Environmental, social, and governance (ESG) bonds are being offered by an increasing number of municipal bond funds. They might provide a fresh source of funding for financiers looking for responses to climate change.
Although climate change is frequently discussed as a global issue, it has a disproportionately negative influence on racial injustice and inequality in national and local contexts. These power disparities influence climate negotiations and worsen the global issue.
Climate change is the term used to describe the progressive variations in temperature and weather patterns brought on by modifications in how the Earth receives and releases solar energy. These changes are primarily caused by human activity, such as burning fossil fuels like coal, oil, and natural gas, which emit greenhouse gas emissions.
The blanket-like effect of these gases traps solar heat and raises temperatures. Moreover, they may restrict water availability, worsen weather patterns, and make it harder to raise food.
The number of exceptionally high temperatures is rising along with the global temperature. The likelihood of future increases in extreme weather events’ frequency and intensity is also very high, particularly in northern hemisphere places where warming is already taking place.
In many ways, the structural inequity that has afflicted humanity for generations is visible in climate change. The processes of wealth extraction that have harmed black communities and indigenous peoples are at the root of this disparity.
Also, this system is based on power dynamics that resemble those of colonialism and empire. Economic inequities that are intricately tied to the production and consumption of fossil fuels have been sustained in large part thanks to these systems.
These unequal power dynamics extend to local levels and are ingrained in the global economy. This is related to the fact that the majority of global emissions are produced by a small number of nations, primarily those who benefited from colonization. Because of this, the majority of countries—including fragile ones like small island developing states—are at the mercy of those who exploit the greatest resources and harm the environment. Hence, the argument goes, we must address these injustices if we wish to effectively combat climate change and address its core causes.
Municipal bonds are a terrific way to earn tax-free income, and high earners who wish to reduce their federal and state income taxes find them particularly appealing. But when investors sell their bonds at a loss on the secondary market or when they must pay capital gains taxes, some tax advantages may be lost.
Muni bonds are divided into two categories: general obligation (GO) bonds and revenue-backed bonds. GO bonds are backed by the general taxing authority of the municipal or state government, while revenue-backed bonds employ a specific source of revenue to pay interest and principal on the bonds. GO bonds are often less dangerous than bonds with revenue backing.
Ad valorem property taxes, which typically secure GO bonds, are not anticipated to decrease significantly during a recession. Yet, changes in consumer preferences or wider economic downturns are more likely to have an effect on revenue-backed bonds. Bigger states and localities may be more susceptible to decreases in their revenue streams since they depend more on sales taxes or other economically delicate sources of income.
Local governments issue bonds to raise money for public improvements like building schools, hospitals, and roads. Municipal bonds frequently offer tax-free interest payments and are thought of as safer investments than corporate bonds.
Investors should be aware that they face a variety of risks when it comes to municipal bonds, including inflation, liquidity, and credit risk. These dangers could have an impact on a bond’s pricing as well as its overall value.
Also, when towns must issue bonds because of the rising cost of finance, their cost of capital may increase. There are many reasons for this, including the price of the issue, interest rates, and the accessibility of new supplies.
Credit rating organizations can also influence the cost of bonds for a municipality, which can affect how easy or difficult it is for that community to raise money. Different racial groups may be affected differently by this, and it is common for people of color to reside in regions with higher loan issuance costs.
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