By Paul Herman
CEO & Founder HIP Investor
Are all municipal bonds sustainable and impactful? Most investors would say yes.
However, just as all businesses are not profitable, not all muni bond issuers and issues are highly sustainable. Some are leaders, some are laggards. Many achieve their mission, but enough lag to distinguish the overall impact — teaching kids, improving patient health and citizen well-being.
If you got sick right now, would you care which hospital you go to? The best hospitals achieve better patient outcomes, with fewer returns for the same condition, while managing with fewer violations.
Do parents seek out the best schools for your kids? Of course they do — some school districts provide students with more teachers per student, higher allocations to the classroom and free school lunches to serve lower-income students.
Across muni-bond sectors, there are more than 200 data-driven metrics and 5 million annual data points to measure performance. VanEck and HIP Investor have partnered to track the overall impact and sustainability of 122,000 entities that could benefit from muni bonds.
By objectively quantifying the mission accomplishment using data-driven evidence of real results, all muni bonds are not fully sustainable; some have negative impacts, like fossil-fuel burning electric utilities.
HIP Investor’s Ratings look deeper into actual results for citizens, beneficiaries and customers of the entities issuing muni bonds, as well as the use of proceeds in issuances. HIP Ratings grade on a 100 point scale. As muni bonds are typically issued by cities, counties, and states, as well as schools, hospitals, road authorities, energy utilities, and water utilities, the mission of these entities benefits citizens.
Indicator of Impact, Future Risk and Future Return
The “HIP” in HIP Investor stands for “Human Impact + Profit.” The HIP ESG ratings provide investors with impact analysis — and a measure of potential future risk. HIP brings 15 years of experience in rating the impact and ESG of 10,000 corporations globally across 85 countries, and nearly 10 years in rating Munis across 122,000 entities, over the U.S. geography of 3,100 counties and 50 states.
Just as not all businesses achieve their goal of profitability, hospitals and schools vary in their ability to fulfill their missions and desired outcomes. In the graph “HIP Rating Dispersion by State,” for 122,000 entities, there is a mix of higher-performing muni entities in green, rating about 50 on an 100-point scale, and lesser-performing muni entities in red, rating 49 or below.
Source: HIP. As of 9/30/2021. DC – District of Columbia, PR- Commonwealth of Puerto Rico.
HIP Ratings of ESG and Impact in muni-bonds can inform investors about potential future risk and drivers of future cash flows that support the repayment of bond principal and overall yield. Each sector has leaders and laggards.
Impact of Each Entity Can Vary by Sector
Source: HIP Investor Ratings as of 9/30/2020.
Impact data and ESG analytics contribute to the understanding of impact, future risk, and return potential.
With growing demand for ESG investments, sustainable municipal bonds could be an attractive option for those seeking income with tax advantages. Investors may wish to consider the VanEck HIP Sustainable Muni ETF (SMI) to gain exposure to a portfolio of investment-grade tax-exempts with intermediate duration and maximize sustainability exposure while seeking to maintain benchmark characteristics. SMI offers investors current income that is generally exempt from federal income tax by investing in investment grade municipal debt securities that have been issued to fund operations that support or advance sustainable development, as well as promote positive social and environmental outcomes.
About the Author
HIP Investor’s founder and CEO R. Paul Herman co-edited and co-authored the Global Handbook of Impact Investing: Solving Global Problems Via Smarter Capital Markets Towards A More Sustainable Society (Wiley 2021).
HIP provides an Overall HIP Rating and also 5 HIP Pillars linked to impact and ESG:
- Health (physical and mental)
- Wealth (income and asset building for people)
- Earth (clean air, clean water, low emissions)
- Equality (by gender and race)
- Trust (transparency, violations)
About HIP Municipal Ratings
HIP Municipal ESG Ratings are driven by 5 million sector specific quantitative data points across 122,000 entities related to munis on actual outcomes, and linked to evidence-based targets to cover nearly 200,000 issuances on impact and ESG and applicable to more than 90% of the municipal bond universe.
Originally published by VanEck on December 3, 2021.
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ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices.
Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful. ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long term financial outcomes of portfolios. Unless otherwise stated within the Fund’s investment objective, inclusion of this statement does not imply that the Fund has an ESG-aligned investment objective, but rather describes how ESG information is integrated into the overall investment process.
The Fund relies on the Data Provider for the identification of issuers that promote sustainable development based on their HIP Ratings; however, there can be no guarantee that the Data Provider’s methodology will align with the Fund’s investment strategy or desirable issuers can be correctly identified. Moreover, the United Nations Sustainable Development Goals (“SDGs”) 9, 11 and 12 may be modified or abandoned in the future and there can be no guarantee that the Fund will be able to continue to use HIP Ratings or find an appropriate substitute ratings system.
The Fund’s strategy of investing in municipal debt securities of issuers promoting sustainable development may limit the types and number of investments available to the Fund or cause the Fund to invest in securities that underperform the market as a whole. As a result, the Fund may underperform funds that do not have a sustainable investing strategy or funds with sustainable investing strategies that do not employ HIP Ratings. In addition, the Fund relies on the Data Provider for the identification of issuers that promote sustainable development based on their HIP Ratings; however, there can be no guarantee that the Data Provider’s methodology will align with the Fund’s investment strategy or desirable issuers can be correctly identified. Moreover, the United Nations Sustainable Development Goals (“SDGs”) 9, 11 and 12 may be modified or abandoned in the future and there can be no guarantee that the Fund will be able to continue to use HIP Ratings or find an appropriate substitute ratings system.
An investment in the Fund may be subject to risks which include, among others, risks related sustainable impact investing strategy, municipal securities, credit, interest rate, call, data, California, New York, education bond , health care bond, housing bond, transportation bond, management, operational, authorized participant concentration, absence of prior active market, trading issues, market, fund shares trading, premium/discount and liquidity of fund Shares, non-diversified, state concentration risks all of which may adversely affect the Fund. Municipal bonds may be less liquid than taxable bonds. There is no guarantee that the Fund’s income will be exempt from federal, state or local income taxes, and changes in those tax rates or in alternative minimum tax rates or in the tax treatment of municipal bonds may make them less attractive as investments and cause them to lose value. Capital gains, if any, are subject to capital gains tax. The Fund’s assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.
An investor should consider the investment objective, risks, charges and expenses of the Funds carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
HIP Investor, Inc. (“HIP”) is a provider to Van Eck Associates Corporation (“Van Eck”) of proprietary research products and services, including ESG ratings, Sustainable Development Goal ratings, Opportunity Zone mapping, Climate-Threat and Resilience ratings, and Human Impact + Profit ratings (collectively, the “HIP Ratings”). HIP is the exclusive provider to Van Eck of HIP ratings and similar data used in connection with any sustainable municipal-bond ETF provided by Van Eck, including the VanEck HIP Sustainable Muni ETF. HIP Investor, Inc. (“HIP”) receives certain fees related to the assets under management (AUM) of the VanEck HIP Sustainable Muni ETF, which creates a conflict of interest with actual and prospective clients of HIP, and biases the objectivity of HIP when discussing, evaluating, and recommending the VanEck HIP Sustainable Muni ETF to actual or prospective clients of HIP. The determination to purchase or utilize the VanEck HIP Sustainable Muni ETF is an important decision and should not be based solely upon HIP’s recommendation, guidance, or services. HIP is an independent contractor of Van Eck Associates Corporation, however HIP does not control or supervise the services or products of Van Eck Associates Corporation, and reference to the VanEck HIP Sustainable Muni ETF does not mean that HIP has performed any level of due diligence on the services or products of Van Eck Associates Corporation. Users of HIP’s website, as well as actual and prospective clients of HIP, are urged to perform their own due diligence on, or consult with a separate registered investment adviser with respect to, the VanEck HIP Sustainable Muni ETF. There is no obligation to purchase or utilize the VanEck HIP Sustainable Muni ETF.