Pivoting to Build a Better Future

October 19, 2020
ESG Perspective and Insights
By Matt Davis, Director of Tax Credit Investments

The ability of corporations to efficiently raise capital is a cornerstone of our economy. The orderly transferal of risk from buyers and sellers, from lending institutions to asset managers and insurance companies, helps ensure that our economy can continue to function and grow. I spent over 20 years of my career proudly supporting this effort. 

For a variety of personal and professional reasons, I have recently made a meaningful pivot in my career to focus my efforts toward the developing field of ESG impact investing. Joining Monarch Private Capital has afforded me the opportunity to be a part of a great team at an established, fully integrated, best in class tax credit firm. Tax credit investing (also known as tax equity investing) enables companies to appreciably boost their ESG performance. But to better understand where I am now, it is worth reviewing the remarkable growth and sophistication of the corporate bond market I have left.

Corporate Bond Market Growth

Consider a few anecdotes that illustrate the incredible forward progress that has occurred over the last 25 years in the world of investment grade (IG) credit. In 1995, if an asset manager or insurance company had a list of corporate bonds for sale, they would fax that list to a number of broker-dealers seeking bids. Once those faxes were returned, trades would be awarded to each broker-dealer line item by line item. An enormous amount of energy had to be devoted to price discovery and execution. 

Today, large, complex lists of corporate bonds can be sent to 50 dealers via electronic trading platforms, like Market Axess or TradeWeb, and executed in minutes. The IG corporate bond market is incredibly liquid, and this is a tremendous positive for investors and borrowers alike. Corporate borrowers now know with confidence the price where they can raise capital. Investors are able to trade, price and manage their corporate portfolios confidently. The last 25 years have seen massive advances in market liquidity, transparency and scale. Now, on any given day, over $20 billion in corporate bonds change hands in secondary market trading. Figure 1 illustrates the growth in average daily trading volume.  


Figure 1. US Corporate Bond Trading Volume, October 1, 2020. Data from SIFMA.

The evolution of the corporate bond market has also been hugely beneficial for corporate borrowers. In the 1990s, the largest IG corporate bond underwriting was $500 million. Today, corporations can borrow billions of dollars across multiple maturities in one day. Earlier this year, for example, Boeing successfully raised $25 billion in the new issue market. Figure 2 illustrates growth in total IG corporate issuance. 


Figure 2. US Investment Grade Corporate Issuance. Data from Bloomberg.

The capital markets have grown for many reasons, including technological innovation, increased transparency and persistently low-interest rates, enabling the size of the new issue market to grow materially. A look at the largest IG corporate bond issues in Figure 3 clearly illustrates the scale, growth and depth of this robust and critical cornerstone of our nation’s capital markets.

Products with Environment and Social Benefits are Surging

One growing component of the corporate market offers a convenient transition relating to my move to the tax credit market and ESG investing. The Green Bond market has been a relatively small corner of the U.S. corporate universe, but it is experiencing strong growth over the past few years. A green bond specifically identifies its use of proceeds for climate and environmental projects. Corporations are increasingly in tune with their impact on our environment and accessing the capital markets to fund efforts to improve their carbon footprints will continue to grow. We can see two things from the data in Figure 4 – how much green issuance has picked up in the last few years and how much room there is for growth relative to the scale of the overall debt capital markets. 


Figure 4. Domestic Green Bond Issuance. Data from Bloomberg.

Tax Credit Equity Funds are Inherently Green

The tax credit market provides a unique opportunity for investors to advance their ESG and impact investing agendas. The tax credit market is actually very mature, with the Low Income Housing Tax Credit (LIHTC) program being established in 1986. A new and exciting development in the space is the broadening awareness of something that has been evident all along: tax credit programs are incredibly efficient ESG investments. When an investor chooses to make a tax equity investment, they are actively choosing to repurpose their tax payments towards qualified projects that also meet their ESG and impact investment goals. Right now, the entire tax credit market is about $25 billion per year. Recall that $25 billion is a fairly typical volume of IG corporate debt traded in a single day! Figure 5 illustrates the current size of the tax credit market across renewables, affordable housing and historic.


Figure 5. Overview of the major tax credit programs Monarch participates in and Monarch’s Estimate of the market size.

Investors have begun to square the circle when it comes to tax credit investing. As investors search for green opportunities, the awareness of the tax credit market to further that agenda is growing.

Our Impact is Quantifiable

I look forward to helping promote and develop renewable energy to combat climate change, add affordable and safe housing to our communities, enable more people to have a chance at achieving the American dream, and save and refurbishing architecturally significant structures. ESG benefits derived from tax equity investing is also subject to empirical verification by ESG ratings agencies. Tax equity investing also has the virtue of providing far more predictable financial returns than other direct ESG investments, making tax equity investing a far more conservative alternative for achieving corporate ESG goals.

I used to measure myself by my production in metrics such as sales credits, commissions, and ranking with clients. Now I look forward to measuring my progress in terms of megawatts of clean energy added to the grid, the number of affordable housing units built for those in need and the number of historic structures saved and reborn for use by a new generation. Monarch Private Capital’s ESG investing has provided me a fantastic platform to achieve this agenda.

For more information, please contact Matt Davis by emailing mdavis@monarchprivate.com.

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