Submitted by AllianceBernstein
Erin Bigley, CFA| Head—Fixed Income Responsible Investing
Marc Uy| Portfolio Manager—Municipal Impact
Gavin Romm, CFA | Head—Fixed Income SMA Solutions
Larry Bellinger, CFA| Director—Municipal Credit Research
Municipal bond investors increasingly want to apply environmental, social and governance (ESG) considerations to their portfolios. But, given a broad spectrum of approaches, knowing where to start can be challenging.
We’ve identified three key strategies for incorporating ESG into muni investing, each with a distinct approach that appeals to different investor objectives. Below, we provide an investor guide to ESG integration, screening and impact investing.
Integration: Measuring ESG Across Muni Portfolios
ESG integration is the process of incorporating ESG factors across a portfolio to gauge its risk and return potential more accurately. It’s a familiar theme in equity and taxable bond portfolios, but still evolving in the muni market, where issuers outnumber US investment-grade corporate issuers by 4 to 1.
Why do it? Because ESG factors can—and often do—directly impact an issuer’s bottom line. In fact, ESG-related breaches can lead to downgrades, lawsuits and looming financial burdens. Conversely, issuers that score high on ESG measures may represent exceptional value, since relative strengths and weaknesses may not be apparent without an ESG lens.
Managers who can discern among ESG laggards and leaders will have a leg up on the muni market, which typically doesn’t yet make such distinctions. That makes ESG integration suitable for all muni investors. From short to long duration, from national to state-specific and from high grade to high yield, every muni strategy can benefit from this additional scrutiny.
To root out potential laggards, managers must ask tough questions. Is that city’s drinking water safe (E)? What’s the town’s high school graduation rate (S)? How intense is local government’s political gridlock (G)? We favor a scoring model, applied consistently across issuers, that rates attributes on a scale of 1 to 10. These metrics boil down to a final ESG score, which helps us discern among undervalued bond issues and potential investments whose outsized ESG risks warrant more yield.
Screening: Customizing According to Investor Preferences
Some muni investors may want to apply ESG screening to avoid specific issuers based on personal considerations and values. For instance, some avoid utilities that rely heavily on coal for power generation or healthcare systems with poor reputations; others may prioritize air quality, income equity or women’s empowerment. A muni screening strategy can customize portfolios based on what investors care about most.
As with integration, muni ESG screening starts with the broad $4 trillion muni bond universe. But after applying ESG screens, managers can further eliminate lower-scoring issuers within the investor’s selected themes.
Given the muni market’s vastness, this kind of screening isn’t easy. Few managers have made the big technological commitment required to gather the data and to screen portfolios for the client’s desired ESG considerations without degrading other key portfolio factors such as quality and yield (Display). But for a bond manager who is properly equipped, screening and best-of-breed approaches can be another notch in the customization toolbelt.
Impact: Improving Outcomes for Underserved Communities
Impact investing intentionally supports social and environmental progress by focusing on programs or projects with specific purpose and results in mind. In this vein, muni impact investing can deliver positive improvements to historically underserved communities. That’s why it’s a natural fit for muni investors who want to make a measurable difference in addressing socio-economic inequities.
Muni impact investing can target many important ESG-related goals, ranging from improving water supplies and mass transit to energy efficiency and economic development. The Buffalo Sewer Authority, for example, issued a $50 million bond to fund green infrastructure and reduce untreated wastewater runoff into nearby waterways. Likewise, the City of Oakland’s Bond Measure KK funds targeted investments in roads and other infrastructure in neighborhoods that need it the most, along with affordable housing.
Improved access to education and healthcare are frequent focus areas too. For example, Gallaudet University, the world’s only liberal arts college devoted to deaf, hard-of-hearing and deafblind students, issued a $40 million bond to fund facility improvements to further optimize its educational environment. Not far away, the West Virginia University Health System’s bond will help pay for expanded outreach to the state’s more vulnerable and at-risk residents, like teens addicted to opioids or older adults living in remote mountain and rural areas.
Results are just as important as intentionality. Impact investors must measure how each bond’s proceeds are being used to meet environmental or social goals, many of which often overlap. Outcomes that tell us whether the project is successful are measured differently depending on sector or ESG themes.
Choosing a Muni ESG Approach Hinges on Investor Goals
As ESG becomes a bigger part of muni investing, it’s important to discern among the many approaches before jumping in. The muni market is vast, and muni bonds—as well as issuers—offer varying ESG-investment risks and rewards. Muni investors considering how ESG adds value to their portfolios should study all their options across the spectrum to know which strategy best aligns with what they hope to achieve.
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
Erin Bigley is a Senior Vice President and Head of Fixed Income Responsible Investing. In this role, she oversees the Fixed Income team's responsible investing strategy, including integrating environmental, social and governance (ESG) considerations throughout the team's research, engagement and investment processes. Bigley also oversees fixed-income ESG thought leadership and product development. She is a member of the firm's Responsible Investment Steering Committee. Bigley joined the firm in 1997 and previously served as a portfolio manager and trader for the global and Canadian bond strategies. She spent two years based in London as the global head of Fixed Income business development for institutional clients. Bigley served as a Fixed Income senior investment strategist for over a decade, most recently as head of the strategist team from 2018 to 2021. She holds a BS in civil engineering from Villanova University and an MBA from the Massachusetts Institute of Technology's Sloan School of Management. Bigley is a CFA charterholder. Location: New York
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
Gavin Romm is a Senior Vice President and Head of Fixed Income SMA Solutions. He is responsible for the management and strategic growth of AB's fixed-income SMA business. This includes the construction and ongoing evolution of AB's deeply customized, technology-driven SMA investment platform delivering bespoke solutions to investors across a variety of commercial channels. Previously, Romm was a senior leader responsible for fixed-income technology and data initiatives, driving innovation through data science, analytics and automation to enhance AB's investment decision-making capabilities. Prior to that, he was a portfolio manager and member of the High Yield and High Income portfolio-management teams. Before joining AB in 2013, Romm was a fixed-income specialist at Bloomberg, where he developed and supported fixed-income cash bond and derivative analysis tools. He holds a BA in economics with a minor in entrepreneurship from Trinity College and is a CFA charterholder. 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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AllianceBernstein (AB) is a leading global investment management firm that offers high-quality research and diversified investment services to institutional investors, individuals, and private wealth clients in major world markets. We believe corporate responsibility, responsible investing and stewardship are intertwined. To be effective stewards of our clients’ assets, we strive to invest responsibly—assessing, engaging on and integrating material issues, including environmental, social and governance (ESG), and climate change considerations in most of our actively managed strategies. We also believe that being a responsible firm allows us to be more responsible investors. Our stewardship practices, investment strategy and decision-making are guided by our purpose, mission and values.
Our purpose—pursue insight that unlocks opportunity—inspires our firm to act responsibly. While opportunity means something different to each of our stakeholders; it always means considering the unique goals of each stakeholder that go beyond the desire for financial returns. AB’s mission is to help our clients define and achieve their investment goals, explicitly stating what we do each day to unlock opportunity for our clients. We became a signatory to the Principles for Responsible Investment (PRI) in 2011. This formalized our commitment to identify responsible ways to unlock opportunities for our clients through ESG integration in most of our actively managed equity and fixed-income client accounts, funds and strategies.
Because we are an active manager, our differentiated insights drive our ability to deliver alpha and design innovative investment solutions. ESG and climate issues are key elements in forming insights and in presenting potential risks and opportunities that can have an impact on the performance of the companies and issuers that we invest in and the portfolios that we build.
Our values provide a framework for the behaviors and actions that deliver on our purpose and mission. Values align our actions. Each value emerges from the firm’s collective character—yet is also aspirational. Each value challenges us to become a more responsible version of AB.
As of December 31, 2022, AB had $646B in assets under management, $445B of which were ESG-integrated. Additional information about AB may be found on our website, www.alliancebernstein.com.
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