Bloomberg launches green, social and sustainability index

Bloomberg LP has launched a U.S. Municipal Impact Index designed to track municipal bonds categorized under green, social and sustainability.

The index, which went live Monday, currently tracks over 2,800 securities and is the first such standardized measure of the U.S. municipal tax-exempt investment-grade impact bond market.

The index is derived from Bloomberg Index Services Limited's flagship Municipal Index and uses Bloomberg’s data and its municipal data analysts’ research to individually vet and categorize as green, social or sustainability municipal bonds.

For inclusion in the index, a bond must either be self-labeled as green, social or sustainability directly from an initial offering, reviewed by independent assurance providers, or use 100% of proceeds for a project in line with the International Capital Market Association (ICMA) principles.

“Investor demand for municipal impact bonds has been growing and its market value has more than doubled in the last three years, but participants have lacked a standard reference point for ESG-adherent securities,” said Nick Gendron, global head of fixed income index product at Bloomberg.

Bloomberg in February 2020 debuted a green leaf icon next to certain bonds on its terminal, designating them as green. This includes clean water, renewable energy (wind, solar, geothermal), green building construction and other related projects, although some of these bonds have not self-designated or had a third-party verification.

Bloomberg doesn't evaluate for "'sustainability,' so we will only utilize either the issuer or 3rd party verification," Gendron told The Bond Buyer. "For 'green,' we do a review based on Bloomberg's own scores. To date, we haven't had a case where we disagree with the issuer, but we would still display as 'Issuer Labeled' as per our index methodology."

They currently add the third-party verifier in the text notes of the DES, or bond description function on the terminal, as an involved party, similar to how they show the underwriter, bond council, trustee and others.

A core principle of Bloomberg's sustainability initiatives and its product development strategy is to "incentivize disclosure and help establish standards and frameworks that will create a foundation of trustworthy information on sustainability," Gendron said. "For example, Bloomberg ESG Scores and Bloomberg Index Services Limited methodologies are all fully transparent and available on our website or the Bloomberg terminal."

While ESG investment considerations have grown around the globe, the U.S. municipal securities market is just beginning to delve into the space in varying degrees and there is no universally accepted definition of ESG.

According to Refinitiv MMD data, $36.60 billion of ESG bonds have been issued this year as of Nov. 30. That surpasses the $16.621 billion issued in all of 2020. Compared to annual municipal issuance — $484 billion total in 2020 and currently at $466.610 billion through Thursday — the figures are small but growing with ESG representing 3.4% of annual municipal issuance in 2020 but 11.68% year-to-date 2021, Refinitiv data shows.

According to the Climate Bonds Initiative, a nonprofit that certifies green bonds and whose standards and criteria many issuers use for verifying their deals, U.S. green bond issuance increased by almost a factor of five from $12.8 billion in 2015 to $61.5 billion in 2020.

CBI does not have its final figures for 2021, but Sean Kidney, chief executive officer of CBI, expects at least 50% growth in 2022 over this year's numbers.

“We’ve seen strong growth for green muni bonds, capped off by California’s $464 million Certified Climate Bond from the State Public Works Board,” Kidney said. “The broader ESG bonds issuance market is growing as well. In Europe in November, 40% of all bonds issued were green or ESG. The U.S. is heading in that direction.”

Bloomberg joins others in providing data and analytics with the rise of sustainable investing, as more investors have become focused on incorporating ESG data into their investment research and decision-making processes.

In November, Intercontinental Exchange expanded its reference data coverage to include two million fixed-income instruments, including municipals, in an effort to provide greater transparency for users to understand ESG risks and opportunities.

CUSIP Global Services in October announced the addition of ESG data attributes for corporate and municipal bonds in its data feed and desktop products.

In October, the Municipal Securities Rulemaking Board launched a feature on its Electronic Municipal Market Access site that indicates if an upcoming municipal security new-issue is either self-designated or certified as meeting certain ESG criteria.

The Government Finance Officers Association in October released best practices for ESG for the issuer community while calls for greater equity and inclusion have prompted some of the largest investment firms on Wall Street to prioritize ESG concerns when working on municipal bond deals with state and local governments.

Kestrel Verifiers, an approved verifier accredited by the Climate Bonds Initiative, verifies bonds that meet the ICMA or the CBI standards and criteria. Sustainalytics provides green designations as well. Build America Mutual also has a green designation for insuring bonds and Nasdaq in late 2019 introduced a Sustainable Bond Network, a global online platform designed to improve transparency in the market for green, social and sustainability bonds.

There is demand for all of this data. A Bond Buyer report released in October noted that more than half of respondents, 56%, rate ESG as important to the municipal industry with the greatest importance placed on the environmental aspect at 73%, followed by governance at 60% and social at 50%. A large majority, 77% of respondents, believe there should be a universal “language” for ESG in the municipal space.

In terms of pricing benefits — one of the key metrics about which issuers care most — Gendron said they have not seen specific price adjustments due to the green, social or sustainability labels at this time, "but certainly recognize there is potential as the market grows and we will continue to monitor this space."

"From an overall performance standpoint, although the compositions of this impact index vs. the overall market are quite different, this impact market has had annual returns of 8.03%, 5.42%, and 1.57% in 2019, 2020, and 2021 YTD through end of November vs. returns of 7.53%, 5.21%, and 1.35% for the overall non-taxable muni index over the same timeframes," he said.

For almost a year now, Refinitiv MMD has been putting out a monthly report on ESG. Peter Franks, senior market analyst at Refinitiv, said "to date, we have not seen any significant value difference between an ESG bond or comparative non-ESG bond. It may happen at some point but for now our research shows no difference."

Gendron said the company believes the index "will hold broad appeal" for both exchange-traded fund product creation and traditional benchmarking, "while also providing a useful tool for in-depth research of this growing segment of the municipal bond market."

The index was launched with history calculated back to Jan. 1, 2019. Eligible bonds within the index are required to have principal and interest denominated in USD, at least one year until final maturity, and hold an investment-grade rating. Only fully tax-exempt issues are included, and rebalancing will occur on a monthly basis.

Bloomberg clients can access the index using the ticker I36676US Index <GO>.