How Governments and Nonprofits Can Deliver Impact for Investors

By: HIP Investor Team | March 30, 2015

For the next few months, our friends and Net Impact members at HIP Investor will be contributing posts to help you break into the field of impact investing, learn how to measure impact across all types of investments, and find great places to work.

We all hear about the daily ups and downs of stock prices, the Dow, NASDAQ, and S&P 500. But what about the bonds issued by governments and nonprofits?

In the U.S., municipal bonds (munis) account for $3.7 trillion of financing for investors, which are attractive for their tax advantages and provide capital for positive impact. How does this support building a better world?

  1. Tax-exempt investing helps society improve

Munis are debt securities issued by governments (states, cities, counties, housing agencies) and nonprofits (universities, health care systems) to finance future spending and infrastructure, like schools, roads, and water delivery. Munis are funded by investors who are promised complete return of their principal investment and semi-annual interest payments. Where applicable, these investments are exempt from federal, state, and local taxes, saving investors taxes on those earnings to finance public good, serving citizens and beneficiaries with social services and environmental benefits.

  1. $3.7 trillion market is large pool of capital

The first municipal bond in the United States was issued by New York City in 1812 for digging a water canal, which resulted in other states financing more construction for new roads, bridges, and waterworks. For the past 200 years, muni bonds have grown to $3.7 trillion invested, according to EMMA, which tracks all issuances. Munis typically fund capital expenditures (new buildings, water pipelines, airport runways) or debt repayments. The wide range of investment opportunities in critical public infrastructure makes muni bonds a significant asset class and provides an exciting opportunity to more closely connect munis to impact investing.

  1. Impact ratings for muni bond investors help drive more impact

Munis represent an existing financial infrastructure that could help citizens to fund sustainable development in their own communities if municipalities were to issue bonds with impact metrics, such as a city implementing renewable energy production. With the strong demand for Green Bonds by investors, the U.S. municipal bond market is ripe for the application of impact ratings to existing issuances and embedding metrics into new issuances. Today, our analyst team at HIP Investor produces ratings for 4,000 muni bonds, which are used by fixed-income managers like SNW Asset Management (www.SNWam.com) to serve impact investors. Fewer than 5 percent of bond managers claim to integrate impact into their financial analysis, according to a Mercer Consulting review of fund managers. This is a risk, especially as low-impact ratings and historical muni bond defaults among cities and counties appear correlated, according to published research from HIP and SNW.

Additionally, the Securities and Exchange Commission is calling for a mandate on issuers of muni bonds to adhere to Governmental Accounting Standards Board (GASB) recommended best practices for increased transparency. Similar to how many impact-savvy companies increase efficiency with water, energy, and waste reduction that ties to bottom line profit and prepares them for any government mandates, the public sector needs to start incorporating greater accountability and transparency into its issuances. Similarly, an Institutional Investor article warns of the risks associated with muni investors overlooking the impacts of climate change on their investments.

What does this mean for you as an impact professional or impact investor? There are more opportunities to drive higher positive impact inside governments and nonprofits by openly communicating performance and connect that to existing financial vehicles like muni bonds. Thus, we can bring benefits to citizens and beneficiaries through increased accountability that can be supported with impact investing in muni bonds.

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