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Seeing green: Investing in municipal green bonds to support local climate projects

Timely insights from portfolio managers and industry experts on key financial, economic and political issues.

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

      New York - Responsible investment vehicles seek to align investments with investors' values through programs and projects that contribute to local communities in a positive way. Green municipal bonds offer investors the opportunity to support climate-aligned projects in such sectors as transportation, water and waste infrastructure, pollution control and renewable energy, which includes wind and solar power.

      Green bond issuance

      Green bonds are standard municipal bonds whose proceeds are used specifically to fund environmentally beneficial projects, as well as social and governance improvements.1 These bonds can encompass not only climate-related issuers in public power, water and sewer, but also issuers in the education, health care and affordable housing sectors of the market.

      Green-labeled issuance remains small. In 2017, there was $12 billion of green bond issuance in the US municipal market, an increase of 85% over the $6.5 billion of municipal green bond issuance in 2016.2 Total par declined to $4.9 billion in 2018 — a drop of 50% from 2017 and 33% less than was issued in 2016 — reflective of lower municipal issuance overall.

      2019_11_18_SeeingGreen

      Without the presence of a financial subsidy, such as a direct payment or tax credit program, there is currently no direct benefit for municipal issuers to issue green bonds. And with green bonds yielding the same as non-green bonds for the same issue, there been no price impact for issuers.

      We anticipate that increasing investor demand for green projects will in turn spur growth in issuance in the municipal green bond market — and encourage more issuers to incorporate sustainability into their investment considerations.

      ESG research analysis

      Green-labeled bond issuance in the municipal market continues to lag overall green bond issuance in the fixed income markets. And green-labeled issuance is still a relatively small percentage of total issuance in the municipal bond market.

      That's why we think it's important for managers to have a proprietary ESG research framework, such as the Calvert ESG ratings methodology we've developed. Having our own ESG municipal bond research framework helps us uncover environmental and social impact projects that are not green-labeled.

      As with all municipal bonds, we believe careful credit analysis is necessary to avoid challenges and uncover value. For green bonds in particular, additional analysis of the green projects and the ongoing use of proceeds is important.

      Bottom line: Our research framework is able to identify "unlabeled" green bonds with material environmental and social impact, uncovering those municipal issues with a purpose that can produce meaningfully positive impact to local communities and their constituents. In our view, strong financial returns and strong social returns don't have to be mutually exclusive; investing with an ESG strategy can provide investors with the opportunity to earn both.