Morningstar - Q3 2021 - 44

Spotlight: Integrating ESG
The Power of the Muni-Bond Market
for Impact Investing
Municipalities are at the intersection
of finance and policy.
Tom Lauricella
MUNIS
Investors may not think of the municipal-bond
market when it comes to building an impact
portfolio around racial justice, but it's one area
where their dollars can have a direct connection
with public policy.
We spoke about this intersection of social
impact investing and public finance with Rachel
Robasciotti,1
founder of Adasina Social Capital;
Ryan Bowers, co-founder of Activest; and
Chelsea McDaniel, a senior fellow at Activest.
Adasina and Activest work together on
the Adasina Fiscal Justice Municipal Strategy.
Tom Lauricella: Let's start at the beginning.
Why municipal bonds?
Ryan Bowers: The municipal market is supposed
to be not only low risk but also public purpose.
But we're seeing things in the market that
are neither good for a city's fiscal health nor
its residents.
Rachel Robasciotti: People start off by assuming
that investing in municipal bonds is an
unqualified good, and what we're saying is,
" No, it isn't. "
You can have cities that are actively financially
exploiting the Black residents. And then,
on the other side of the table-something that we
haven't dug into as deeply yet-is that there's
evidence of racial discrimination in the municipalbond
market. There are cities that are doing
a great job, but there's evidence of them being
penalized in the municipal-bond market-
charged higher interest rates simply because
they're Black communities.
And so, the strategy that we put together flows
capital to those communities that are doing
things right. It strategically invests where we have
partnerships and where we know that our
bondholder engagement can have a tremendous
impact on that community.
Lauricella: Many investors might not see the link
between racial justice and municipal finances.
Ryan, how did Activest come to find its mission?
Bowers: Right after Michael Brown was
shot and killed by the police in Ferguson in 2014,
a number of our foundation clients asked
us to figure out how to get some dollars quickly
on the ground.
What came out was essentially that the city
of Ferguson was raising an outsize portion
of its revenue from excessive fines and forfeitures
and fees on the Black community. Everything
from fees for broken taillights to jaywalking and
motor vehicle violations. People call it " taxation
by citation. "
In Ferguson, 20% of their revenue was coming
from Black residents in this way. The national
average is closer to 2%. This is a problem across
St. Louis County.
Lauricella: How did this spill over into the bond
market after the consent decree between
the U.S. Department of Justice and Ferguson?2
Bowers: After the consent decree, Moody's
downgraded Ferguson's bonds from investmentgrade
to junk, and the pricing on their
bonds went from one to one on the dollar down
to around 50 cents on the dollar.
So, we saw that and had an aha moment because
we knew that the rating agencies don't have
a racial justice lens. And we know that there are
other Fergusons out there, not just across St. Louis
County but across the country.
Whether it's excessive tax abatements that take
revenue from school districts to police misconduct
expenses of billions of dollars, as bondholders
we took the angle that it is actually the fiduciary
duty of investors to know when there is a
mispricing of social risk in the bond market.
Lauricella: You mentioned tax abatements. How do
they fit into this?
Bowers: When Jacob Blake was shot in Kenosha,
the city council and the police supported
the city buying body cams for the police
department. But they didn't end up [making the
purchase] because they said they didn't
have enough money to do it. But then we found
out Kenosha had actually given away
29% of their revenue in 2016 toward corporate
tax abatements.
This is significant because research shows these
dollars given away to corporations are the
most expensive, redundant, and ineffective ways
to do development. Wisconsin has the most
tax abatements given away in the country
of all the states. So, Kenosha was the most abated
city in the most abated state.
You can see how decisions around expenditures
impact the ability to use revenue in a way that
1 We profiled Rachel Robasciotti ( " Investing for Social Justice From the Bottom Up, " Page 69) in the Q3 2020 issue.
2 The decree sought to remedy the unconstitutional law enforcement conduct that the Justice Department found during its investigation into the Ferguson Police Department.
44
Morningstar Q3 2021

https://www.morningstar.com/authors/1953/tom-lauricella https://adasina.com/ https://www.activest.org/ https://www.nxtbook.com/nxtbooks/morningstar/magazine_2020q3/index.php#/p/69 https://www.morningstar.com/articles/998577/investing-for-social-justice-from-the-bottom-up

Morningstar - Q3 2021

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