Over the past five years, the municipal bond market has seen a rapid increase in the amount of outstanding debt labeled as green, social, or sustainable. This phenomenon is not as new in other sectors of the market; for almost a decade, green bonds, social bonds, sustainability bonds and sustainability-linked bonds have been steadily growing in popularity in the corporate sector.

In many ways, the municipal bond market seems uniquely well-suited for these sorts of labels. Municipalities across the country regularly issue debt to fund improvements in local infrastructure, including repairs and construction for school buildings, sewer systems, medical facilities, water treatment plants, affordable housing, and community parks. The focus on infrastructure means that municipal bonds can often be identified as promoting so-called ‘green’ or ‘sustainable’ programs without the help of labels. Bonds issued to fund mass transit improvements, bike lane construction, or water management projects, for example, can generally be directly tied to projected emissions reductions or positive resource management outcomes.

Identifying municipal bond issuances that are socially beneficial can be more complex because the links between infrastructure projects and social benefits are often not as direct. However, the nature of municipal bonds – the fact that many municipal bond securities are obligated to local municipalities, utility service areas, and special districts around the country – gives them an intrinsic socioeconomic dimension. Municipal bonds, in other words, are unique in that they can be tied to both the projects they are funding and the local communities in which those projects are taking place.

This paper represents a deep dive into the $60B universe of socially labeled municipal bonds. We first discuss the history of social labels in the municipal bond market, the overall trends in issuance since 2018, and the benefits that some issuers have experienced, before turning to the socioeconomic characteristics of current issuers, granular information about the associated projects, and the shortcomings of these labels. Within the specific context of the municipal bond market, social labels may be less useful and informative than they initially seem – not because the labels themselves are incorrect or inaccurate, but because they are incomplete. Unlike corporate bonds, municipal bonds are associated with specific communities, and the potential impacts of different projects will depend on the characteristics and needs of those communities. The final section of the paper takes a step back, proposing a series of alternatives to social labels that could help direct low-cost capital towards the communities that need it most.

Executive summary