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AllianceBernstein: Municipal Impact Investing - Bonds That Transform Our Communities

AllianceBernstein: Municipal Impact Investing - Bonds That Transform Our Communities

Published 06-09-22

Submitted by AllianceBernstein

Marc Uy | Portfolio Manager—Municipal Impact
Larry Bellinger, CFA | Director—Municipal Credit Research


Larry Bellinger: As impact investors, we certainly start with credit fundamental research. But in addition to that, we overlay this with specifically looking at bonds and how it transforms communities.

Marc Uy: We want to make investments in historically under-resourced and low socioeconomic communities across America. And more specifically, as that relates to water, that means making investments in much needed infrastructure to really help change the trajectory of these communities. Because we've known that, for such a long time, that having access to clean water, having access to a running sewer system, is something that a lot of these communities are still striving for—even in the 21st century.

LB: One important area is lead contamination in the drinking water and the removal of lead from service lines. Lead is a neurotoxin. There is no safe level of lead in drinking water. And it has all kinds of ramifications.

MU: Children in high poverty areas are two and a half times more likely to get lead poisoning than children in low poverty areas. And black infants are estimated to experience around a 50% higher average loss of IQ points versus white and brown children. And, really, Larry, the only effective solution to this problem is just the full eradication of lead service lines. This can be costly, and it can be politically hard to do.

LB: I have to admit—in light of the Flint lead water crisis—it is surprising to me that more municipalities have not invested. This occurred in 2015–16, and we really haven't seen much investment up to this point. So hopefully, going forward, we'll see more investments.

MU: There's been a couple of large, you know, large cities in the Midwest. But unfortunately, they're still up against large funding needs, right? A large city that started their lead service on replacement back in 2017—they're still slated to finish this project in about 70 years’ time. For cities like that and for countless other under-resourced, historically marginalized communities across America, they're going to be dealing with having to drink out of water bottles and using in-house water filters for a very long time.

LB: So, what we're doing as impact investors is we're engaging with these municipalities to hopefully prioritize these projects and speed them up.

MU: Newark is one of the few success stories out there. And back in 2019, they brought a $120 million bond to market to do a full service-line replacement. It not only married the funding that they were able to get from the municipal bond market, but they were also able to pair that along with the political necessities as well. So, this meant that they were able to pass state and local legislation that'll allow them to use public monies on private property.

And on top of that, they also passed legislation that allowed them to go on to private properties, so that they would be able to just go forward and make these lead service line replacements without having to wait for a homeowner’s consent. And this was so important to the success of this project that it lowered the amount of time that it took from eight to ten years down to being completed in three years.

LB: But we are also advocating for utilities to remove and mitigate the forever chemicals in their systems.

MU: One of the investments that we made over the last year was in a large water utility system in the Northeast. And one of the things that we really liked about this project was because they're dealing with all the issues that come from storm water runoff. So that means forever chemicals and environmental issues that can come from water overwhelming a system where you have all this pollution being, you know, just thrown into lakes and rivers and streams.

And so, what this large water utility aimed to do was that they wanted to reduce the amount of storm water runoff. And so, they did this by building out green roofs, tree canopies, all these different ways just to capture rain. They also aimed to remove impervious pavement, to make it even harder for this rain to move into these water systems.

And the other really interesting thing that we liked about it was this utility system took the approach of using an equity lens. So that meant that they were looking at all the low-income neighborhoods—these low-lying areas that are disproportionately affected when flood waters come—that they were really looking to make an investment in these communities to try to change the trajectory of them.

LB: And what was unique about this specific issue is that they held themselves accountable to meeting environmental goals. So, they came up with a unique structure, which is step-up coupons if they do not achieve their environmental goals by a certain time frame. So, what's exciting is that they innovated. But I think the market is going to follow.

MU: We also know that it's very hard to get things done on a political side of things. But from what we've seen from the success of Newark is that there's a model out there that can be replicated. It's just going to take effort from both the political side of things and also from investors going forward that are looking to be able to really change the trajectory of these communities.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to change over time.

About the Authors

Marc Uy is a Vice President and Portfolio Manager for AB's Municipal Impact products. He joined the firm in 2004 as a member of the Trading and Technical Team. In 2011, Uy was promoted to associate portfolio manager and implemented investment strategies and monitored risk exposures across AB's municipal platform. In 2018, he advanced to his current role, where he oversees ESG portfolio strategy and research. Uy holds a BS in business management from Babson College. Location: New York

Larry Bellinger is a Senior Vice President and Director for the Municipal Credit Research Group, providing high-yield research on municipal credits, with a focus on senior living and hospitals. He initially joined AB in 2012 as a municipal credit research analyst, focusing on municipal credits in Northeastern states, as well as Florida, Ohio and Wisconsin. Bellinger returned to the firm in 2019. In between, he spent three years as a research analyst with Schroders, covering all regions and all municipal sectors for investment-grade and high-yield credits. Earlier in his career, Bellinger worked at Moody's Investors Service, where he primarily analyzed municipal credits in the Northeast. Prior to that, he was an analyst at insurance-rating agency AM Best Company and a D&O underwriter for financial institutions at insurance company Chubb. Bellinger holds a BS in business administration (international business) from Central Washington University, an MBA from Michigan State University and a JD from Rutgers Law School. He is a CFA charterholder. Location: New York

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