US muni bonds ‘well-positioned’ for thematic ESG investing, PRI report says

Written by Adam Cadle

19/01/2023

US municipal bonds are “well-positioned” for investors pursuing a thematic ESG approach, the Principles of Responsible Investment (PRI) has said.

In its latest report, The thematic ESG approach in US municipal bonds, the PRI said muni bonds fund much of the US’s public services and infrastructure through providing capital to an issuer base including cities, counties, school districts, utilities, universities, and hospitals, and it is the “clear environmental and social implications” of these projects which make them “well-positioned”.

“US municipal bonds are useful for fixed income investors seeking to contribute to sustainability outcomes, since issuers of these bonds are crucial for the wellbeing of most Americans and also the transition to a low carbon economy,” said Jasper Cox, investment practices analyst, fixed income, at the PRI.

“This report will help market participants understand the potential of muni bonds for a thematic ESG approach, but also how investors still need to perform appropriate due diligence on both labelled and unlabelled bonds.”

“This report will help market participants understand the potential of muni bonds for a thematic ESG approach, but also how investors still need to perform appropriate due diligence on both labelled and unlabelled bonds.”

Some PRI signatories are using muni bonds to align investment objectives with the UN Sustainable Development Goals, or, alternatively, exclude bonds linked to revenue from certain sectors, such as tobacco, according to data from the PRI’s Reporting Framework.

Investors can contribute to positive outcomes or reduce negative outcomes through investing in both labelled and unlabelled muni bonds. The labelled muni bond market has grown rapidly, most of all through issuance of use-of-proceeds bonds, such as green, social and sustainability bonds. While less common, labelled bonds that link financial terms to project outcomes and sustainability targets have also been issued by some municipal entities.

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