The ESG Muni Bonds Market has great potential

Yield use bonds have been the most popular form of municipal ESG bond issuance described in the US, and this market segment has significant potential under the United Nations-backed principles of responsible investment.

The Institutional Revolutionary Party said in a report, ESG Thematic Approach to US Municipal Bonds, The US municipal bond market is one of the largest and most liquid sub-sovereign bond markets, worth $4 trillion last year.

Households and non-profits own about 40% of Money because of its tax-exempt status, which also leads to institutional investors treating US securities as a separate asset class than corporate and sovereign bonds, and they are often managed separately.

“Interestingly, the percentage of foreign investors in the money market, albeit small (at 2.9% of the total outstanding volume), has grown in recent years,” the report added. “One possible factor could be that insurers in the EU and the UK receive preferential capital treatment under second solvency rules for investments in financial revenue bonds that finance infrastructure.”

The Commonwealth of Massachusetts issued its first green U.S. money bond in 2013, and the Public Research Corporation said a new market for named bonds has developed that enables issuers to allocate financing to projects that achieve specific sustainability outcomes.

“However, the extent to which these instruments support truly sustainable financing depends on the strength and rigor of the criteria used to issue rated bonds, as well as on the underlying data and methodologies used to structure the bond,” the report added.

Two-thirds, 64%, of municipal green bonds received an external review in 2021, down from 73% in 2020. An even smaller proportion of social bonds, 52%, and sustainability bonds, 30%, were received. External reviews. Issuers may decide not to seek an external review if they have difficulty devoting staff, time and money to these processes, according to the report.

He added that the main advantage of choosing to issue an ESG-labelled Muni bond over an unlabeled one is that it signals to stakeholders, including citizens and local governing bodies, the issuer’s commitment to sustainability, particularly if the bond forms part of a broader sustainability strategy. Institutional Revolutionary Party.

Another benefit may be “Greenium”, whereby the yield on the labeled bonds is lower than their unrated counterparts because the former attracts investors with a specific ESG mandate. There is anecdotal evidence of Greenium for several base points for taxable muni bonds but limited evidence for one for tax-exempt debt, according to the report.

Yield use bonds have been the most common form of bond named to date.

“Although still in its infancy, this market segment has great potential,” the report said.

In 2021, municipal bond issuers raised $45.9 billion through described debt using proceeds, the third consecutive year of more than 70% year-over-year growth. As a percentage of total new issuances of financial bonds, it also increased to 9.7%, from 5.5% in 2020 and 3.2% in 2019.

Source: PRI

The issuance is geared toward the US Northeast and West Coast and the top 10 money issuers account for bond proceeds utilization one-third of the total issuance, 35%.

The average nominal amount of proceeds-use debt in 2021 was $86 million in 2021, and nearly $100 million in each of 2018, 2019 and 2020, compared to an average of less than $40 million in public debt annually over the same period. .

“Many US securities are self-rated, and it is critical that issuers provide sufficient information on the use of proceeds, both before and after issuance, in addition to any available performance metrics, to allow investors to examine how the money is being spent,” the report added. “Whether the bonds are self-rated or subject to external review, investors should encourage more reporting on the use of proceeds or systematic progress toward sufficiently ambitious sustainability goals.”

Additionally, the Constitutional Institute for Reform also highlighted that controversy in some US states, where politicians have opposed aspects of incorporating ESG into funding, may hinder issuance.

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