Navigating the Growing ESG Muni Bond Market

Interest in investments that support environmental and social impact objectives is growing rapidly among both institutional and individual investors. This is particularly true with respect to the retail-focused municipal bond market. Every week we see an increasing number of new municipal bond issues – both tax-exempt and taxable with a “Green Bonds”, “Social Bonds” or “Sustainability Bonds” label.

Bloomberg data indicates that Municipal Green Bond issuance alone increased by 65% from $11.093 billion in 2019 to $18.359 billion in 2020. Earlier this year Standard & Poor’s estimated total municipal sustainable debt issuance (including all three categories) of $30 billion for calendar year 2021.

These imprimaturs are only provided after third-party verification of multiple characteristics of the offering with a focus on use of proceeds, project selection, allocation, and management of proceeds, reporting on use of proceeds and other factors. Environmental and social impact criteria and category checklists are available from multiple organizations with the Climate Bond Initiative, International Capital Markets Association Green Bond Principles and United Nations Sustainable Development Goals all providing a robust menu for review.

So how can financial advisors best help their clients navigate the ESG municipal bond world? The number one thing to do is to carefully LISTEN to their clients.

Despite the rip-roaring equity market of the past 10 years and the current low fixed income yield levels overall, individual investors rightly continue to consider municipal bonds as an integral part of their portfolios because of several benefits -- particularly diversification, credit quality and tax-advantaged income. A municipal bond manager can assist the advisor in meeting the objectives of their client, starting with an “inventory” of the financial parameters of the client’s investment objectives including income, appreciation, liquidity requirements, and credit risk tolerance.