One of the things many investors enjoy about municipal bonds is that they can see the fruition of their investments right in front of their eyes, said Maya Philipson, co-founder and chief operations officer of the San Francisco-based Adasina Social Capital.
But these investments can do more than fund public projects like building roads and bridges. That was the topic of a recent webinar from Adasina, which is launching a new investing strategy: addressing racial justice via municipal bonds.
“Municipal bonds have this amazing ability to be original, place-based impact investing that actually impacts specific communities,” Philipson said during Adasina’s recent webinar.
Funding such projects doesn’t mean that investors should expect smaller returns or higher risk, said Eric Glass, the founder of Clarion Call Capital.
“There still remains an assumption that, because we are doing impact investing, there must be concessionary returns — that is not true,” he said. “We believe that using fundamental credit and market research, along with incorporating environmental, social and governance frameworks, will help us better identify value and also mitigate risk.”
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A 2023 study published in the journal PLOS One found that U.S. communities with greater percentages of Black residents face higher interest rates on their municipal bonds and therefore pay higher borrowing costs. Analyzing 712,000 munis valued at nearly $2 trillion, researchers found these communities pay about $900 million more annually in interest.
It’s all about doing enough research
Glass said that the industry typically pays less attention to some public fixed-income investments because many investors believe that underdeveloped municipalities are associated with greater financial risk.
However, he said that Clarion Call Capital utilizes traditional core fixed-income principles to drive strategic impact investments.
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“We believe that using fundamental credit and market research, along with incorporating environmental, social and governance frameworks, will help us better identify value and also mitigate risk,” said Glass.
As part of its racial justice strategy, Clarion Capital manages over $50 million in municipal bond investments, Glass said.
His firm exclusively focuses on physical infrastructure in communities in which at least 21% of the population is Black in order to enhance financial returns and impact in historically underresourced communities (just over 14% of the U.S. population was Black, as of 2023). Glass said that some of the best impact investment is in historically Black colleges or universities and health care systems.
Partnerships with grassroots organizations
Advisors could engage with social justice organizations to help identify areas most in need and to conduct research, said Rachel J. Robasciotti, the co-CEO of Adasina Social Capital, during the webinar.
“We partner with them to provide the data often that we use in our evaluation process and ensure that our portfolios reflect real-world needs, rather than just solely relying on, for example, government reporting,” said Robasciotti. The question such partnerships can help answer, she said, is: What should investors focus on?
“We take what we learn and build a bridge. We leverage the capital to make large-scale, positive impacts on the world through coordinated investor activism and advocacy,” said Robasciotti. “We want to prove social justice metrics are investable by being the first asset manager to invest.”
As one example, Robasciotti said that Adasina Social Capital has mobilized an investor coalition, representing $1 trillion in assets, to push publicly traded companies to stop paying subminimum wages. Adasina itself manages more than $300 million in assets, she said.
How to advise interested clients
Financial advisors who have clients interested in adding racial justice-focused municipal bonds to their portfolios should start with plenty of transparent, in-depth research.
Because these bonds may involve investing in areas or projects traditionally perceived as having higher risk, Glass stressed the importance of thorough due diligence so that an advisor is able to clearly communicate the purpose, risks and social impact to their clients.
“This is a very labor-intensive strategy,” he said. “But if we are not able to engage in that inquiry, if there is no engagement, we will not make that investment.”
