ImpactAlpha, April 18 – Hidden inside the $3.8 trillion market for U.S. municipal bonds are mispriced social and environmental risks, untapped value and a whole lot of potential for on-the-ground impact in historically disadvantaged neighborhoods.
That’s why AllianceBernstein’s Eric Glass is so excited about boring old municipal bonds.
“What we’re trying to do is evaluate these municipalities along environmental social and governance frames,” Glass told David Bank in an interview for ImpactAlpha’s Returns on Investment podcast. “Doing that and doing that well is all about helping us to mitigate risk and identify value.” (A recent report from giant asset manager BlackRock called out hidden climate risks in municipal bonds, as well as in other asset classes.)
AllianceBernstein is a global asset management firm with $516 billion in assets under management. Glass manages the AB Municipal Impact strategy, a $500 million portfolio within Bernstein’s $42 billion portfolio of municipal impact bonds. Muni Impact invests only in underserved and low-economic-status communities and each investment is made with a specific intention — for school bonds, to close the achievement gap; for hospital bonds to reduce the “death gap” between wealthy and poor zip codes.
Agent of Impact
Glass helped AllianceBernstein develop its impact investment offerings in 2015, after years of internal agitation. The impetus: a long-time, and large, client walked away from firm for an asset manager with impact investment products. “They wanted to do it. We didn’t have it,” Glass says.
Municipal bonds are the original impact vehicles, says Glass. Municipalities borrow money to build roads, bridges, schools, wastewater treatment plants, solar arrays, wind farms and other vital infrastructure.
“These are public goods!” says Glass. And easily trackable, he says, with data points and key performance indicators that investors can track over time to determine the impact of their capital. Better yet, muni markets weren’t yet pricing social and environmental risk.
“There’s no doubt in my mind that that’s not being property reflected,” says Glass. “I think it’s highly material and I think if you’re not doing that as an asset manager you are missing out on material risk to your portfolios and to the asset value of your portfolios.”
Tax-advantaged municipal bonds can provide low-cost capital for sustainable projects. Late last year, the Industrial Development Authority of Pinal County in Arizona issued $61.4 million in municipal bonds to refinance a biodigester that generates “renewable natural gas” from dairy cow manure, reducing methane emissions. “We broke through into the world of a well-understood debt form called the muni bond to finance parts of our work building distributed green infrastructure,” said Equilibrium’s Dave Chen, which developed the project.
Impact investors are starting to get exciting about the boring bonds. Neighborly in 2017 raised $25 million from investors including Ashton Kutcher’s Sound Ventures, Laurene Powell Jobs’ Emerson Collective, 8VC and Stanford University, to create a muni-bond fintech platform that connects investors and issuers.
“Unbelievable innovation sits on the sideline in local government,” says Neighborly’s Jase Wilson. “We need to get back to the era when the financing mechanism was the way to rally troops around bringing the new thing to life.”
AllianceBernstein’s Glass is rallying around issuers like Boston Medical Group, a 567-bed medical center in Boston’s South End. Boston Medical helps keep patients from the low-income populations it serves out of the hospital and in better health by providing housing, transportation, childcare, education and workforce development services in the community.
Glass believes such “safety net” hospitals like Boston Medical will be better rewarded – and their bond issuances, better investments – because the institution is “so focused on population health management and trying the make the population healthy.”
In contrast, Glass is getting out of bonds issued by the Chicago Public Schools. “Betrayed,” a bombshell report last summer from the Chicago Tribune, detailed a decade of sexual assault on girls by teachers administrator, coaches, security guards and other students. School administrators didn’t engage with efforts by AllianceBernstein, a bond holder, to understand changes the school was making to protect girls from such attacks going forward.
“Sexual violence becomes a material risk to bond issuers,” says Glass. Now, AllianceBernstein due diligence on “child-involved” institutions includes an extensive list of questions about the history of sexual abuse at that institution.
“We’re using environmental and social frames because they’re material,” says Glass. “They have a direct impact on your profit and loss statement. Anything that impacts your profit and loss statement, impacts your ability to pay back your debt.”