"BNY Mellon has been helping apply capital to social change for more than 225 years. It began with a loan to a fledgling government undertaking a large social experiment: The United States of America and democracy. We continue to think about the potential for investments to enable positive change today."

    --Social Finance at Scale: Creating Value for Investors, BNY Mellon 2015

More and more, investors are coming to recognize the importance of integrating their values and social priorities with their financial goals.

“Social finance" is the term used to refer to investment activities that seek to generate financial returns while looking at the positive social and environmental impact of the investment. It has evolved to include a variety of investment strategies:

  • Avoiding exposure to perceived harmful activities using negative screens    
  • Using positive screens to incorporate investments with positive environmental, social or governance (ESG) characteristics    
  • Investing thematically in growing trends like robotics, aging baby boomers or clean energy    
  • Seeking equally strong performance on social and financial considerations through different forms of impact investing

Contrary to a common misconception in the market, a sustainable approach to investing does not necessarily mean sacrificing potential returns. At BNY Mellon Wealth Management, we believe it's possible to achieve investors' socially-minded goals while delivering competitive, risk-adjusted financial returns.

Our fixed income team has expertise in creating socially-sensitive portfolios based on an investor's specific values. The municipal bond market is a natural fit for social finance given the clear link between sustainability and credit risk. That's why we've expanded our platform for meeting the goals of those who want to proactively impact the local communities in which they invest by introducing our new Social Finance-Themed Municipal Impact Strategy.

Linking Sustainability and Credit Risk

Credit risk management is a central component of how we help our clients preserve their principal and generate a consistent level of after-tax income. We have long believed that borrowers who are responsible stewards of the community are more likely to demonstrate sustainable credit health and deliver more resilient financial and social outcomes.

Our rigorous credit-research process includes not only a thorough analysis of both traditional credit risk factors, such as economic trends or the financial health of the municipality, but also non-financial sustainability factors. We screen for material ESG factors that may impact a municipality's credit health and its ability to repay financial obligations.

Municipal Bonds: A Natural Fit for Impact Investing

"It is difficult to overstate the importance of the municipal securities market. There is perhaps no other market that so profoundly influences the quality of our daily lives."

--Luis A. Aguilar, Commissioner of the U.S. Securities and Exchange Commission Feb 13, 2015

The characteristics of municipal bonds make this sector an efficient and meaningful asset class for impact investing. After all, the purpose of municipal bonds is to fund essential projects and services that benefit our local communities.

These bonds come in the form of general obligation bonds (GOs) or revenue bonds. GOs are used for general government purposes, such as education and public safety. Revenue bonds are designed to finance specific projects, such as public infrastructure, health care, utilities and cultural centers. Both varieties of municipal bonds are used to provide public benefits and can have a material impact on social and environmental challenges such as poverty, resource scarcity and energy efficiency.

In addition to the public mission, the scale and diversity of the municipal market provide plenty of opportunities for investors, making the asset class an optimal vehicle for implementing an impact strategy. With $3.7 trillion in investable assets outstanding, the breadth and diversity of the municipal market is unlike any other.

A Differentiated Approach: The Social Finance-Themed Municipal Impact Strategy

To meet investors' growing desire to have an impact on their local communities, BNY Mellon Wealth Management has introduced the Social Finance-Themed Municipal Impact Strategy.

It's a customized portfolio of municipal bonds designed to meet an investor's social impact goals while generating an attractive, tax-sensitive return. What makes the strategy unique is that the security selection process is driven by a dual focus on both risk and impact.

We perform a top-down, strategic review of the key factors that influence bond returns and a bottom-up analysis that evaluates a bond's financial health—including its repayment sources, governance quality and any significant ESG factors. The result is a proprietary credit rating that we use to measure risk.

We then overlay a community impact assessment, which evaluates the environmental and social benefits of each security to arrive at a proprietary impact rating.

By combining both ratings, we can identify investment opportunities that have the potential to deliver both financial returns and a social/environmental impact.

Using the investor's specific financial goals, we can create a customized portfolio of social-finance oriented municipal bonds.

Exhibit 2 illustrates what a sample impact-oriented municipal bond portfolio might look like. It can include a range of investments, targeted to benefit a wide variety of community missions and services.  It can also be customized to suit the investor's bond maturity and credit quality preferences; minimums and maximums may be established for each.

As with any investment strategy, a disciplined and repeatable process is required to deliver long-term value. We believe that our fixed income team's research process, in-depth credit analysis and ability to assess a bond's value to the community will enable us to construct portfolios that satisfy an investor's social and financial goals.

Investing Aligned to Your Values

At BNY Mellon Wealth Management, our goal is to help clients successfully achieve their wealth objectives by aligning their investments with their values. We've long been an advocate of recognizing the importance of sustainability factors in determining credit risk, and have developed a more proactive approach that can meet investors' social finance needs. Building on our proven approach to evaluating and constructing high-quality fixed income portfolios; we have developed a new framework for rating the community impact of municipal securities. This innovative approach will ultimately help meet the personal goals of our clients while benefiting the local communities in which they invest.

  • Disclosure

    This material is provided for illustrative/educational purposes only. This material is not intended to constitute investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of all of the investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.BNY Mellon Wealth Management conducts business through various operating subsidiaries of The Bank of New York Mellon Corporation.©2016 The Bank of New York Mellon Corporation. All rights reserved.