Since 2015, Activest has been a leading voice in acknowledging the materiality of Fiscal Justice™ in municipal finance. Fiscal justice is Activest’s multilayered, critical analysis of the equity of municipal budgets—measured at the intersection of fiscal health and racial justice. Our research demonstrates that cities realize stronger fiscal outcomes when they prioritize the well-being of their most marginalized residents.
A 2022 academic study out of The Wharton School of the University of Pennsylvania, a leader in business and financial studies, has incorporated Activest’s research to develop a predictive model for municipalities’ fiscal justice risks. The study, which examines over 10 years of data from close to 3,000 U.S. counties, quantifies their contribution to structural racism and the increasing costs of over-policing and shrinking revenues—among numerous others. “Local governments differ in the environmental and social outcomes they provide their residents, such as rates and distribution of toxic emissions, incarceration, and health outcomes …The distribution of [ESG] performance across their constituents and these differences are material for investors,” the study states.
Fiscal justice is a measurable financial risk. The study concludes that, “Of particular substantive importance are a set of factors related to racial justice including inequality in racial exposure to toxic waste, expenditures on public safety, and inequality in housing prices.”—all of which are indicators within our Fiscal Justice™ methodology.
Additionally, the study noted other academic research that confirmed that Historically Black Colleges and Universities pay a premium though they pose no additional financial risk, “Recent research on investor biases with respect to race, by Dougal et al. (2019), found evidence that historically black colleges and universities (HBCUs) pay a credit premium unrelated to their underlying credit quality—which is further exacerbated in the Deep South.”
Below are some of the key material findings from the UNPRI blog post and full manuscript* ( as direct quotes and summaries) written by Christopher Bruno and Witold Henisz at the Wharton School:
ESG factors do associate with municipal bond yield.
“ESG factors led to predicted differences in credit yield of approximately 5 to 30 bps over five-year periods (1.9% to 11.5% of average yield to worst).
A long-term focus on the benefits of investments in ESG issues for current and potential residents should be rewarded by investors concerned about a municipality’s fiscal health and strength. The theory, main results, and supplementary analyses holistically suggest that investments in affordable housing for underserved populations, the clean-up of toxic waste that disproportionately affects such groups, reduced reliance on revenue sources that penalize these groups and on expenditure sources that treat social tensions primarily as a safety issue for the advantaged instead of addressing root causes of tension are not only philanthropic or ideological. They offer good economic investments. Issuers who deliver on their ESG-related use of proceeds could be recognized for this in future transactions, not just via the issuance of more affordable green bonds, but also in the pricing and performance of every municipal bond.”
Public safety expenditures and inequality in housing & in the population near toxic emission facilities correlate with increased credit risk.
In the main results, the variables related to age-adjusted mortality rates, inequality in exposure to toxic facilities, and direct public safety expenditures related to the highest amount of increased risk (yield) in the future (t+5). In a supplemental analysis of more counties, inequality in housing is also related to higher yield in the future (t+5).
Higher revenue from fines and forfeits is often an indicator of unfair practices.
“[I]nequality in these outcomes can be a source of conflict and unrest within a community—this too can affect a region’s viability as a place to live. It is therefore important to recognize ESG outcomes and inequality in ESG outcomes in an analysis of the credit risk of municipalities….fines and forfeits revenue, and public safety expenditures, as well as inequality between Black and White residents in housing values, population near toxic facilities, mortality, incarceration, and poverty. Governments with higher revenue from fines have higher ratios of Black residents (Sances and You 2017). Revenue-driven law enforcement distorts police behavior and decision-making, altering the quantity, type, and racial composition of arrests (Makowsky, Stratmann, and Tabarrok 2019). For example, the Ferguson, Missouri police department was known for racially discriminating revenue-generating practices that derived over 20% of the city’s revenue from fining residents.”
Check out a Wharton-authored blogpost on UNPRI summarizing some of the study’s findings on ESG factors in municipal finance.
*Study is has not yet gone through journal peer review and thus figures are preliminary