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How Municipal ESG Performance Can Signal Lower Credit Costs

By John StreurChairman, Calvert Research and Management and Bill Delahunty, CFAPortfolio Manager, Municipals

Calvert recently sponsored a working paper for a study conducted by Witold J. Henisz and Christopher C. Bruno at the Wharton ESG Initiative, titled "Environmental, Social, and Governance Factors and Municipal Bond Yields." The study finds that better ESG performance by municipalities can be associated with reduced credit risk.

Key takeaways are:

  • Strong ESG performance, measured by a novel dataset included factors such as mortality rates, jail population, poverty rates, crime rates and housing inequality, was found to be associated with reduced bond yields.
  • Where possible, the difference of outcomes for white vs Black people was considered to explore the implications for racial equity or racial justice. This relationship was very complex.
  • Like their counterparts in the private or sovereign sectors, municipal issuers differ substantially in their ESG performance. Investors have a strong financial and moral interest in distinguishing among them—the Wharton study was designed to offer an expanded toolkit for doing so.
  • The research suggests that good ESG policies linked to community ESG performance outcomes can provide long-term benefits to business growth, migration, and the tax base, while possibly reducing racial inequities.

To read the full paper on the Calvert Center for Responsible Investing website, click here.

Bottom line: The Wharton study finds the association between better ESG performance by municipalities and reduced credit risk (i.e. lower credit yields) was present when controlling for economic performance (e.g., median household income and unemployment rate) and fiscal health (e.g., revenue and debt per capita).