Future Returns: Maximizing Benefit Through Social-Impact Muni Bonds

At the core of this investing concept are communities that have been left behind, such as the old industrial city of Bridgeport, Conn.

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At the end of 2022, asset managers held US$8.4 trillion in ESG-aligned investment vehicles, according to the US SIF Foundation, representing 13% of all U.S. assets under management. 

Eric Glass was one of the pioneers of that class of investments, helping launch AllianceBernstein’s Municipal Impact fund in 2015. Glass helped raise US$1.4 billion for the fund, and managers proudly point to its many positive impacts

But in 2021, Glass walked away from the Nashville, Tennessee-based

AllianceBernstein, striking out on his own to develop a municipal strategy that he believes can be even more impactful to local communities and more beneficial to investors. The muni-bond market has long been the vehicle for financing the fundamentals of a community—roads, water, electricity, education, and so on. Using it to target needier populations represents the muni market’s natural evolution toward “socially responsible” metrics, Glass says. 

It’s a concept that he thinks has particular resonance for high-net-worth households, for whom tax-advantaged municipal bonds are a natural fit, and who often have a hankering to do “good,” not just well, with their wealth.

Glass spoke with Penta about what he’s working on, and what investors should keep in mind if they’re interested in this approach. 

‘Historically Excluded Communities’

At the core of this investing concept are communities that have been left behind. As an example, Glass contrasts affluent Westport, Connecticut, with a neighbor 20 miles away, the old industrial city of Bridgeport. 

“I have zero desire to invest in Westport, but I absolutely will invest in Bridgeport,” he says. When Westport city managers need to build a hospital, upgrade a school building, or replace old city vehicles with a greener fleet, they’ll have no trouble accessing the municipal bond market. 

In contrast, Bridgeport, with a lower credit rating due to things like its poorer population and higher crime rate, will likely be able to issue bonds, but at a higher cost to its already needier taxpayer base.

Impact Is key

Another example of somewhere Glass would want to invest: the Boston Medical Center (BMC), with the busiest emergency room in the Northeast, and over 40% of its payments coming from Medicaid—more than three times the national average

Glass calls BMC “a beacon of light” for connecting social conditions—like education, access to nutritious food, adequate housing, and more—to health outcomes. “Hospital management is being creative about improving the community’s health,” he says. “It’s just an incredible, incredible organization.” 

But the risk associated with its revenues and its safety-net status means BMC has a credit rating of triple-B, according to Moody’s, just two notches above “junk” bond status. 

From his perch on Wall Street, Glass was accustomed to being able to ask muni-bond issuers like cities, hospitals, and historically Black colleges and universities what they planned to do with the proceeds of the debt they were raising. And he expected issuers to engage in the conversation.

“If I’m the head of a charter school and a potential investor starts asking about the curriculum, or the school-to-prison pipeline, [or] how do we address explicit bias, I should be waxing poetic about this,” he said. “There has to be a best effort in terms of sharing what your theory of change is, what are you trying to accomplish with this financing.”

It’s fair to note that individual investors will find it challenging to ask those questions, let alone get satisfactory answers. Individuals make up a much bigger swath of muni-market investors than in most asset classes, but institutional investors with millions of dollars to deploy command a lot more attention. 

Still, Glass thinks the more investors ask, the more issuers will become accustomed to having to answer. Also, if investors are buying bonds that have already been issued, in the secondary market, they should read the reports issuers must file to show how proceeds have already been spent. That’s available publicly on the website of the market’s regulator, the Municipal Securities Rulemaking Board

Gaining Higher Yields via Social-Impact Munis

The strategy may sound intriguing, but is it only for impact investors? Not at all, Glass says. Everyone needs a diversified portfolio, he points out, and fixed income is a smart way to offset the volatility of stocks. Municipal income is tax-free, a boon for high-net-worth investors. 

What’s more, the higher spreads—additional yield relative to other forms of fixed-income—these lower-rated issuers offer can be very attractive, Glass says. 

For example, the yield on a benchmark top-rated bond, like the ones issued by wealthy Westport, is currently about 3.40%. But triple-B bonds, like the ones from the Boston Medical Center, are yielding 4.90%. That additional yield is what investors ask of lower-rated organizations. 

But in the muni-bond market, lower-rated doesn’t necessarily mean risky. Municipal defaults are vanishingly rare: Throughout the entire universe of investment-grade-rated bonds, there have only been 16 defaults going back to 1986, according to S&P data. 

Stay tuned: Glass is currently developing a platform of fixed-income impact investing vehicles for investors interested in the philosophy and approach he’s honed.