Two virtual roundtables exploring regional economies as they emerge from COVID-19 lockdowns also brought Breckinridge clients together with research analysts to explore relevant environmental, social and governance (ESG) issues. Roundtable discussions held during the first half of 2021 focused on ESG topics that were brought into sharper focus by the pandemic, ranging from environmental issues to unequal wealth, health and educational opportunities.

Breckinridge has long recognized the importance of ESG issues and their potential long-term impacts on the finances and credit fundamentals of municipalities. It has factored the ESG research findings of its corporate and municipal bonds analysts into security decisions for a decade. In the last few years, ESG integration in the investment process has gained broader attention across the asset management industry and, with the pandemic, ESG issues have assumed higher priority for many investors.

Massachusetts and Boston Focus: March Roundtable

Our March roundtable featured Senior Research Analyst Alriona Costigan of the Breckinridge municipal bond research team. The session was hosted by the Northeast Consultant Relations team: Aimee Korch, Director, Relationship Management, Ben Clough, Relationship Manager, and Sabrina Marasco, Relationship Management Associate. The program focused on the Commonwealth of Massachusetts and its underlying municipalities as they reopen their respective economies and contend with ESG challenges.

Referencing the effects of the pandemic, Alriona discussed how inequities became wider and more apparent during the pandemic across the U.S. and specifically, in Massachusetts. “Unfortunately, inequality has become more acute, with household net worth becoming increasingly divergent during the COVID period. That said, the public is more aware of inequality issues, which we believe could be the catalyst for more meaningful change. Efforts to address inequality will most likely be reflected via policymaking and budgeting. That said, while these actions could play into broader finances of a municipality and thus, credit quality, whether these efforts materiality impact credit quality remains an open question.”

The pandemic brought to light how divergent access to opportunities and resources can be for different people and communities. The majority of those who lost their jobs as the pandemic spread were lower wage workers, where a meaningful portion of their paycheck covers rent or other housing costs. “Lower wage workers are the fabric of the city and state’s economy,” Alriona said. “Without this segment, certain services and goods are not available. Therefore, it’s important that these individuals have not only access to employment opportunities, but also to housing.

She explained that Massachusetts appears to recognize the importance of equity and the need to address it through affordable housing. “Boston has one of the least affordable housing markets in the U.S.,” Alriona noted. “It has a median household income of about $71,000 and, according to Zillow, an average home value of almost $700,000. This is a key ESG challenge.”

She mentioned that In October 2020, Massachusetts created the Eviction Diversion Initiative, which is aimed to prevent evictions owing to the pandemic by providing emergency financial assistance and lower-cost legal aid options to low-income tenants and homeowners. Also in October, the Governor’s office announced its largest-ever annual commitment to affordable housing awards. As part of this, 2,400 housing units will be preserved, with 90 percent of units being made available to households making less than 60 percent of Area Median Income.

While equality remains a key challenge, Alriona mentioned that Breckinridge believes climate risk to be one of the biggest ESG risks for the Commonwealth and Boston, its capital city and economic hub. Buildings, transportation systems and general infrastructure all stand to be impacted by sea level rise, which by extension, can be detrimental to residents, the economy and the long-term credit strength of the city. Boston’s sea-level-rise threat is heightened by the fact that roughly 50 percent of the city and many of its low-income neighborhoods are built on low-lying landfill. This means rising sea levels can impact a greater part of the city and can result in more physical and monetary damage.

Alriona explained that the city in 2020 dedicated roughly $30 million a year to address climate resiliency broadly including sea level rise, representing 10 percent of the city’s five-year capital budget. As part of this initiative, Boston will look to reinforce vulnerable areas, including a plan to raise one neighborhood’s Main Street by two feet.

Projects also are in development to address sea level rise and flooding vulnerabilities in Greater Boston’s public transportation system artery and to retrofit existing spaces for better protection. “We believe sea level rise is a serious risk facing Boston,” Alriona said. “Left unchecked, it can impact the underlying credit and fiscal strength of the city over the longer-term. In our opinion, Boston has demonstrated the political will to address it and to develop concrete strategies to tackle it.”

Sunbelt States: June Roundtable

In June, Director, Relationship Management, Mitchel Syp and Relationship Management Associate Matt Mitchell hosted Senior Research Analysts Robert Azrin, CFA, and Timothy Daley, both of the municipal research team. The discussion centered on the Sunbelt States with particular attention to Florida, Georgia and Texas.

During the conversation, the participants agreed that extreme weather events can drain a municipality’s finances over the longer-term and that a focus on climate change and environmental considerations related to infrastructure are likely to be at the forefront for years to come.

Breckinridge looks at a range of environmental and climate change threats facing municipalities and state including sea level rise, flooding, extreme heat, water stress and hurricane threat. Rob explained that analysts integrate third party data with their own research to identify municipalities that have the greatest exposure to physical climate risk. “We then dive into how a municipality or state is tackling these challenges,” he said, “including planning their conduct and actions they take to address risks.”

“Climate risk is the most significant ESG risk facing Florida and some of its largest metropolitan areas, in our view,” Rob added. “Sea level rise and flooding threaten transportation systems, residential and commercial real estate and infrastructure, including utilities. If these risks are not managed, flooding could have long-term negative ramifications for residents and businesses, the local and state economies and long-term credit quality. Extreme heat and increased severity of hurricanes also pose challenges.” He said that Breckinridge analysts have conducted engagement meetings with state and local government officials over the past few years, including a meeting with the state’s acting Chief Resilience Officer in 2020.

Tim provided insights into similar climate-related risks confronting Texas, including flooding and hurricanes along the coast, as well as heat and water stress. Hurricane Harvey highlighted the risks along the coast, and a February 2021 winter storm that crippled power in several areas emphasized the importance of improved resiliency planning.

Tim noted that the State of Texas does not have a formal sustainability plan, although cities like Austin and Houston do. Similarly, neighboring Georgia does not have an office of sustainability or resiliency, while some local governments like Savannah and Atlanta have created formal positions and plans. “As, Rob emphasized, some local governments are doing more but could use more help from their states.”

Rob and Tim also shared a view that inequality and social issues are ESG risks that were elevated during the pandemic and remain so after 2020. Both analysts acknowledged that many factors can influence the future growth of a community and its credit quality, and that addressing ESJ issues while important, may not be sufficient in and of themselves, to promote long-term credit health.

They explained that Breckinridge account for unequal wealth, health and educational opportunities in ESG analysis, but challenges exist in the municipal space given data on such topics is not always robust or consistently reported. “Unfortunately, inequality has become more acute,” Tim said, “with household net worth diverging significantly during COVID.

“In our frameworks we review income inequality metrics and we review what actions states and municipalities are pursuing to equal the playing field,” Tim said, “including efforts focused on related to housing affordability and public safety.”

The small-format virtual roundtables Breckinridge hosted were launched as the firm sought to develop new avenues for interacting with clients during the pandemic-related restrictions on travel and meetings.

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