By Carmen Nuzzo, Head of Fixed Income, PRI, and Jasper Cox (@jasper_cox), Investment Practices Analyst, Fixed Income, PRI

Momentum is building for investors in US municipal (muni) bonds to incorporate environmental, social and governance (ESG) factors systematically in their analysis and valuations.

In 2018, the wildfire Camp Fire struck Butte County, California, killing 85 people and destroying 19,000 buildings. It devastated the town of Paradise, where 90% of the 27,000 residents left, many permanently. In the wake of the fire, the Moody’s credit rating on pooled bonds by the California Statewide Communities Development Authority plummeted.[1]

Although since then the credit rating has rebounded[2], the episode demonstrates how vulnerable muni bonds are to ESG risks: muni issuers raise revenue from local communities and fund a wide array of infrastructure and public services. Some, such as sewer and water utilities, are inherently linked to environmental factors while others, such as education and healthcare providers, are linked to social ones.

Weather-related events are now becoming more frequent and expensive, affecting the issuers’ ability to generate revenues if, for example, property and land valuations decline and businesses relocate. They may also increase public spending for repairs, infrastructure adaptation, compensation and subsidies. Moreover, recent protests against racial injustice and rising income inequalities have put a spotlight on social risks, since the composition and the characteristics of the local population can impact the level of local government expenditures and the revenues available to repay debt.

Despite the materiality of ESG risks in the muni market — which is the world’s largest liquid sub-sovereign debt market — muni investors have been slow to consider ESG factors in security analysis.

However, this is beginning to change. During our 28 September webinar, ESG Integration in the US Municipal Bond Market, market specialists will discuss how they are approaching ESG factor incorporation, starting from a risk-return perspective. They will also review the findings of the PRI’s first report on the topic, ESG Integration in Sub-Sovereign Debt: The US Municipal Bond Market, which examines why demand for such an approach is growing.

Tailwinds and headwinds

Several drivers are propelling ESG integration in muni bonds.

  • Retail investors, who make up a large part of the buyer base, and asset owners are increasingly interested in incorporating sustainability into their investment choices.
  • Globally, financial regulators are pushing for greater ESG disclosure. While this may not be affecting the muni market directly at this stage, it is spurring action from investors across all asset classes.
  • The Biden administration has pledged action on climate change and social inequality, following many initiatives at state and local levels.[3]

However, muni investors seeking to incorporate ESG factors face distinct challenges.

The issuer base is both very large, with more than 35,000 active issuers, and heterogeneous, making security analysis difficult. It includes states, cities, counties, government enterprises and agencies, non-profits and private entities. Some entities share a similar profile to sovereign debt issuers; others are more like conventional corporate borrowers. In addition, state or federal support may help issuers withstand credit threats, blunting the risk of any one ESG factor.

Data may be too granular or not sufficiently so, and in any case is often dispersed across different sites and databases. Finally, some issuers do not yet see the need to give investors ESG information; others lack the resources to do so.

Our research found that, to improve their ability to incorporate ESG factors, investors would like:

  • Data that is tailored to the issuer’s sector and geography, but allows for comparability across the sector.
  • Information on issuers’ strategies to identify and manage ESG risks.
  • More openness to engagement.
  • Better dissemination of ESG information, for example on a dedicated page on the issuer’s website or in financial statements.

Looking ahead

As a follow-up to its work on ESG integration in muni bonds, the PRI plans to examine screening and thematic approaches, including the growing labelled bond market. We will also conduct work on how issuers, investors and other market participants can engage with each other more effectively. And we will broaden the focus to sub-sovereign debt outside the US.

Finally, inspired by its work in the corporate market, the PRI will seek to broaden the investor dialogue among issuers, credit rating agencies and ESG information providers.[4] Such conversations have helped stakeholders understand expectations, challenges, and market nuances from a variety of perspectives.

Stay up to date with this new workstream by visiting




This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories. Please note that although you can expect to find some posts here that broadly accord with the PRI’s official views, the blog authors write in their individual capacity and there is no “house view”. Nor do the views and opinions expressed on this blog constitute financial or other professional advice. If you have any questions, please contact us at [email protected].