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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) factorsamong investors is driving the increased use of green bonds, social bonds,climate bonds and sustainability bonds in the $4.0 trillion municipalsecurities market.

Just as ordinary municipal bonds enable local governments tocost-effectively finance basic infrastructure like bridges, schools andhospitals, bonds that are characterized as “ESG” bonds financeinfrastructure projects that have specific environmental and socialbenefits or implications in local communities. ESG-oriented municipal bondsmay 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 agencieshave integrated environmental, social and governance credit factors intheir rating processes, and other market-based ESG scores and ratings havebeen developed to serve the rising information needs of investors and othermarket participants.

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

Breaking Down “ESG” Factors

Environmental, Social and Governance (ESG) factors are a set ofconsiderations 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 targetedenvironmental and social goals and outcomes and evaluate the long-termrisks 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 labelof “green bond,” “climate bond,” “social bond,” “sustainability bond,” oranother label. Then there are many bonds in the market that carry no ESGlabel but may nonetheless meet certain ESG criteria. Issuers may decide notto label a bond for a variety of reasons, including costs associated withhaving an independent third party verify and certify the label.

Furthermore, bonds that do carry a label may or may not followinternationally recognized standards and certification frameworks. Twointernationally recognized sets of standards for the issuance of ESG bondsare the International Capital Markets Association (ICMA) and the ClimateBond Initiative (CBI). These frameworks, described below, provide a basisupon which an investor may evaluate the degree to which a bond issuance isaligned with their investment objectives. ESG-labeled bonds that do notfollow any recognized framework are known as self-designated bonds.

Figure 1. Uses of Proceeds from Municipal Bonds

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 inJanuary 2014, the first globally adopted standards for green bondissuance.2 The ICMA has since added the Social Bond Principles (SBP)and the Sustainability Bond Guidelines (SBG). For an issuer to claimthey have met these voluntary standards outlined by ICMA, they need todemonstrate their observance of four pillars:

1) Use of Proceeds. Issuers must provide specific information toinvestors prior to the bonds being issued to indicate the recognizedgreen 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 disclosethe framework for deciding which projects should receive green, socialor sustainable bond funding; the criteria for assessing environmentalor social benefits; and the environmental or social impacts issuersexpect their projects to generate. Supporting studies, projections ofexpected impacts, internal research and third-party assessments areoften used to substantiate the environmental or social benefits.

3) Management of Proceeds. Issuers typically disclose information abouttheir processes for tracking and verifying how bond proceeds areapplied or allocated to eligible projects within a reasonable period oftime after the bonds are issued. In the case of projects that werealready financed prior to the start of the issuer’s green, social orsustainable bond program, issuers would disclose the percentage of thebond proceeds that will be used for new project funding versusrefinancing the previous debt.

4) Reporting. At least on an annual basis, issuers are strongly encouraged to make availablereports that provide updates on the use of the bond proceeds as well asthe estimated impact or benefits of projects that are supported by thebond financing. This may include expected results based on estimatesthat 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 organizationfounded in 2009 for the purpose of facilitating climate change solutions inthe global bond market. The CBI is administered by the Climate BondsStandard Board that comprises large institutional investors, environmentalnon-governmental organizations (NGOs) that provide oversight of the ClimateBond Standard, approved verifiers and the certification process.

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

Self-Designated Bonds
An issuer may decide to label a bond as “green” or “social” or other ESGlabel without utilizing an existing framework or by adopting their owncriteria. In these instances, an issuer would identify within the offeringdocument for the bonds the criteria used for establishing the “green” orother label. Issuers may also label a bond as “green” if the projectintends to obtain certification as Leadership in Energy and EnvironmentalDesign (LEED) from the U.S. Green Building Council. In these instances, theissuer generally is under no obligation to disclose if the project did notend up with LEED certification.

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

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External Review and Verification
Several auditors as well as climate, environmental, social and governanceinstitutions offer independent opinions on an issuer’s green, social,sustainability or climate bond program. These assessments are to helpensure that the criteria for selecting projects are consistent withrelevant standards for eligible projects. The external reports produced from theauditing process will identify if the project adheres to an existingframework and review the issuer’s method of tracking the use of proceeds,allocation of funds, statement of environmental or social impact, oralignment to the principles.7

The external report in many instances will be attached to the offeringdocument, called an official statement, as an appendix. Issuers can alsowork with a verifier to provide a yearly statement that provides an updateto the investor on the progress of the project and its adherence to thespecified principles or framework.

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Investor Risks and Considerations

General Investing Risks. When evaluating any investment decision, investorsshould consider the relevant risk factors for any municipal bond. Thesefactors can include credit risk, market risk, climate risk and reinvestmentrisk, among other risks. Investors should discuss risk with their financialprofessional when contemplating buying or selling a bond. Access additionalresources on understanding investing risks in the MSRB Education Center. 

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

Data Availability. Overall, ESG data is not widely disseminated, and the quality andcomparability of available data is subject to questions. For investorsutilizing the MSRB’s free Electronic Municipal Market Access (EMMA®) website to research municipal bonds, the best source of publicly availableESG information can be found in the official statement or continuingdisclosure documents submitted to the MSRB for posting on EMMA. Theofficial statement or continuing disclosure will contain the criteria usedby 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 ratingfor various ESG criteria. Specifically, the rating agencies consider ESGfactors as part of any other potential risks that could be material. FitchRatings, Inc. (Fitch), Kroll Bond Rating Agency, Inc. (KBRA), Moody’sInvestors Service, Inc. (Moody’s), and S&P Global Ratings (S&P) alluse 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.