US municipal bonds can be considered a natural fit for ESG investment

When seeking to build an ESG-focused portfolio, fixed income investors often look first to the corporate sector. The corporate sector offers plentiful data and information and ESG ratings on specific securities. While the US municipal sector tends to be less widely recognized in the ESG investing space, many of the ideals of responsible investing are embedded in most US municipal bonds (from here, referred to as municipal bonds). Invesco Fixed Income believes this natural alignment provides an opportunity for investors to combine potentially robust returns with environmental, social, and governance (ESG) goals.

We know many of our European clients have clear ESG goals. We are also mindful that our European insurance clients are working to adhere to the Solvency II directive. This paper explains how municipal bonds can help European investors meet ESG investment objectives while at the same time offering attractive yields and potential advantages under Solvency II. Because municipal issuers focus on social services and communitybased projects, municipal bonds can be considered in many ways “a natural fit” with ESG investing. At the same time, taxable municipals can offer attractive relative value versus corporate bonds (even after hedging costs) and higher capital-adjusted yields compared to other types of bonds under Solvency II.