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Responsible Investing

Unlocking the value of ESG in municipal bonds

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Q&A featuring Nuveen’s municipal and responsible investing teams


Nuveen believes that responsible investing principles can help provide enduring benefits for our clients and our communities. Responsible investing includes assessing environmental, social and governance (ESG) principles alongside traditional investment research and may enhance long-term performance and help manage risks for investors.
Municipal bonds are known for generating tax-exempt income and enhancing portfolio diversification, but they also provide a way for investors to make positive contributions to society through their investment. Adding an ESG focus means prioritizing better environmental, social and governance practices by municipal issuers, resulting in positive outcomes for their constituents. 

Adding an ESG focus means prioritizing better environmental, social and governance practices by municipal issuers, resulting in positive outcomes for their constituents.”

At Nuveen, we bring together market-leading responsible investing and municipal investment capabilities by evaluating ESG performance at the municipal issuer level. 

How does Nuveen integrate ESG principles in managing this strategy?


Our proprietary ESG municipal methodology is sector-specific and focuses on issuers that excel in terms of environmental stewardship, social impact and management to promote sound public-policy decisions. By integrating an ESG methodology into the investment process, we identify specific issuers within sectors that are ESG leaders, while avoiding the laggards and those that operate within sectors that are associated with negative social outcomes. We also invest in thematic bonds, which directly finance environmentally friendly or socially beneficial projects. For example, proceeds of bond issues to advance environmental projects include wind and solar energy, clean drinking water or mass transit infrastructure. Social and sustainability bonds might support affordable housing, education and health care in low-income communities.

Isn't municipal investing, by its very nature, ESG investing?


Not necessarily. Most municipal issuers are purely public-purpose entities that finance critical infrastructure that promotes the health, safety and well-being of citizens, but this doesn’t address whether the outcomes for people and the planet are ultimately positive or negative. 

Nuveen seeks to direct investment dollars to issuers that demonstrate ESG leadership relative to their peers and/or use bond proceeds in ways aligned with the United Nations Sustainable Development Goals (SDGs). The SDGs are a collection of social and economic development goals established by the UN in 2015 and adopted by 193 countries as a plan of action to achieve a better and more sustainable future for all.

Most municipal issuers are purely public-purpose entities that finance critical infrastructure that promotes the health, safety and well-being of citizens, but this doesn’t address whether the outcomes for people and the planet are ultimately positive or negative.”

Is the strategy simply a portfolio of green bonds?


We aren’t limited to investments in green bonds. We invest in issuers that demonstrate leadership among their peers on ESG principles regardless of whether specific issuances are labeled and marketed as green. Thematic bond issuers are assessed on the use of proceeds going towards positive environmental or social impact, rather than the issuers’ overall ESG performance. 

In practice, we find that the majority of holdings in ESG municipal separately managed accounts are ESG leaders as opposed to thematic bonds. Moreover, as most issuers don’t choose to label their bonds as being green or socially beneficial, we allow for the purchase of bonds without such labels. For example, a public power authority with a heavy reliance on coal for generation is likely to have poor ESG performance. Yet that same public power authority may issue bonds to construct a wind farm, thereby diversifying its generating assets and reducing its environmental impact.

How does Nuveen identify ESG leaders?


We developed a rigorous, proprietary methodology for identifying ESG leaders by measuring positive outcomes specifically tailored to their respective sectors. For example, in the public power sector, we score issuers on their overall management, reliability, affordability, energy conservation efforts and inclusion of renewable energy in their generation portfolio. Cities, by contrast, are evaluated by factors such as air quality, housing costs and the rate of violent crime, among other factors.

Having the ability to track and analyze ESG factors may reveal relative value by considering management quality, sustainability and social impact.

Do ESG principles assist with relative value determinations?


Applying ESG analysis to municipal securities may also help in determining relative value. Municipal issuers with similar credit ratings may exhibit divergent ESG profiles. Having the ability to track and analyze ESG factors may reveal relative value by considering management quality, sustainability and social impact. For example, consider the analysis in Figure 1, comparing the credit and ESG metrics of two public universities.

While both universities maintain relatively similar credit metrics and ratings, they have very different ESG profiles. As an example, Indiana University and The University of Colorado share similar acceptance and matriculation rates while their cashflow margins and student populations differ. By employing ESG analysis, we may detect value that cannot be observed through standard municipal credit analysis alone. 

Figure 1. Revealing relative value among similar credit profiles 

Sustainable development goals graphic 


Does responsible investing mean sacrificing performance?


Strong performance by a sector excluded by the ESG criteria (such as tobacco) could create periods of underperformance. Conversely, names excluded from a portfolio may prove to be more prone to credit deterioration and/or headline risk, which could provide a benefit to an ESG-focused portfolio.
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Dimitrios N. Stathopoulos
Head of Americas Institutional Advisory Services
This report provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any investments or related securities. The analysis contained herein is based on the data available at the time of publication and the opinions of Nuveen Research. Information is current or relevant as of the date indicated and such information may become outdated or otherwise superseded at any time without notice. This analysis is based on numerous assumptions. Different assumptions could result in materially different outcomes. The report should not be regarded by the recipients as a substitute for the exercise of their own judgment. An investment in any municipal portfolio should be made with an understanding of the risks involved in investing in municipal bonds.

A word on risk
There are risks inherent in any investment including the possible loss of principal. Bonds and other fixed-income investments are subject to various risks including, but not limited to interest rate risk or the risk that interest rates will rise, causing bond prices to fall; and credit risk, which is the risk that an issuer will be unable to make interest and principal payments when due. The value of the portfolio will fluctuate based on the value of the underlying securities. This information should not replace an investor’s consultation with a professional advisor regarding their tax situation. Nuveen is not a tax advisor. Investors should contact their tax advisor regarding the suitability of tax exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on state of residence. Income from municipal bonds held by a portfolio could be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer.

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Nuveen Asset Management, LLC is a registered investment adviser and affiliate of Nuveen, LLC.
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