It’s important that impact investors know how to measure impact across all investments, including muni bonds issued by governments and nonprofits. This important but often overlooked segment includes bonds from three sectors: state and local governments, healthcare, and education.
Most investors have choices when investing for impact in the for-profit portfolios through publicly listed companies and mutual funds, including their 401(k) or 403(b) choices. In our feature on Impact Companies, we included firms on the S&P 100 and showed how investors can allocate their portfolio using impact scores of Environmental and Social Governance (ESG) indicators. Investors can use a similar methodology to measure, rate, and allocate portfolios to muni bonds – and their associated human, social, and environmental impacts on citizens and beneficiaries.
The Mechanics of Muni Bonds
Governments tax citizens, and nonprofits collect donations. In addition, both can issue Municipal Bonds, as described in our post on governments and nonprofits delivering impact for investors, to fund critical infrastructure development. The Municipal Securities Rulemaking Board (MSRB) seeks to protect investors, municipalities, and the public interest by publishing information on municipal securities through an online tool EMMA - Electronic Municipal Market Access. Investors can find information using unique identification numbers of each muni bond, also known as CUSIPs (just like Ticker Symbols for stocks). Muni bonds can cover durations up to 30 or 40 years, and generally the interest paid to investors is tax-advantaged.
A Closer Look: Measuring Impact in Three Sectors
The top three sectors muni bonds include healthcare, education, and state and local government. In the following sections, we’ve outlined specific ways you can measure impact for each of these sectors.
Healthcare
Today, patient satisfaction with doctors, nurses, and hospitals is tracked and reported through avenues such as U.S. News and World Report's rankings of Best Hospitals. Our team analyzes hospital systems on their medical outcomes and patient performance. Doing so also links to the financial risks and returns of those issuers, as patient referrals and retention affects reputation and revenue. The Medicare Hospital Compare Tool can also provide signals about problems with patients that may cause higher costs.
Education
Graduation rates, test scores, and student-to-teacher ratios are important measures of results for education systems. In primary schools and K-12 school districts, these metrics suggest likely academic performance. School districts with higher test scores are more prevalent when class sizes are smaller, according to HIP’s analysis of more than 320 K-12 school districts. Families seek out high-performing school systems, which are funded both by city or county revenues, as well as with muni bonds.
When analyzing school districts, another indicator of impact is whether the school district board reflects the diversity of the local population, which more closely links the decision-making to the community. Similar to the myriad studies indicating that diverse corporate boards lead to higher returns, the same thesis can be applied to education. For example, if the board of a school district in a border town in Texas is made up of all white males, its decisions may not be appropriate for the students it serves, which could affect the bottom line and future performance at the school district.
State and Local Governments
US census data tracks many of the ways that cities, counties, and states serve their citizens. We’ve found a few indicators that, if measured, can help determine the effectiveness of state and local governments.
All of these metrics help impact investors understand how competitive a state or locality might be – to attract citizens to a high quality of life and build a strong foundation of home ownership and income growth. In an era of increased risks of municipal bankruptcies, impact metrics can provide an early indicator.
Want to learn more about the impacts of governments and nonprofits and their muni bonds? HIP Investor teams with SNW Asset Management to help investors find attractive, impact-focused portfolios that both benefit society and pursue investor goals of income and impact. Get the latest by following the market updates on the SNW blog.
And finally, when pursuing a career in public service, seek out governments and nonprofits that are metrics-focused to help them accelerate and develop expertise in constructing meaningful impact measurement systems that link to financials.