The proliferation of green bonds and the growing desire for environmental, social and governance designations on municipal securities is making it difficult for issuers to know what to disclose and when.
That was a theme raised by panelists at the Government Finance Officers Association’s 3rd annual MiniMuni Conference Oct. 20.
As the issuance of green muni bonds becomes more prevalent and ESG factors become more important to investors, issuers are being forced to reckon with how to go about explaining these dynamics to analysts and investors.
“ESG is more than just green bonds or ESG tags,” David Erdman, capital finance director, State of Wisconsin said. “The best practices that we’ve put out here in the last two years are addressing ESG disclosures and it’s not necessarily talking about disclosures that you need to do if you’re going to have a green bond,” he added. “So keep everyone in their lane.”
Erdman urged the audience to not confuse the terms “ESG” and “green bonds,” as a focus on ESG issues means one thing and issuing and marketing a green bond means something else entirely. His best practices don’t touch on specifics for green bonds or ESG labelled bonds, but rather, offer general disclosure rules for issuers of state general obligation bonds.
The National Federation of Municipal Analysts has established a working group for producing a checklist on green bond disclosures, which should be released for public comment by the end of the year.
GFOA is also working on developing green bond disclosure guidance, that should be out sometime in the next six months.
But as these products hit the markets, conversations with analysts become even more complicated, as they’re often eager to understand the direct benefits of a green or ESG bond.
“Anytime you start talking about ESG with investment bankers, they’ll want to go into what’s the benefit of doing a green bond, or what’s the benefit of doing an ESG bond?” Erdman said. “It’d be great if there was a benefit. That’s a different discussion.”
But still, providing analysts with adequate and timely disclosures about what could be affecting their green bonds or general ESG strategy, could help analysts and the wider market in the long run.
“An analyst’s responsibility is to assess risk to opine upon a municipality’s credit quality, to understand a municipality’s response to its challenges, and the impact those challenges have on their operations and finances,” Anne Ross, NFMA’s chair said.
“Analysts use your disclosures to ascertain the trajectory your credit is on and to compare and contrast one municipality against another,” she added. “Robust, timely and frequent disclosure enables buyers to decide how to best allocate their investment capital in both the primary and secondary markets.”
The emphasis on annual and interim reporting cycles, as evidenced in the Securities and Exchange Commission’s May 2020 guidance for COVID-19 related disclosures, are only becoming more and more important. That guidance, in the form of a joint statement from then-SEC Chair Jay Clayton and muni office Director Rebecca Olsen, described factors that could weigh in favor of issuers providing voluntary-good-faith disclosures to investors regarding the financial impacts of the pandemic.
Issuers like Erdman are still wrapping their heads around the market for green and ESG bonds. The focus then becomes what information to provide to investors and rating agencies for a more comprehensive risk assessment.
“What information do we have to disclose so that other credit analysts have the information they need in order to make a good risk assessment as ESG impacts municipalities and issuers in general?” Erdman asked.
The adoption of common language around these products could be one way to help issuers establish more common ground with other segments of the market, as noted in a recent Arizent/Bond Buyer Research Survey.
Following the popular guidance on COVID-19 disclosures from the SEC, many want the same type of guidance for ESG and green disclosures. But in a panel discussion last week, Olsen stated that there is nothing like that planned. Others don’t feel it’s necessarily the regulators’ responsibility to develop standards.
“Relying on regulators to provide universal ESG language is scary,” Erdman said. “Hopefully, they will let the industry work together to address that.”