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Responsible Investing

Innovation in ESG municipal bond investing

Overhead view of a water treatment plant

Nuveen developed a proprietary ESG scoring methodology designed to evaluate a municipal issuer’s potential contribution to positive ESG outcomes relative to their peers. Using a comprehensive approach, Nuveen seeks to help clients achieve the investment benefits of municipal fixed income while aligning with their values and helping to provide positive outcomes for our communities.

Municipal ESG integration is underdeveloped in the industry

Over the past decade, the integration of environmental, social and governance (ESG) factors into investment analysis and decision making has become common in public equities and corporate taxable fixed income. ESG integration into the municipal bond market, however, remains underdeveloped.1

We believe this disparity exists for a few reasons. First, the municipal market lacks third-party ESG ratings from the data providers that offer valuable inputs into the equity and taxable fixed income markets. The sheer volume of municipal issuers — approximately 50,000 — and the shortage of ESG disclosure by these municipal issuers contribute further to the gap. As a result, very few municipal strategies explicitly integrate ESG factors or ratings, and those that do tend to focus on social and green bonds.

Another factor may be an underlying belief that municipal bond investments are inherently ESG oriented, since most municipal issuers finance public services like transportation, sanitation infrastructure, schools and utilities.

However, like any industry or asset class, municipal issuers vary significantly as to how well they are governed and how constituents experience environmental and social outcomes. We believe that integrating ESG factors into our municipal strategies may help encourage these positive outcomes, while continuing to seek competitive returns.

Nuveen has a history of leadership

Nuveen’s long history and leadership in the municipal bond market, coupled with our responsible investing expertise, prompted us to develop a rigorous in-house, data-driven methodology to assess municipal ESG leadership, tailored to individual municipal bond sectors.

At the same time, we actively participate in organizations that have shaped the responsible investing field over the past five decades such as the Principles for Responsible Investment (PRI) and the Global Impact Investing Network (GIIN). More recently, we have advised on white papers with the UN Principles for Responsible Investment’s Sub-Sovereign Debt Advisory Committee, the Government Finance Officers Association (GFOA), the California Debt and Investment Advisory Commission (CDIAC) and the California Green Bond Market Development Committee (CGBMDC). We also participated in an ESG disclosure pilot program for municipal issuers with CDP (formerly Carbon Disclosure Project).

By participating in working groups focused on responsible investing as well as traditional public finance, Nuveen seeks to bridge the gaps in conversations that have historically left ESG out of the municipal market. Through these partnerships, Nuveen is helping to advance ESG disclosure and best practices in the field, bringing focus and client interest to this growing area.

Proprietary methodology identifies bonds that can deliver positive outcomes

The responsible investing and municipal credit research teams collaborated to develop a proprietary, sector-specific ESG municipal methodology. One of the goals is to identify issuers that we believe excel at environmental stewardship, good governance and positive social outcomes.

Our models generate ESG scores across municipal sectors covering 92% of the holdings in the Bloomberg 3 – 15 Year Blend Municipal Index.2

These scores are available for consideration to all Nuveen municipal analysts and portfolio managers, and are part of the investment criteria in our ESG focused municipal bond strategies with an ESG component.

For municipal portfolios focused on ESG investing, our disciplined investment process begins with the client’s objectives, incorporates analysis from the credit research team and includes the ESG score as a component of the process.

Scoring identifies ESG leaders by sector

For each municipal issuer, sector-specific ESG factors are weighted and scored using a proprietary framework to determine the overall ESG municipal score.

The weighted average of the factor scores is aggregated to create an overall ESG score on a range of 1 (worst) to 5 (best). Municipal issuers scoring 3 and higher are considered ESG leaders and typically represent 50% to 65% of our regularly traded municipal holdings.3 Issuers that rate below a 3 are not eligible for inclusion in ESGfocused municipal portfolios, unless the bond has a qualifying use of proceeds with positive environmental or social impact, as described in the thematic use of proceeds section.

For example, Figure 1 shows how scoring would work in the hospital sector based on quality of care, patient satisfaction and affordability of care. In contrast, in the public power sector, we score issuers on their overall reliability and affordability of electricity, energy conservation efforts and inclusion of renewable energy in their generation mix.

Figure 1: ESG factors and weightings determine an overall score

Nuveen collaborates with the University of Michigan

Nuveen selected University of Michigan Center for Smart Infrastructure Finance (CSIF) for its expertise in improving efficiencies using data and information, including areas such as data fusion, machine learning, and natural language processing combined with engineering modeling.

Key partnership benefits included:

We believe robust proprietary data models can provide an information advantage for our portfolio managers in selecting ESG securities for portfolios to help clients achieve their goals.

Aligning municipal bonds to the UN Sustainable Development Goals

We believe the United Nations Sustainable Development Goals (SDGs), as shown in Figure 2, serve as a useful guide for how municipal bond investments may translate to real-world, positive outcomes. These 17 interconnected goals are designed to be a “blueprint to achieve a better and more sustainable future for all.4 ” Underpinned by 167 development targets, the goals were agreed to by 193 governments in 2015 to go through 2030. They reflect the breadth of issues to be addressed as we consider sustainable development over the next decade.

As part of our scoring model, we developed an SDG alignment framework that aligned sector model factors to the underlying targets of specific SDGs. SDG-alignment indicates if an investment is directionally consistent with or linked to the overarching theme of one or more of the SDGs. Issuers with an aggregate ESG score of three or higher are generally aligned to the sector-relevant SDG.

Figure 2: Nuveen’s investing approach is aligned with United Nations goals

Thematic use of proceeds from bonds can add to diversification

In addition to ESG leaders, we also invest in bonds with a use of proceeds intended to directly finance projects with environmental or social benefits. These bonds typically make up less than 15% to 20% of ESG-focused portfolios, but allow for diversification. They could have green, social or sustainable labels assigned by the issuer or could be unlabeled.

Unlabeled thematic bonds are identified through our active fundamental research process by reviewing the offering documentation to determine whether the projects are making a positive impact. For example, as shown in Figure 3, proceeds may be used for the construction or maintenance of water sanitation facilities. Social and sustainability bonds might support affordable housing development, the creation of education facilities or health care in low-income communities.

We also evaluate thematic use of proceeds by leveraging market standards such as the International Capital Markets Association’s SDG framework.

Figure 3: Financing projects that help communities

Applying ESG scores: Real-world examples

ESG integration can be an important input when constructing portfolios. Municipal issuers with similar credit ratings may exhibit divergent ESG profiles. Having the ability to track and analyze ESG factors provides more information about an issuer’s management quality, sustainability and social impact.

The growing demand for ESG-focused investments requires looking beyond thematic bonds to identify issuers based on ESG factors and outcomes.
David Blair, Portfolio Manager

Figure 4 compares the credit quality and ESG metrics of two state housing authorities. While they maintain relatively similar credit metrics and ratings, their ESG profiles are very different. Massachusetts has a higher need for public housing and better access to public transportation, which is more aligned with the underlying goals of sustainable cities (SDG11).

When paired with Nuveen’s in-depth fundamental municipal credit expertise, ESG integration becomes another tool to evaluate municipal issuers for clients that seek to align their investments with their values. In this case, an ESG leader can provide the intended outcome (e.g., a higher quality of life) in a more positive way than its peers, , according to the analysis shown in the ESG considerations section in Figure 4.

Figure 4: Identifying ESG leaders among issuers with similar credit profiles

ESG factors help align investments and values

Municipal bonds are known for generating tax-exempt income and enhancing portfolio diversification, but they can also provide a way for investors to make positive contributions to society through their investments. Adding an ESG focus means analyzing sound environmental, social and governance practices by municipal issuers, which can result in positive outcomes for their constituents.

We bring together market-leading responsible investing and municipal investment capabilities by evaluating ESG performance at the municipal issuer level. Employing ESG analysis provides an additional lens with which to view the portfolio, helping clients who seek to align their investments with their values.

Our proprietary municipal ESG scoring methodology is a powerful tool that helps evaluate municipal issuers for positive environmental and social outcomes.
Sarah Wilson, Head of ESG Integration
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1 Summary of Responses to the MSRB’s Request for Information on ESG Practices in the Municipal Securities Market, August 2022.

2 Nuveen, Perform/Creditscope, 30 Jun 2023.

3 Nuveen, Perform/Creditscope, 22 Aug 2023.

4 United Nations Sustainable Development,

This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on Please note, it is not possible to invest directly in an index.

Important information on risk

Investing involves risk; principal loss is possible. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Bond insurance guarantees only the payment of principal and interest on the bond when due, and not the value of the bonds themselves, which will fluctuate with the bond market and the financial success of the issuer and the insurer. No representation is made as to an insurer’s ability to meet their commitments. This information should not replace an investor’s consultation with a financial professional regarding their tax situation. Nuveen is not a tax advisor. Investors should contact a tax professional regarding the appropriateness 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 the 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. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.

Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well.

Nuveen, LLC provides investment solutions through its investment specialists.

This information does not constitute investment research as defined under MiFID.

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