Measuring the Impact of Your Municipal Bond ESG Portfolio
April 20, 2018 By Sage Advisory
Investors have long considered municipal bonds to be a way to invest in community-focused development, but measuring impact can be difficult. Until very recently, muni investors had to be content with having only a limited understanding of the nature, intensity, and duration of the financing’s impact at the local level. That changed in 2015 with the introduction of the United Nations Sustainable Development Goals 2030 (SDGs) framework.
The SDGs identified a global impact construct that offered investors a basis upon which to measure their investing. There are 17 core SDGs along with 169 performance sub-targets. The SDGs cover a broad range of social and economic development issues, including poverty, education, climate change, gender equality, sanitation, energy, environment, and social justice. The 169 sub-targets are used to measure progress toward reaching the target and ultimately accomplishing the stated core goal by 2030. This comprehensive framework allows organizations to align their projects with a broad global goal and have a measurable, target-based action plan to get there.
The United Nations Sustainable Development Goals 2030
(Source: United Nations)
The process for measuring ESG impact has become more standardized for publicly held companies, but ESG assessment tools have generally been unavailable and not often applied to municipal bond investing. Following the introduction of the UN’s SDGs, Sage developed a proprietary framework to evaluate the ESG impact associated with individual municipal investments. Through this framework, Sage first classifies each municipal entity within an issuer category or reference peer group. Then, after an in-depth review of the issuer’s relevant financial data and the entity’s ESG-related information, Sage assigns three scores: an overall ESG score, an impact score that evaluates the ESG-related relevancy of the project, and an impact intensity score that measures the magnitude of the project’s impact on the surrounding environment and/or community.
One of Sage’s municipal holdings is Aurora, Colorado, Water Revenue Bonds (5% due 8/1/2046 that are rated AA+/AA+). The proceeds are being used to fund the Prairie Waters Project, which will provide a sustainable long-term water supply under drought conditions to the city’s growing population. The project has resulted in more efficient utilization of water supply and has increased the availability of water by 20%. The project category is classified as Water Treatment, which would map to SDG 6, “Clean Water and Sanitation,” and SDG 11, “Sustainable Cities and Communities.”
Once Sage selects securities, the overall portfolio is evaluated in terms of its fundamental financial risk characteristics, i.e., credit quality, maturity, effective duration, and call features. In addition, the portfolio is evaluated in terms of its overall ESG risk characteristics relative to its historical trends, the level of anticipated community impact, and finally, the expected community impact intensity accruing from the projects represented within the portfolio.
Each month, Sage produces a report for each client invested in our ESG strategy. The report illustrates general holdings and security characteristics, in addition to offering a broader context to better understand local ESG impact levels and global SDG alignment at both the individual security and portfolio levels. These monthly reports enable ESG investors to know on an ongoing basis if they are making the right decisions as they strive for a better “double bottom line.”
Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.
Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.