Tough times are ahead for municipal bond issuers. But efforts to beat COVID-19 might spark the collective will to tackle other long-simmering environmental and social challenges. Will the virus become a crucible that ultimately encourages impact investing in our cities and municipalities? Eric Glass, Portfolio Manager for AB’s Fixed Income Impact Strategies joins Travis Allen to discuss the ways municipal bonds help create the foundation upon which local economies thrive.
00:00 - 00:01
Welcome to On Purpose.
00:01 - 00:35
I'm your host, Travis Allen, Senior Investment Strategist and National Managing Director at Bernstein. Today, we're going to share some clips from a virtual municipal impact event we hosted for clients across the country. Our guests included Eric Glass, portfolio manager for AB's Municipal Impact Portfolio, a tax exempt bond strategy that supports positive social and environmental change in historically marginalized rural and urban communities with low socioeconomic status.
00:36 - 00:49
Many of these communities are hurting right now. So Eric set the stage by explaining how his strategy helps address some of their most basic needs. Each one of our investments has a specific intention, right?
00:49 - 01:21
So when we're talking about, say, for example, education, what we're really trying to do is to reduce the achievement gap, the opportunity gap that exists between those that have and those that have not. When we talk about healthcare, for example, we're trying to ultimately reduce the life expectancy gap that exists between those that live in wealthy zip codes and those that live in poor zip codes. And unfortunately, throughout the country, there are places, there are communities that are really literally a couple of miles apart where the differential in life expectancy or the death gap can be upwards of 30 years.
01:21 - 01:54
So how do we go about reducing that disparity? And we think we can do that through investing in municipal assets. So whether that's healthcare systems, systems of education, mass transportation, clean water and sanitation, electric utilities, where we're promoting a transition from fossil fuels, renewables, economic development, and workforce development. These are the foundations. These are the pillars of municipal finance. And so the municipal world is, from my perspective, the original impact market. Right.
01:55 - 02:26
Eric spends his time scouring the country looking for investments like the ones he mentioned. Take the portfolio's investment in the city of Newark. Newark has suffered from a lead problem in its water over the past several years. Lead is a neurotoxin that steals IQ points from children and can even result in death when consumed. The Environmental Protection Agency's public health goal for lead is zero. No level of lead exposure is deemed safe, which is why the municipal impact portfolio is helping eradicate lead. Here's Eric.
02:27 - 02:44
Bonds were issued and we purchased bonds and provided proceeds that are going to replace the 18,000 identified lead service lines in the city of Newark. And to date, I'm very happy to report that to date, 11,000 of the 18,000 service lines have actually been replaced.
02:44 - 03:02
So from my perspective, that's the beginning of the end to letting in the water in the city of Newark. And now it's incumbent upon us to see if we can spread that and replicate that investment from Newark to Chicago to Philadelphia to Cleveland to Pittsburgh, et cetera, et cetera, et cetera.
03:03 - 03:28
And so that's something that we're really, really proud of. That's a good news story. But lately, it hasn't been an easy time for municipal bond investors, as Eric and I discussed during the event. There's all this conversation now about reallocating resources away from law enforcement and towards some of the things that you're interested in investing in, social services, healthcare, education, and so on and so forth.
03:28 - 04:01
But I feel like I have to ask the elephant in the room that came up during COVID-19, are you concerned at all that what we're living through is going to result in significant defaults in municipal bonds as they struggle to balance their budgets going forward, given what's happening in the economy? So I'd be, I'd probably be foolish to sit here and say that things aren't stressed more today than they were, say, six months ago. I mean, think about what drives municipal finances.
04:01 - 04:10
It's generally speaking, sales tax, income taxes, corporate taxes. Right. And so those all were basically eviscerated.
04:10 - 04:43
But what I would suggest is that coming into this disruption, that municipalities were in a much better position, had built up reserves both at the state level, the local level, in the good times to protect against times like this. And then you add to it the CARES Act and what will be eventually be the Heroes Act and what will be federal stimulus, as well as efforts by the Federal Reserve to provide liquidity to the municipal market. And really, what I don't see widescale defaults.
04:43 - 04:57
And this is really about dust settling and getting back to a degree of normalcy as far as operations. And what we need more than anything is liquidity. And I think that the market is set up to provide that liquidity.
04:57 - 05:22
So, Eric, it's been almost four years since you launched AB Impact. And I don't want to put you on the spot here, but I think it's worth asking, has it lived up to your expectations from risk/return, but even more important for this discussion today, responsibility standpoint. I mean, honestly, has it lived up to the risk and return, it has.
05:23 - 05:55
We're using environmental, social, and governance frames to do two things. One, identify value and two, mitigate risk. And I think we've done a pretty decent job of that over the last four years and we will continue to do that. I think that when we talk about what's the next incarnation for impact, we're going to double down and quadruple down on the investments that we're making in community and uplifting community and providing resources and foundations upon which to reduce the disparities that we originally talked about.
05:55 - 06:28
I think where we try to differentiate ourselves is that it's one thing to make these investments. It's another thing to create collaborations and partnerships, to try and change the way the game is played, and to expedite the reduction in those disparities. And so making investments and then partnering with others to, for example, we're looking to decarcerate juvenile justice in the state of New Jersey. And we've had a modicum of success in terms of people engaging with us and discussing with us and being aligned with what we want to accomplish.
06:29 - 06:43
Now we need to move forward and actually see the numbers. And then can we take that investment and can we replicate it? New Jersey is not the only state that has a problem when it comes to juvenile justice. It's not about the ability. For us, it's about the willingness.
06:43 - 07:08
And again, how can we use our leverage as investors to make it very clear to municipalities that you will change or you will lose, you will see your investors divest and what's going to be left. I think I really like about that last example about taking, when you find a good solution to the issue, take it national. Right.
07:08 - 07:26
In the same way that you and I have talked about when there is a charter school that has discovered the pathway to improving educational outcomes in a particular community, but they need resources to expand, give them the room to expand so they can replicate that program.
07:26 - 07:50
I love that idea. We're about partnering. We've obviously identified aspects of a municipality or an enterprise system or what have you, the work that they're doing, they're doing some great work from an environmental and social perspective. We just want to partner. We want to help that institution, that entity scale its work and get to everyone it really needs to get to.
07:51 - 08:20
Given, obviously, the struggles in New York with COVID-19, coronavirus, and the huge impact that it had, especially on those at the lower end of the income bracket and essential jobs, which means that they have to remain facing the public, and jobs that tend not to pay very high wages and you can't do from home. Can you talk about some of the impact opportunities that you are working on in New York City?
08:20 - 08:53
Believe it or not, MTA, how do essential workers get to work? Right. And I think one of the things that we've found out through the pandemic is that the MTA is essential, even though the ridership is down, was down something like 95 percent at its low. I mean, when you think about mass transportation and you think about that environmental and social contribution that it makes, so for example, for those of you in New York City and using MTA, the MTA is responsible, in a normal operating year, the MTA is responsible for mitigating 17 million metric tons of greenhouse gas emissions.
08:53 - 09:15
That's effectively three and a half to four million cars off the road because the equivalent of that greenhouse gas emissions out of the environment, because of its existence. Right. And you think about the social aspect, for $2.75, you can you can travel from Coney Island up to Pelham if you wanted to. That's a great equalizer from a cost perspective.
09:15 - 09:34
So, I mean, there's so many, so many benefits that a transportation system provides to localities and MTA, we are large investors in MTA, we've always been large investors to the MTA, can view that as one of the cornerstones of our impact. And we'll continue to work with the MTA around those issues.
09:35 - 10:09
If we didn't do these bond deals, right, you really, you said you scour the country in order to find these impact investment ideas, would some or all of them be financed anyway? And so I think there's a real opportunity to talk about the value-add and the engagement that you do with the issues. That's a great question. There are two components to impact investing. There's the intentionality and there's the additionality. And the additionality is what the question is really alluding to. To date in impact investing, most of the investments have been on the private debt and private equity side.
10:09 - 10:25
And there so an argument to be made that these particular deals would not, or these particular projects would not be done without the financing of the participants, and there is a component to that. There is a truth to that when we go in the public markets.
10:25 - 10:45
But what I would add is clearly from an international perspective, we are making investment decisions based on the intention. And then as far as the additionality is concerned, while these particular projects most will get done or could get done, you wouldn't necessarily have the oversubscription that you would get in those deals and the lower cost of capital that you would get with those deals if we weren't involved.
10:46 - 11:07
That's one aspect of it. And another aspect is that we're asking questions. Every potential investment that we make, it's incumbent that we actually talk directly to the issuer. If we don't, the investment decision is made pretty easy. We don't make it. And what is important about that is we have a specific, idiosyncratic inquiry for each issuer that we engage in.
11:07 - 11:39
And so the additionality that we are bringing to the table is, there's not a day that goes by that I don't get a banker or an insurer asking me, why did you ask that question? No one, and we've been doing this for 30 years, no one has ever asked us that question. And there's a teachable moment at that time to say, like, these environmental, social, and governance criteria are material to your ability to pay back debt. And that's what I care about. I'm going to ask these questions and you're going to engage on these questions. And if you don't, we won't invest. And we're going to follow up and you're going to hear from me again.
11:40 - 11:57
And so the additionality is, and believe it or not, and so, for example, is kind of a goofy story. But I made mention of the investment we made in New York and MTA. So I would say about four years ago, MTA had an investor relations book where it was like 50 pages or so.
11:57 - 12:17
They talked about their environmental benefit on page 46. Now because of our engagement, and they told... and the only reason I know this is because they have specifically told me. We basically, before it was on page 46, and now it's on page 3. And it's on page 3, Eric, because you've been a pain in the ass and you've been constantly asking this question.
12:17 - 12:49
And just for them to understand that this is a big part of what they do, this is a huge benefit to all communities to have the MTA here. So my point is that through our engagement and through our activism, we are just trying to change the way in which finance, specifically in the municipal world is looked at. And that's our additionality. We are changing the questions that are being asked and the data that's being disclosed and the answers that we're getting. Thank you. Thank you for that.
12:50 - 13:24
So, Eric, you mentioned education a couple of times. How do we foster better, equal access to educational opportunities? Ibram Kendi, How to Be an Antiracist, basically talks about this in, as an opportunity gap. For poor communities, they are left with buildings, school buildings that are anywhere between, again, 60 and 100 years old. What does that say to a student that has to go to school there? What does it say to a teacher that has to teach there? It basically says from my perspective that you don't matter.
13:25 - 13:55
So we can talk about outcomes and achievement and we do. And we talk about it a lot from an education perspective. But if we're going to have all these kids run a race, the least we can do is have them start at the same place. And that's about equity in the buildings themselves. That's about state-of-the-art facilities. That's the starting point for our investment. We are trying to inject equity. The right to an education starts with a quality building, and that's what we're doing.
13:56 - 14:30
Distance learning is leaving underserved communities behind. There's no question about that. I would love to have a longer conversation about that. I know Eric has spent a lot of time thinking about that in the MUNI impact portfolios. The inequality has become even less equal. And it's one of the things that is going to be an ongoing challenge as we look at the fall and school districts makes big plans, make plans for bringing kids back to campus or resuming distance learning. Especially, I would like to thank Eric Glass. Let me just leave with this.
14:30 - 14:48
the amazing thing about this country, even with the long history of inequality for sometimes hundreds of years doing the wrong thing is that we have the ability to change things. We have the ability to change things.
14:49 - 15:13
And whether it's locally in your community, whether it's more at a national level, some of the larger policy discussions, or whether it's with your portfolio, I think now is the time for people to, who desire change to speak up for it. This has been On Purpose. Thanks for joining us. And remember, we all have values we hold dear.
15:14 - 15:36
Now you can ensure your investments reflect them. Please subscribe and rate us on Apple Podcasts or your podcast service of choice. And feel free to reach out to me directly on LinkedIn. Thank you again. Bernstein: Making money meaningful for individuals, families, and foundations for over 50 years. Visit us at Bernstein.com.
- Travis Allen
- Managing Director