Impact Blog
How we apply ESG principles to muni bond portfolios

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Calvert disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Calvert are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Calvert fund. References to individual companies for Engagement or Research purposes are provided for illustrative purposes only and may not be representative of the results of all of Calvert’s engagement efforts. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results.

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      By Lauren KashmanianMunicipal Portfolio Manager, Eaton Vance Management

      New York - Responsible Investing is a relatively new but rapidly expanding area in the municipal bond space. We believe the concept is well-suited for a market that finances entities and projects intended to serve the public good. A key component of Responsible Investing is incorporating environmental, social and governance (ESG) factors into the investment process through credit analysis and portfolio construction.

      As state and local governments in the U.S. continue to address climate change initiatives, there will be increasing opportunity within the U.S. municipal bond market for investors who are interested in purchasing bonds according to ESG principles. By providing funding to programs and projects such as renewable energy, clean water and sustainable waste, education and health care in underserved areas, affordable housing projects and land conservation, ESG investors will be able to make a meaningful difference.

      Which bonds qualify for ESG portfolios?

      Responsible Investing is not just about avoiding investments that are deemed to have negative impacts, but can be more about investing to achieve both positive impacts on society and the environment as well as favorable investment results. At Calvert, we believe that embracing ESG factors is good business practice.

      Credit research is central to our investment approach. We rely on the deep and extensive knowledge of our credit team to provide analysis on the fundamental credit strength of any issuer in the construction of our investment portfolios. Our research analysts examine the issuing documents for any municipal issuer to determine how bond proceeds will be used. Therefore, we can analyze the societal impact of potential projects or programs that are being financed.

      By analyzing credits for both underlying credit strength and sustainability factors, we aim to deliver superior long-term performance for our investors. In addition to assigning an internal credit rating on bonds held in the portfolios, analysts will apply an ESG rating to each bond based on Calvert's proprietary rating system.

      Why might ESG standards contribute to credit strength?

      ESG standards incorporate the long-term sustainability of a project and the possibility of lower costs, lower waste and more efficiency over time, which may contribute to underlying credit strength. Research has suggested that the implementation of sustainable practices can create efficiencies to improve investor value and mitigate risk over time.

      For example, initiatives to increase sustainability of water and sewer systems, conserve natural resources or improve energy efficiency over time could increase savings for state and local governments in the long run.

      Bottom line: Through careful credit analysis and portfolio construction, municipal bond investors have the potential to integrate an ESG focus and align their investments and values, without sacrificing credit quality or performance.