In their recent report, S&P Global Rating indicates that municipal debt issued under the Environment, Social and Governance (ESG) label will continue to grow in the future, taking up a significant section of the overall municipal issuance. More and more local governments are tapping into the ‘Green Debt’ for their capital needs, which includes projects like water and wastewater utilities, financing green buildings, public transit, and much more.
In this article, we will take a closer look at the nature of sustainable debt and what the future holds.
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With an increasing focus on sustainability, both at the local and state level, social and governance factors are playing an important role in new debt issuances. It’s also important to understand this debt holds a special place in the hearts of many investors who are conscious of how local governments are making a difference in both their respective communities and the environment with their debt-funded capital projects.
Like an ordinary municipal debt issuance that enables local governments to raise capital to finance projects, including buildings, bridges, airports, and/or mass transit, ESG debt is also issued in a similar way. However, as Municipal Securities Rulemaking Board (MSRB) explains, “bonds that are characterized as “ESG” bonds finance infrastructure projects that have specific environmental and social benefits or implications in local communities. ESG-oriented municipal bonds may be of interest for investors who prioritize “impact investing” strategies or who integrate ESG policies into portfolio objectives, securities selection, or engagement with issuers. Credit rating agencies have integrated environmental, social and governance credit factors in their rating processes, and other market based ESG scores, and ratings have been developed to serve the rising information needs of investors and other market participants.”
As aforementioned, the ESG label includes the following factors:
Some of these agencies include California Statewide Communities Development Authority (CSCDA), which issued over $4 billion ESG debt in 2021, and New York City Housing Development Corporation, which issued over $2.8 billion. Furthermore, investors saw a significant increase in Water, Wastewater, and Stormwater projects using sustainable debt to finance their capital projects. This area issued around $28 billion of ESG debt in 2021.
And, finally, transit agencies throughout the U.S. bore the brunt of COVID-19 shutdowns, due to the general public’s reluctance to travel using modes of public transportation. However, we witnessed mass transit agencies also issuing over $24 billion in sustainable debt.
Here is a glimpse of municipal sustainable debt issuances by sector from 2013-2021:
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Investors should carefully review the official statement and rating analyses before making investments in any municipal debt issuances.
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Disclaimer: The opinions and statements expressed in this article are for informational purposes only and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned. Opinions and statements expressed reflect only the view or judgement of the author(s) at the time of publication and are subject to change without notice. Information has been derived from sources deemed to be reliable, the reliability of which is not guaranteed. Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professionals and advisers prior to making any investment decisions.