. The Climate Bonds Initiative’s (CBI) certification program is used globally by issuers, investors, governments, and financial markets to delineate investments that address climate change. While the proceeds of this deal were used to finance ESG-positive projects, like light rail and shuttle services, the deal was also verified as constructive on climate change. ESG strategies – please take note. With over $19 billion in municipal green bond issuance in 2020, and an estimated $35 billion in 2021, this could be just the beginning.
Now that I’m an Investment Product Specialist, I haven’t made a municipal bond buy, sell, or hold recommendation since 2016. Regardless, I’ll forever be a fan and never a critic of this asset class. The always-evolving municipal market is full of interesting and occasionally unusual issues, such as sinking funds and pricing conventions. Professional management can help investors navigate these idiosyncrasies. As ESG’s reach extends further into the municipal bond world, we’re excited about the opportunity to do even better than good.
Sources: Bloomberg as of 12/31/20. Bank of America as of 1/15/21. Green bond data sourced from Bloomberg and Bank of America.. Reprinted by permission. Copyright © 2021 Bank of America Corporation (“BAC”). The use of the above in no way implies that BAC or any of its affiliates endorses the views or interpretation or the use of such information or acts as any endorsement of the use of such information. The information is provided “as is” and none of BAC or any of its affiliates warrants the accuracy or completeness of the information. The above examples are for illustrative purposes only. Actual results may differ. Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith. The views contained in this report are those of IR+M and are based on information obtained by IR+M from sources that are believed to be reliable. This report is for informational purposes only and is not intended to provide specific advice, recommendations for, or projected returns of any particular IR+M product. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Income Research & Management.