Municipal Bonds Are Meeting Sustainable Investing

Sustainable investing concepts are making their way to assets beyond equities with fixed income proving to be fertile, predictable territory for that evolution.

While conventional wisdom dictates that environmental, social and governance (ESG) principles are best applied to aggregate bond strategies, the reality is some corners of the bond market are more conducive to ESG and sustainability than others. Advisors and clients see this at the sector level with stocks.

Municipal bonds are highly pertinent in this conversation and some exchange traded funds make it easier to go green with normally staid munis. That group includes the VanEck HIP Sustainable Muni ETF (SMI).

While SMI is new on the municipal bond ETF scene – it debuted last September – it checks some boxes that are important to investors, including diversity in terms of bond types and a focus on sustainability.

SMI Relevant Idea Right Now

As advisors know, the fixed income arena is a minefield this year and municipal bonds aren’t providing much in the way of safety. On the bright side, some experts argue muni declines may be a case of too much, too fast and that as a result, there might be some value in this asset class.

Specific to SMI, there’s potential allure not only because of its ESG traits, but also because the fund focuses on investment-grade debt and is intermediate-term, indicating it’s not highly sensitive to changes in interest rates.

“SMI offer investors a way to build a sustainable core muni portfolio without significantly affecting risk and return, over the long term. SMI provides access to a diverse group of issuers at both the state and local levels, who are proactively investing in solutions that fund operations or projects that support or advance sustainable development, as well as promote positive social and environmental outcomes or mission accomplishment,” says Michael Cohick, VanEck director of product marketing.

Something that many clients may not be aware of – even those well-versed in municipal bond mechanics – is that this corner of the bond market is rather conducive to sustainable investing principles. Add to that, this combination could prove to be fertile territory for active management and SMI checks that box as its managed by HIP Ratings.

“HIP Ratings and Data are applied to analyze, evaluate, and prioritize municipal securities based on their ESG, SDG, and Climate Threat Resilience ratings,” adds VanEck. “A rating is only assigned to municipal securities of issuers where at least one qualified opportunity zone is located in the issuer’s region. VanEck uses HIP Ratings to narrow the universe of eligible investments to municipal securities that fund operations or projects that support or advance sustainable development, as well as promote positive social and environmental outcomes or mission accomplishment.”

SMI Covers Lots of Bases

A nifty attribute of SMI is, that despite its rookie status, its ability to check multiple sustainable boxes – something many established ESG funds aren’t able to do.

HIP’s ESG ratings encompass environmental, equality, health, trust and wealth scoring. Consider SMI’s top holding – debt issued by Val Verde School District in California.

“Bonds in SMI were issued by the school district to finance capital improvements including enhancing student safety and campus security systems, relieving overcrowding, repairing aging infrastructure, upgrading classrooms to support college/career readiness in STEM subjects, arts, and skilled trades,” adds VanEck.

As a result of that bond sale, the district directed proceeds to dramatically boost its high school graduation rate. That’s just one example of how muni bond investors can remain capitalists while improving the world around them.

Related: For Advisors, ESG Is Rich with Client Relationship Opportunities