There’s an unusual opportunity in the municipal bond market for sustainable and conventional investors alike today, according to Steve Liberatore, head of ESG/Impact for global fixed income at Nuveen. It lies in so-called green bonds, whose proceeds are targeted toward environmental themes, such as building solar generation, or bolstering the efficiency of power generation and transmission. Liberatore says that even as munis have sagged amid stepped-up bond issuance, green bonds and their relatively safe cash flows look attractive.
Green bonds have a market value of around $2.9 trillion globally. They’re issued by a variety of entities, including corporations—not just municipalities. But they’ve been overlooked, partly because of the disdain for environmental, social, and governance approaches and outflows from sustainable equity funds. The Trump administration has taken an antagonistic stance toward renewable energy and called the future of the Inflation Reduction Act into question. Yet Liberatore believes the outlook for renewable energy (a focus of many green bonds) remains bright.
Over the years, he says, “the rapid growth of the green bond market has come with an ever-increasing diversification of issuers and funded projects. As a result, there are attractive opportunities across the ratings spectrum and up and down the capital stack that could align with any investor’s risk/return parameters.”
Liberatore helped write the Green Bond Principles of the International Capital Markets Association. He manages more than $21 billion in assets, including the Silver-rated Nuveen Green Bond Fund TGROX, the Bronze-rated Nuveen Short Duration Impact Bond Fund TSDBX, and the Nuveen Core Impact Bond Fund TSBRX. To learn more about his views, read the following condensed, edited excerpts of his recent conversation with Morningstar.
Leslie Norton: Tell us about your recent experience navigating the markets.
Stephen Liberatore: With this type of market environment, you have to take the macro out and say, ‘We’re not really sure where we’re going and what the strategy is.’ We have a slowing economy with ugly forward-looking data, a not-great consumer environment, and concern about tariffs and immigration policy. A multisector bond fund generally gives you four different high-level levers to pull for performance: duration, asset allocation, security selection, and intraday trading. You don’t want to be short duration, because if the economy really slows down and takes inflationary pressure down, that would lead to the Federal Reserve cutting rates. So how do you position your neutral duration? You look for points that you know. I think the Fed’s a little more hawkish than the market gives it credit for. So you price a little flat around the yield curve.
Then you go back to asset allocation and security selection. We’re looking for sectors and securities that have more stable cash flow profiles, domestically focused industries that are less impacted by international trade. Because of the volatility, when the market is ripping higher and liquidity is great, we’re selling. When the market is softer and you’re seeing spreads widen, we buy. To use a baseball analogy, it’s a singles-and-doubles-type year.
Norton: Let’s pivot to green bonds. We’ve had a muni market downturn. Is this a good moment to be considering green bonds, or is there more weakness ahead?
Liberatore: In the muni space, we’ve had a very interesting period. Green bonds are a subset of labeled securities bonds, which earmark proceeds for specific environmental or social projects. Their issuance across fixed income is at or close to the pace of issuance last year, except for US corporates, which seem to be struggling with the focus of the administration. Corporates are still funding the same underlying projects, they’re just not issuing labeled bonds. In other sectors—Yankees, structured securities, mortgage-backed securities, asset-backed securities, international super sovereign issuers, NGOs—you still have issuance.
The noise around ESG outflows is on the equity side. Fixed-income continues to see inflows. Green bonds, and labeled bonds in general, are a more and more important factor in the fixed-income space. There’s a growing buyer base. It is longer-term focused. Munis are a great example. We continue to see very good opportunities, very attractive opportunities that are very diverse, not only from an issuer perspective but from what they’re funding. These structures are less correlated with the rest of the bond market.
Norton: How have green bonds fared during this muni downturn?
Liberatore: There have been a few basis points of outperformance because demand for that paper is a little bit higher, and you tend to get more of a crossover buyer like ourselves. After US tariffs were announced April 2, spreads for taxable munis widened less than corporates. For the broader municipal market, they’ve performed in line, and the underperformance is because of issuance, volume related. The overhang of additional supply will work itself out.
You’ve seen an increase in demand for more stable, less risky types of investment paper. We’re not the only ones who are thinking about being more neutral in terms of risk, or maybe upping quality. Generally, general obligation munis or essential service debt is considered less risky. So in environments where volatility increases, people look for more stable investment options. At the same time, you have a situation where, because there’s been so much issuance in the muni space, and it’s underperformed, the spreads look relatively more attractive than corporates.
Norton: Give us some examples of green bonds that you own.
Liberatore: In the Nuveen Core Impact Bond fund, one example is the Hanwha Qcells 4.65% bond, maturing in 2029, to finance the construction of a new 3.3-gigawatt solar panel manufacturing facility in the state of Georgia. It will be located near another Hanwha Qcells plant that opened in 2019, even before the Inflation Reduction Act, to manufacture 1.7GW modules but recently expanded to 5.1GW capacity. Together, the two facilities will be a significant driver of energy transition manufacturing in the southeastern US.
In the Nuveen Green Bond fund, another example is the Climate Investment Funds Capital Markets Mechanism 4.75% bond, due in 2028. This was the inaugural issue of the Climate Investment Funds, formed for the sole purpose of issuing bonds to raise proceeds to finance the Clean Technology Fund. The CTF in turn provides resources to scale up low-carbon technologies in low- and middle-income countries.
Norton: Are green bonds only for sustainable investors, or for conventional investors too?
Liberatore: They are for all investors. A green bond is in its simplest form a security whose proceeds have a direct and measurable environmentally positive outcome, like a clean water project or a renewable energy project. These are long-lived projects that take a long time to come to fruition but obviously have benefits that you can see and measure, that generally have a stable cash flow revenue to repay the debt. That stability is attractive to investors.
Norton: What’s the longer-term thesis beyond the current attractions?
Liberatore: Our framework is that the environment impacts society, which impacts the economy. If a place doesn’t have good water, people don’t want to live there. If you modernize your water system today, it will be cheaper to operate in the future. That will result in more manageable, more stable water bills over time, translating into greater likelihood that your customers can pay the bill and that the utility will repay you as a bondholder.
So when we think about investing in green bonds, we’re ultimately thinking about how the deployment of capital translates into more stable free cash flow, which then relates to the issuer’s ability to repay us as a lender. That’s how we outperform. It’s not in picking winners, which is the equity market. It’s in avoiding losers because we’re an asymmetric payoff asset class.
Norton: This administration has been antagonistic to the energy transition, and the IRA’s future is in question. What does this mean for the energy transition and green bonds?
Liberatore: At the end of the day, we’re transitioning to renewables not because of environmental benefit, but because it’s simply cheaper. Taking solar and wind. According to Moore’s Law, the cheaper they are, the more efficient they become, the cheaper to produce. Those principles will continue regardless of what other things occur policy wise. How do you meet growing demand? You look for availability and cost. Renewables are simply the cheapest, fastest way, especially paired with various forms of storage.
Right now, you have a three-year backlog for natural gas turbines, versus two years for hybrid solar and one year for wind. The cost of batteries is declining pretty rapidly. You’re seeing the introduction of other types of storage, like pumped hydro. We’ll see the removal of high-cost generation, and replacement by low-cost generation, continue. The likelihood is that it’s fossil to renewable until we have a nuclear fusion breakthrough. Until then, it seems most likely that for most developed countries, the power grid will be renewables with some form of natural gas involved, purely driven by cost and accessibility.
Norton: What does the green bond market look like for energy transition?
Liberatore: For corporates, the vast majority of green bonds will be renewable energy projects. Within munis, there’s a decent amount of renewable projects, but also a more diverse universe that might include, say, solar panels on water treatment facilities. Conservation projects are also becoming a factor in green bonds, such as blue bonds that finance projects around marine and ocean conservation.