MBNE Could be Meaningful as More States Embrace ESG Munis

Some fixed income observers believe that with more asset allocators and investors demanding more combinations of bonds and environmental, social, and governance (ESG) benefits, municipal bonds are fertile territory for that combination. Some exchange traded funds are up to that task, including the SPDR Nuveen Municipal Bond ESG ETF (MBNE).

MBNE debuted in April and focuses on municipal issues exempt from federal and state taxes, confirming for SSGA that there are ways for investors to marry ESG and tax benefits under the umbrella of a single ETF.

MBNE could also be at the right place at the right time because while there’s are ongoing political debate surrounding ESG ratings, some high-ranking officials in various states see value in ESG.

“As politicians and fund managers spar over how public finance should respond to questions related to the environment, social, and governance concerns, muni bond issuers on the front lines are quickly getting up to speed,” reports Scott Sowers for The Bond Buyer.

The political debate pertaining to ESG could actually work in favor of municipal bonds because the benefits offered by this asset class are bipartisan. Those include tax benefits, reduced risk compared to some corners of the bond market, and steady income.

Additionally, there’s a growing appetite for municipal bonds with ESG principles. Currently, it’s an exclusive club, which is saying something because munis are among the largest fixed income segments. Just look MBNE. The rookie ETF holds just 100 bonds. That could be a sign that as that appetite increases, cities and states can issue ESG municipal bonds at favorable interest rates.

According to Bond Buyer: “Investors and regulators are looking for ESG disclosures about environmental, social, and governance factors that may affect municipal issuers credit and its ability to pay debt service,” said Cindy Harris, chief financial officer of the Iowa Finance Authority. “Rating agencies want to know how cities, counties, and states are responding to ESG-related risks, and then we also have investors who are also looking to buy green bonds or social bonds that fund positive, environmental or social outcomes.”

Further underscoring the potential near-term benefits of MBNE is an option-adjusted duration of 4.97 years – intermediate-term territory – and yield of 4.56%. It’s rare to find those data points simultaneously under the roof of one ETF, particularly one with strong credit quality, as does MBNE.

For more news, information, and strategy, 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.