Chicago is a city still notorious for the junk-bond status it finally managed to shed last year. But earlier this year, investing as little as $1,000 of their own savings, a new crop of municipal bond investors helped Chicago open a new chapter of its municipal bond history.
In some ways, the bond offering was similar to any other Chicago municipal bond offering. The city borrowed $160 million dollars from investors, and the city repays investors over time, plus interest, using local tax revenues (in this case local sales tax revenues).
These bonds are specifically funding a set of projects that were already on the City of Chicago’s to-do list as part of its post-COVID recovery plan — planting 15,000 new street trees in historically disinvested neighborhoods over the next three years, converting motels and single-room occupancy buildings into housing for people and families transitioning out of homelessness, grants to community and economic development projects on the South and West Sides of the city, and even replacing the city’s fleet of gas-powered vehicles with electric vehicles.
The new wrinkle here is in the marketing — both the kind of investors the city courted and what it told them.
Many of the bond investors in this offering were local. For these bonds, the city gave Chicago and Illinois residents priority over other investors (the city received $165 million in offers to buy $160 million in bonds, meaning some investors from outside Illinois were turned away). Typically the minimum investment in Chicago municipal bonds is $5,000, but for the purposes of reaching local individual investors, the city lowered the minimum investment for this offering to $1,000.
“We were very interested in maximizing retail participation, and in particular, Chicago retail participation so that Chicagoans can invest in their own community,” says Jennie Huang Bennett, chief financial officer for the City of Chicago. Her office tells Next City that 92 out of an estimated 200 investors in this offering invested less than $25,000, including 10 investors who invested the minimum of $1,000.
More importantly, this offering was Chicago’s first-ever “social bond” issuance, meaning the city didn’t just rely on financial returns to attract investors. Instead, the city explicitly marketed to investors who were as much if not more interested in the positive social impact of the dollars they invested in the bonds. They’re also known as “ESG” investors.
ESG stands for “environmental, social and governance,” and the acronym has become a shorthand for investment strategies that attempt to account for those non-financial factors when picking investments to make. With few exceptions, ESG investors have typically not been municipal bond investors. Until recently.
“We did see more investors come in,” Huang Bennett says. “Specifically, the $88 million dollars from ESG investors represented an expansion upon our existing investor base.”
More and more cities like New York and Chicago have started marketing bond offerings as social bonds or in other cases green bonds or sustainability bonds. Investment rating agency S&P predicted such ESG-targeted municipal bond issuances would surpass $60 billion in 2022, up from $46 billion in 2021.
Prior to these last few years, ESG investors mostly had only large private sector investment options — either stocks or bonds issued by large corporations that track and report on their positive social impact on the world. Various firms have emerged over the years to provide social impact ratings for corporations. But recent reporting has exposed some of those ratings to be so badly flawed that a lot of ESG investing may be little more than a marketing gimmick for professional money managers looking for higher fees.
Despite the emergence of such issues in ESG investing, momentum continues to build behind the idea. One recent report from accounting giant PwC predicts ESG investment portfolios in the U.S. will more than double from $4.5 trillion in 2021 to $10.5 trillion in 2026. Another report from Deloitte predicts ESG investment will include half of all professionally managed investment portfolios globally by next year.
In some ways municipal bonds were the first ESG investments, in the sense that they’ve always purported to have some kind of public benefit as a result of funding public sector activity. The first municipal bond in the U.S. was issued in 1812 by New York City to fund the construction of the Erie Canal.
But, as historian of capitalism and racial inequity Destin Jenkins details in his book “The Bonds of Inequality,” access to municipal bond financing was also carefully controlled so the positive impacts they produced were often limited to white communities, while Black or brown communities were denied the same — or worse yet they could be directly displaced by the projects that municipal bonds financed.
A small but growing slice of ESG investors does believe that municipal bonds can and should be a tool to promote racial justice instead. Adasina Social Impact, a Queer Black woman-owned investment advisory firm, has a partnership with Black-led racial justice investment rating agency Activest to bring investors interested in racial justice into the municipal bond markets.
As I’ve detailed previously, the Adasina/Activest approach is two-pronged. On the one hand, by investing in bonds issued by cities that rely too heavily on predatory policing or other tactics that disproportionately harm Black communities, they want to use their position as bond investors in those cities to discourage such tactics. On the other hand, they also want to invest in municipal bonds that have some degree of explicit racial justice intentionality in the projects they finance.
Chicago’s social bonds are one example of curating a set of projects with at least some intentionality around racial justice. Huang Bennett’s team started out last year by looking at the $1.2 billion Chicago Recovery Plan, which lists more than 30 projects or programs that the city plans to fund using a combination of recovery dollars allocated from the federal American Rescue Plan Act (ARPA), combined with some bond financing.
The City of Chicago’s finance team then also spent time talking with ESG investors around the country to get a more refined sense of investment factors that would generate the most interest.
“Before we started to structure this bond issue, we talked to the top ESG investors in the market and we asked them what are the type of characteristics that you want to see in a bond issue,” Huang Bennett says. “The number one thing we heard from all of them is the ability to track impacts out of the projects that are being financed and the use of proceeds.”
ESG investors also told the finance team they wanted to see potential impact beyond a certain substantial scale. Items in the Chicago Recovery Plan that didn’t meet that threshold will likely be financed using ARPA dollars or a later bond issuance that wouldn’t necessarily be targeted at ESG investors.
After all that, the finance team narrowed down the list to seven projects included in the Chicago social bond offering documents. Notably, those documents include maps showing where the city’s priorities have been for each type of project. For example, the map for the city’s plan for 15,000 new trees yearly until 2026 shows that the city’s tree planting over the past several years has prioritized the historically disinvested South and West Sides of the city. The map for vacant lot redevelopment shows that the city’s vacant lots for sale are concentrated in those same areas. The map for community development grants is more widespread but shows clusters on the South and West Sides.
“The broader Chicago Recovery Plan has a strategy for clustering, where appropriate, so that you’re not just doing one investment in one neighborhood that doesn’t survive because it doesn’t have all of the other investments that need to go with it to then transform that neighborhood,” Huang Bennett says.
In another remarkable turn of a new historical page for Chicago, ESG investors called for something Chicagoans have long desired to see more from their city government: transparency and accountability for how the city will use the dollars it is borrowing, upfront and on an ongoing basis.
The social bond offering documents also list some, but not all of the potential social impacts that go along with each of the seven projects. Under community development grants, for example, the city promises to report back to investors on the number of businesses served, dollar amounts per grant, projects completed and locations of each project. The city has committed to voluntarily reporting on these metrics annually to social bond investors until all the bonds are repaid.
“One of the things that I think is the hardest for a municipal issuer is going through the work of developing an ESG bond issue, which is not insubstantial, especially when you consider the level of impact reporting that’s required to do if you if you commit to doing that on an annual basis, over the life of the bonds,” Huang Bennett says.
Huang Bennett also sits on the board of directors for the Municipal Securities Rulemaking Board, the main regulatory body for the $4 trillion municipal bond market. The MSRB has started looking into possible opportunities and barriers between ESG investors and municipal bonds — even amid the backlash against ESG investment from some lawmakers.
Having new investors competing to buy municipal bonds can even help drive down the cost of financing in this new, higher-interest rate environment. In this social bond issuance, ESG investors helped the city of Chicago save around $500,000 in interest paid over the life of these bonds.
“We know that it’s an evolving market,” Huang Bennett says. But with the new investors helping reduce the overall interest charged, “we were able to benefit from that through the three to five basis points over the non-ESG financing.”
This article is part of The Bottom Line, a series exploring scalable solutions for problems related to affordability, inclusive economic growth and access to capital. Click here to subscribe to our Bottom Line newsletter.
Oscar is Next City's senior economic justice correspondent. He previously served as Next City’s editor from 2018-2019, and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for media outlets such as Shelterforce, B Magazine, Impact Alpha and Fast Company.