Muni bonds gain ground for climate and social change
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Many investors are already familiar with the tax benefits of municipal bonds, also known as munis or âmunisâ bonds. Today, these assets have also become popular among those who want to have an impact on climate and social change.
In addition to the tax savings and relatively low risk, municipal bonds can be attractive to those seeking funds in areas such as renewable energy, clean water, transportation, or low-carbon infrastructure.
The municipal bond market grew by $ 474 billion in 2020, with $ 27.6 billion issued for green, social or sustainable bonds, more than double the figures for 2019, according to S&P Global Ratings.
âWe expect growth in the green bond market to also be driven by renewed interest in climate change and the country’s aging infrastructure,â said Laura Levenstein, chief risk officer at Build America Mutual , speaking at the press conference. CNBC Financial Advisors Summit Tuesday.
As the municipal bond market explodes for retail, institutional and international investors, experts at the FA Summit have shared the latest updates.
One of the biggest challenges for investors is finding legitimate green or social municipal options, as there can be labeling inconsistencies in the bond market.
Some are wary of âgreenwashingâ, where issuers distort the environmental impact of their obligations for marketing purposes. However, there are also municipal bonds financing climate or social projects without the impact label.
“We see a lot of unlabeled impacts [bonds] on the municipal market, in particular on the social level, âsaid Michael Kashani, global head of ESG portfolio management at Goldman Sachs Asset Management and panelist at the FA Summit.
For example, there may be municipal bonds funding the construction or expansion of K-12 schools in underserved communities without the âimpactâ label, he said.
Build America Mutual, the largest provider of external green bond audits, has identified around 175 U.S. green municipal bonds worth about $ 2.5 billion, Levenstein said.
Over time, more social, green and sustainable bonds have aligned with one of the 17 sustainable development goals, she said.
“I think the alignment gives investors more reassurance that they are buying legitimate green, social and sustainable bonds,” Levenstein said. “And that’s sort of where we see the market moving next year.”
Impact investing returns
While many impact-oriented investors wish to support green or social projects, portfolio returns remain the primary concern, Kashani said.
But with around 50,000 municipal bond issuers and 1 million securities, there are endless ways to customize a client’s portfolio to suit individual preferences, he said.
âThere is a lot of flexibility and variability, depending on how deep a client wants to go,â Kashani said.
For example, some clients may prefer higher percentages of impact funds for specific industries, which may affect returns. However, there are many options to bring “economic, environmental justice, transparency and equality” across their portfolio, without sacrificing their goals, Kashani said.
With current yields higher than Treasuries, municipal bonds – which typically bypass federal interest levies – have been a haven for those worried about President Joe Biden’s impending tax hikes.
Muni bonds, already known for their relatively low risk of default, saw an increase in credit in 2021 as state and local governments received billions in federal stimulus funds.