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Making an Impact: ESG Investing and Municipal Bonds

Making an Impact: ESG Investing and Municipal Bonds

The increasing focus on environmental, social and governance (ESG) factors among investors is driving the increased use of green bonds, social bonds, climate bonds and sustainability bonds in the $4.0 trillion municipal securities market.

Just as ordinary municipal bonds enable local governments to cost-effectively finance basic infrastructure like bridges, schools and hospitals, bonds that are characterized as “ESG” bonds finance infrastructure projects that have specific environmental and social benefits or implications in local communities. ESG-oriented municipal bonds may be of interest for investors who prioritize “impact investing”1 strategies or who integrate ESG policies into portfolio objectives, securities selection or engagement with issuers. Credit rating agencies have integrated environmental, social and governance credit factors in their rating processes, and other market-based ESG scores and ratings have been developed to serve the rising information needs of investors and other market participants.

This document provides an overview of ESG investing considerations specific to the municipal bond market, including:

Breaking Down “ESG” Factors

Environmental, Social and Governance (ESG) factors are a set of considerations investors many use to assess potential investments, including municipal bonds, to make decisions that reflect their objectives. ESG factors can help investors align their portfolios with targeted environmental and social goals and outcomes and evaluate the long-term risks of their investments.

In the municipal bond market, ESG factors might include:

  • Environmental factors such as the issuer’s readiness to withstand or mitigate effects of storms, fires, droughts and other climate-related events on physical infrastructure and the lives and property of people in their community; transition to cleaner and more renewable energy sources; efforts to reduce carbon emissions and control pollution; investments in sustainable public transportation; nature conservation; and sustainable water and wastewater management
  • Social factors such as accessible education, quality healthcare, affordable housing and reliable water supply for underserved communities
  • Governance factors such as sound internal controls, financial practices and long-term planning

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Labels and Frameworks

The municipal securities market by its nature finances many environmentalor social related projects. Figure 1 illustrates that in 2020 alone, stateand local governments issued nearly half a trillion dollars in municipalbonds. New issuances financed a wide range of initiatives in the areas ofeducation, health care, housing and other sectors. Distinguishing whichmunicipal bonds meet an investors’ preferred ESG criteria can bechallenging because there is no universally accepted ESG standard ordefinition for municipal bonds.

Municipal bonds that align with one or more ESG factors may carry a label of “green bond,” “climate bond,” “social bond,” “sustainability bond,” or another label. Then there are many bonds in the market that carry no ESG label but may nonetheless meet certain ESG criteria. Issuers may decide not to label a bond for a variety of reasons, including costs associated with having an independent third party verify and certify the label.

Furthermore, bonds that do carry a label may or may not follow internationally recognized standards and certification frameworks. Two internationally recognized sets of standards for the issuance of ESG bonds are the International Capital Markets Association (ICMA) and the Climate Bond Initiative (CBI). These frameworks, described below, provide a basis upon which an investor may evaluate the degree to which a bond issuance is aligned with their investment objectives. ESG-labeled bonds that do not follow any recognized framework are known as self-designated bonds.

Figure 1. Uses of Proceeds from Municipal Bonds

percentage chart

International Capital Markets Association

ICMA is a membership association for firms active in the internationaldebt capital markets.

ICMA introduced the Green Bond Principles (GBP) and standards in January 2014, the first globally adopted standards for green bond issuance.2 The ICMA has since added the Social Bond Principles (SBP)and the Sustainability Bond Guidelines (SBG). For an issuer to claim they have met these voluntary standards outlined by ICMA, they need to demonstrate their observance of four pillars:

1) Use of Proceeds. Issuers must provide specific information to investors prior to the bonds being issued to indicate the recognized green and/or social categories of projects that the bonds will finance(e.g., climate change adaptation, renewable energy, affordable housing. See Figure 2).

2) Process for Project Evaluation and Selection. Issuers must disclose the framework for deciding which projects should receive green, social or sustainable bond funding; the criteria for assessing environmental or social benefits; and the environmental or social impacts issuers expect their projects to generate. Supporting studies, projections of expected impacts, internal research and third-party assessments are often used to substantiate the environmental or social benefits.

3) Management of Proceeds. Issuers typically disclose information about their processes for tracking and verifying how bond proceeds are applied or allocated to eligible projects within a reasonable period of time after the bonds are issued. In the case of projects that were already financed prior to the start of the issuer’s green, social or sustainable bond program, issuers would disclose the percentage of the bond proceeds that will be used for new project funding versus refinancing the previous debt.

4) Reporting. At least on an annual basis, issuers are strongly encouraged to make available reports that provide updates on the use of the bond proceeds as well as the estimated impact or benefits of projects that are supported by the bond financing. This may include expected results based on estimates that were developed during the design of the project.

Figure 2. ICMA Principles and Guidelines




   Green Bond Principles (GBP)

   The proceeds from Green Bonds may be used to finance one or more of the non-exhaustive list of categories
  • Clean transportation
  • Climate change adaptation
  • Eco-efficient and/or circular economy adapted products, production technologies and processes
  • Energy efficiency
  • Environmentally sustainable management of living natural resources and land use
  • Green buildings
  • Pollution prevention and control
  • Renewable energy
  • Sustainable water and wastewater management
  • Terrestrial and aquatic biodiversity conservation


  Social Bond Principles (SBP) 

   The proceeds from Social Bonds may be used to finance one or more of the non-exhaustive list of categories

  • Affordable basic infrastructure (e.g. clean drinking water, sewers, sanitation, transport, energy)
  • Access to essential services (e.g. health, education and vocational training, healthcare, financing and financial services)
  • Affordable housing
  • Employment generation, and programs designed to prevent and/or alleviate unemployment stemming from socioeconomic crises, including through the potential effect of SME financing and microfinance
  • Food security and sustainable food systems (e.g. physical, social, and economic access to safe, nutritious, and sufficient food that meets dietary needs and requirements; resilient agricultural practices; reduction of food loss and waste; and improved productivity of small-scale producers)
  • Socioeconomic advancement and empowerment (e.g. equitable access to and control over assets, services, resources, and opportunities; equitable participation and integration into the market and society, including reduction of income inequality)


  Sustainability Bond Guidelines (SBG)

  The Sustainability Bond label can be applied to bonds that finance or refinance projects that are both green and



Climate Bond Initiative
The Climate Bond Initiative3 is an international non-profit organization founded in 2009 for the purpose of facilitating climate change solutions in the global bond market. The CBI is administered by the Climate Bonds Standard Board that comprises large institutional investors, environmental non-governmental organizations (NGOs) that provide oversight of the Climate Bond Standard, approved verifiers and the certification process.

“Climate Bonds” incorporate the four ICMA pillars (Use of Proceeds; Process for Project Evaluation and Selection; Management of Proceeds; and Reporting) and demonstrate how the project will contribute to a low carbon and climate resilient economy in accordance with the 2 degrees Celsius warning of the Paris Agreement.4 Unlike the voluntary framework for ICMA, Climate Bonds must be reviewed by an approved verifier who will review the issuer and the bond for conformity to the ICMA Green Bond Principles5 and the United Nations Sustainable Development Goals (UNSDG).6

Self-Designated Bonds
An issuer may decide to label a bond as “green” or “social” or other ESG label without utilizing an existing framework or by adopting their own criteria. In these instances, an issuer would identify within the offering document for the bonds the criteria used for establishing the “green” or other label. Issuers may also label a bond as “green” if the project intends to obtain certification as Leadership in Energy and Environmental Design (LEED) from the U.S. Green Building Council. In these instances, the issuer generally is under no obligation to disclose if the project did not end up with LEED certification.

Using a “green” or “social” or other ESG label may be beneficial to an issuer as it may help the issuer obtain a lower rate for the offering. It may also help attract interest from potential buyers in an already crowded market.


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External Review and Verification
Several auditors as well as climate, environmental, social and governance institutions offer independent opinions on an issuer’s green, social, sustainability or climate bond program. These assessments are to help ensure that the criteria for selecting projects are consistent with relevant standards for eligible projects. The external reports produced from the auditing process will identify if the project adheres to an existing framework and review the issuer’s method of tracking the use of proceeds, allocation of funds, statement of environmental or social impact, or alignment to the principles.7

The external report in many instances will be attached to the offering document, called an official statement, as an appendix. Issuers can also work with a verifier to provide a yearly statement that provides an update to the investor on the progress of the project and its adherence to the specified principles or framework.

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Investor Risks and Considerations

General Investing Risks. When evaluating any investment decision, investors should consider the relevant risk factors for any municipal bond. These factors can include credit risk, market risk, climate risk and reinvestment risk, among other risks. Investors should discuss risk with their financial professional when contemplating buying or selling a bond. Access additional resources on understanding investing risks in the MSRB Education Center. 

Greenwashing Risk. One risk specific to ESG investing in the United States is “greenwashing risk,” or the risk that the proceeds of the sale of a bond that is labeled as a green, social, sustainable or climate bond will not achieve the ESG goals described. Given the lack of a universally accepted definition of what constitutes a green, social, sustainable or climate bond, reasonable people may disagree about whether a particular bond is, for example, sufficiently “green.” There is potential reputational risk to the underwriters and the bond issuers if the issuance does not achieve thedesired outcome. A full and exhaustive review of the disclosure regarding the project, its adherence to recognized frameworks and any available third-party verifications may assist in mitigating greenwashing risk.

Data Availability. Overall, ESG data is not widely disseminated, and the quality and comparability of available data is subject to questions. For investors utilizing the MSRB’s free Electronic Municipal Market Access (EMMA®) website to research municipal bonds, the best source of publicly available ESG information can be found in the official statement or continuing disclosure documents submitted to the MSRB for posting on EMMA. The official statement or continuing disclosure will contain the criteria used by the issuer to justify the “green,” “social,” “sustainability” or “climate” bond label.

  • Official statements may contain verifier’s reports and an explanation on the criteria used for an ESG label. In some instances, an issuer may bring one offering to market that includes use of proceeds for green/social projects and non-green/social projects. Investors should be careful to review the entire official statement for further detail on which series is “green” and which one is not.
  • Continuing disclosure documents can include post-issuance verifier’s reports and annual updates on the use of proceeds

Figure 3. Sample Official Statements for ESG-Labeled Bonds


Beyond the MSRB, a number of entities exist that provide scoring and rating for various ESG criteria. Specifically, the rating agencies consider ESG factors as part of any other potential risks that could be material. Fitch Ratings, Inc. (Fitch), Kroll Bond Rating Agency, Inc. (KBRA), Moody’s Investors Service, Inc. (Moody’s), and S&P Global Ratings (S&P) all use environmental, social and governance credit factors in their ratingprocesses.8

Investor Protections. The MSRB provides significant protections for investors and potential investors who work with a dealer to buy or sell municipal securities. MSRB rules establish professional qualification requirements for dealers, prohibit false or misleading advertising, require dealers to disclose material information, and require fair pricing, among other requirements that ensure investors are treated fairly and appropriately.9 The MSRB is not authorized to require municipal issuers to make disclosures about their bonds, including ESG bonds, though municipal issuers are subject to the antifraud provisions of the federal securities laws. The MSRB’s EMMA website is designated as the official repository for issuers’ disclosures.

Given the rapidly evolving nature of ESG considerations in the municipal market, the MSRB may update this publication in the future.

1 The U.S. Impact Investing alliance defines Impact Investing as: the practice of investing across asset classes for measurable social, economic or environmental impact alongside risk and financial terms. From: U.S. Impact Investing Alliance, Private Capital Public Good, December 2020.

2 Torsten Ehlers and Frank Packer, “Green Bond Finance and Certification,” BIS Quarterly Review (September 2017): p. 90.

3 Funders include the Rockefeller Foundation, The Inter-American Developmental Bank (IADB), The U.K. Foreign and Commonwealth Office, The Swiss Confederation and the United Nations Development Program (UNDP) and the Bank of America Merrill Lynch Foundation.

4 The Paris Agreement 2015.

5 The Green Bond Principles outline the voluntary practices to ensuring transparency and the components of a green bond. International Capital Market Association, Green Bond Principles: Voluntary Process Guidelines for Issuing Green Bonds, June 2018.

6 George Inderst and Fiona Stewart, Incorporating Environmental, Social and Governance (ESG) factors into Fixed Income Investment, World Bank Group, 2018.


7 There are many forms of external review verification and scoring used to assess the issuance’s adherence to the specified principles or framework. Investors should carefully review the documentation to understand the type of assessment conducted.

Fitch,Introducing ESG Relevance Scores for Public Finance/Infrastructure: Marking the Intersection of Credit and ESG Risks(May 16, 2019), pp. 2, 6-21;The Ratings Process: How Fitch Assigns Credit Ratings(May 22, 2019), pp. 1-3;2020 ESG in Credit White Paper(2020), p. 43; KBRA,2021 Form NRSRO, Exhibit 2 – Procedures and Methodologies Used toDetermine Credit Ratings(2021);Environmental, Social and Governance (ESG) Considerations bySector: Public Finance(Nov. 6, 2019), p. 2. Moody’s,General Principles for Assessing Environmental, Social andGovernance Risks Methodology(Dec. 14, 2020);2021 Form NRSRO, Exhibit 2 - Procedures and Methodologies Used toDetermine Credit Ratings. S&P,Credit FAQ: How Does S&P Global Ratings IncorporateEnvironmental, Social, And Governance Risks Into Its RatingsAnalysis(Nov. 21, 2017);The Role Of Environmental, Social, And Governance Credit Factors InOur Ratings Analysis(Sept. 12, 2019);ESG Evaluation Brochure(Oct. 2020).

9 See MSRB brochure,Information for Municipal Securities Investors.