Innovation is afoot in the municipal bonds market, and it comes courtesy of asset allocators’ desire for more fixed income products with environmental, social, and governance (ESG) ties.
In fact, municipal bonds are ideal territory for the greenification of fixed income, underscoring the relevance of exchange traded funds such as the SPDR Nuveen Municipal Bond ESG ETF (MBNE). MBNE debuted last April and entered 2023 with $35.11 million in assets under management — a decent tally when considering that 2022 was one of the worst years on record for the broader bond market.
However, municipal debt outperformed broader bond benchmarks last year, and that has some analysts bullish on what 2023 has in store for muni bonds, particularly high-quality fare such as what resides in MBNE. Add to that, the growth outlook for green municipal debt is intriguing.
“Municipal bond issues are down 17% this year compared to 2021 as interest rates have spiked, according to SIFMA. But state and local government issues under environmental, social and governance, or ESG, frameworks are up,” reported Andrea Riquier for Impact Alpha.
Currently, the landscape of bonds that credibly warrant ESG labels is small but growing, and the same is true when the universe is boiled down to specific asset classes, such as municipal or corporate debt. That’s one reason why MBNE holds just 97 bonds. Fortunately, signs point to that field growing.
“A note from Barclays’ municipal research group forecasts $45-50 billion of such local bond issuance in 2023, a roughly 20% increase compared to about $40 billion this year and only $19 billion in 2020,” added Riquier. “New York City and Atlanta each recently issued their first social bonds. Both sales were oversubscribed, helping the cities drive down their cost of capital.”
Regarding the size of the green municipal bond universe, the aforementioned data points confirm that the growth potential is there. In the meantime, investors can potentially benefit from MBNE being an actively managed fund because that style of management can steer investors clear of greenwashed debt while keeping the fund honed in on bonds that credibly deserve the green label.
MBNE accomplishes that objective with a 30-day SEC yield of 2.88% and an option-adjusted duration of 4.92 years. The ETF’s credit quality should be appealing to even the most risk-averse investors, as more than 86% of the fund’s holdings are graded AAA, AA, or A, implying that default risk is minimal.
For more news, information, and analysis, visit the ESG Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.