Applying ESG principles to municipal bond portfolios

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The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.

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      By Lauren KashmanianMunicipal Portfolio Manager, Eaton Vance Management

      Boston - Responsible Investing is a relatively new but rapidly expanding area in the municipal bond space. Its goal is to provide opportunities for investors to align their portfolios with their personal values and their investment objectives. We believe the concept is particularly well suited to the municipal market, which finances entities and projects intended to serve the public good.

      A key component of Responsible Investing is incorporating environmental, social and governance (ESG) factors into the investment process, through credit analysis and portfolio construction. Typical muni ESG securities include bonds issued by local government and nonprofit organizations to fund renewable energy projects, public education facilities in underserved communities, public transportation, and affordable housing.

      Determining which bonds qualify for ESG portfolios

      While Responsible Investing involves avoiding investments deemed to have a negative impact, it is more about investing to achieve both a positive impact on society and favorable investment results. As such, it is a strong match with the actively managed, research-based investment style practiced by our municipal bond team.

      Meeting ESG standards, for example, requires analysis of the long-term sustainability of a project and its potential to lower costs, reduce waste and provide more efficiency over time — factors that may contribute to underlying credit strength, improve investor value and mitigate risk over time. In pursuit of those goals, our analysts assign each bond in our portfolios both an internal credit rating and an ESG rating based on Calvert's proprietary rating system.

      Green municipal bonds — ESG investing in action

      Within the ESG realm, green municipal bonds are issues that fund environmentally beneficial projects in a wide variety of sectors, including transportation, water and waste infrastructure, pollution control, wind and solar power, and even health care and affordable housing. As of the end of 2017, the most recent data available, the U.S. green municipal market was growing rapidly, with $12 billion of issuance in 2017, an increase of 85% over the $6.5 billion of muni green bond issuance in 2016. Source: Climate Bonds Initiative, 2018.

      To illustrate the diversity of Responsible Investing and green municipal bonds, we favor a major metropolitan transportation authority that issued green bonds to refurbish and upgrade commuter rail track and stations and fund new connections between its existing rail lines. The proceeds of the bond issue were used on eligible projects pursuant to the low carbon land transport criteria and relevant climate bonds industry standards. We also favor a municipal power company that issued green bonds to fund the construction of a 32-turbine wind farm, generating enough electricity to power more than 43,000 homes. The project provides utility customers with a long-term supply of renewable electric energy and the associated environmental benefits.

      Bottom line: Investments in green bonds and other ESG securities afford investors an opportunity to invest with meaningful social and environmental impact. Through careful credit analysis and portfolio construction, municipal bond managers can provide an ESG focus that aligns investors' holdings with their personal values — without sacrificing credit quality or performance.