Municipal Impact Investing: Bonds That Transform Our Communities

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By Marc Uy and Larry Bellinger, CFA

Transcription

Larry Bellinger: As impact investors, we certainly start with fundamental credit research. But on top of that, we layer that by looking specifically at Bonds and how they transform communities.

Marc Uy: We want to invest in historically underfunded, low socioeconomic communities across America. And specifically, when it comes to water, that means investing in much-needed infrastructure to really help change the trajectory of these communities. Because we’ve known for so long that access to clean water, access to a working sewage system, is something that many of these communities are still striving for – even in the 21st century.

KG: An important area is lead contamination in drinking water and the removal of lead from service lines. Lead is a neurotoxin. There is no safe level of lead in drinking water. And that has all kinds of ramifications.

UM: Children in high poverty areas are two and a half times more likely to be lead poisoned than children in low poverty areas. And black infants are estimated to experience an average loss of IQ points about 50% greater than that of white and brown children. And, really, Larry, the only effective solution to this problem is simply the complete eradication of lead service lines. This can be expensive and politically difficult to do.

KG: I have to admit — in light of Flint’s lead water crisis — I’m surprised more municipalities haven’t invested. This happened in 2015-16, and we haven’t really seen a lot of investment so far. So I hope that in the future we will see more investment.

UM: There’s been some big, you know, big cities in the Midwest. But unfortunately, they still face huge funding needs, don’t they? A major city that started its main replacement service in 2017 – it is still expected to complete this project in about 70 years. For cities like that and countless other historically marginalized and underresourced communities across America, they’re going to have to drink from bottled water and use internal water filters for a very long time.

KG: So what we do as impact investors is we engage with those municipalities to hopefully prioritize those projects and accelerate them.

UM: Newark is one of the few success stories. And in 2019, they put on the market a $120 million bond to do a full service line replacement. This not only married the funding they were able to get from the municipal bond market, but they were also able to match this with political necessities. So that meant they were able to pass state and local laws that would allow them to use public funds on private property.

And on top of that, they also passed a law that allowed them access to private property, so they could just go ahead and do these lead service line replacements without having to wait for consent of the owner. And it was so important to the success of this project that it reduced the time it took from eight to ten years to complete to three years.

KG: But we also advocate that utilities remove and mitigate permanent chemicals in their systems.

UM: One of the investments we made in the last year was for a large water distribution system in the northeast. And one of the things that we really liked about this project is that it deals with all the issues related to stormwater runoff. So that means forever chemicals and environmental issues that can come from water flooding a system where all that pollution is, you know, just dumped into lakes and rivers and streams.

And so what this big water utility was aiming to do was they wanted to reduce the amount of storm water runoff. And so, they did it by building green roofs, tree canopies, all these different ways just to catch the rain. They also aimed to remove the impermeable pavement, to make it even more difficult for this rain to enter these water systems.

And the other really interesting thing that we liked is that this utility system took the approach of using an equity lens. So that meant they were looking at all the low-income neighborhoods — those low-lying areas that are disproportionately impacted when floodwaters come in — that they were really looking to invest in those communities to try to change their trajectory.

KG: And what was unique about this specific issue was that they held themselves accountable for achieving environmental goals. Thus, they proposed a unique structure, which consists of increasing the coupons if they do not reach their environmental objectives within a certain period. So what’s exciting is that they broke new ground. But I think the market will follow.

UM: We also know that it is very difficult to get things done politically. But from what we’ve seen of Newark’s success is that there is a pattern that can be replicated. It’s just going to take effort from both the political side of things and also from investors looking to be able to really change the trajectory of these communities.

The opinions expressed herein do not constitute research, investment advice or trading recommendations and do not necessarily represent the opinions of all of AB’s portfolio management teams. Views are subject to change over time.

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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

Melissa C. Keyes