Atlanta plans more ESG deals amid skepticism from Georgia state officials

Atlanta officials are eyeing more ESG deals in the years ahead after the successful sale of the city’s first social bonds last month, undeterred by a growing opposition from Republicans in the state government to the use of public funds for what they call “woke” investments.

Atlanta’s first social bond issuance in early November received $1.2 billion in priority orders for $410 million of general obligation bonds, city officials said.

Of that, a $366 million tranche carried a social bond designation from Sustainalytics. The GO bonds carried ratings of AA-plus from Fitch Ratings and Aa1 from Moody’s Investors Service.

“We were happy about the reception we received in the market and the oversubscription for this offering,” Treasurer Courtney Knight said. “We wanted to do with this inaugural social bond offering to be very deliberate about the framework.”

To decide where those funds would go, city agencies combed local communities before the deal, Knight said, and sought out needs across mass transit, road and bridge infrastructure, parks, museums, and art centers that resulted in a ten-year master plan.

“We went through that list and talked extensively with our operating departments and quickly recognized that there had been a yeoman’s effort at identifying and prioritizing projects serving communities throughout the city,” Knight said. “We understood very quickly that we had the elements of what would be a social bond.”

Municipal bond issuance to meet environmental, social and governance considerations is growing amid increasing demand from investors.

A data-driven process that ensured those projects met or exceeded industry standards for ESG designation helped make the deal less assailable and “much more difficult to politicize,” Knight said of Atlanta’s deal, especially important as opposition to the entire ESG concept mounts from officials in the Republican-controlled state government.

Criticism of ESG investing principles is an increasingly popular dog-whistle Republican elected officials use to motivate their right-wing base voters using words like “woke” as insults against policies and people perceived as liberal.

On the state level, Georgia is a red state — albeit narrowly. GOP Gov. Brian Kemp was re-elected in November with more than 53% of the vote, though in the Senate race, Republican candidate Herschel Walker, dogged by controversy, couldn’t pass 49% either in the November general election or December runoff, and Democrat Raphael Warnock won the seat. But Atlanta remains solidly in Democratic hands.

Attorney General Chris Carr is perhaps Georgia’s most vocal ranking official setting sights on public funds and ESG investments and has continued to pursue measures on the state-level to keep public funds out of the ESG markets.

Carr, reelected in November with 51.9% of the vote, has called for a divestment of public interests from all things ESG-related and joined fellow Republican officials in other states trying to bar public pensions from “woke” investments and ban government entities from doing business with banks that apply ESG criteria to investment portfolios.

This month, he also led efforts calling for a rollback of federal regulations that have helped bolster ESG investing, penning a brief signed by the attorney generals of Alabama, Arizona, Arkansas, Idaho, Indiana, Louisiana, Mississippi, Oklahoma, South Carolina, Tennessee, Texas, Utah and West Virginia and filed with the U.S. District Court in Eastern Texas that states their opposition to certain authorities granted to the Consumer Finance Protection Bureau that allow for the “investigation and punishment of all acts of supposed discrimination,” according to the legal action.

“Unfortunately, this behavior is typical of a recent federal executive practice: undertaking major policy changes through agency action rather than the constitutionally prescribed legislative process,” the brief said, adding federal authorities have “aggressively moved to enforce climate-related disclosures and other policies on regulated entities.”

In the suit, Carr said certain powers granted under the 2008 Dodd-Frank Act are now being pushed past constitutional bounds in pursuit of social and environmental causes, including authority allowing federal watchdogs to inquire into ESG disclosure practices of municipalities, impose “the ESG framework” on large financial institutions, and encouraging retirement fund managers and other stewards of public funds to “make investment decisions that reflect climate change and other ESG considerations instead of maximizing financial return.”

He is one of a mounting number of state GOP officials seeking similar changes to their state’s ESG-related investment practices.

According to research published by law firm Morgan Lewis seventeen states have passed or proposed anti-ESG legislation in the last year, and in many more local officials are mulling codifying such regulations in light of a growing demand “for investments that match certain political or policy beliefs.”

In a commentary published in October, the libertarian-leaning think tank Reason Foundation highlighted among other things what it called continuously shifting criteria for ESG by rating agencies, major banks, and pension fund managers that force those parties to “ignore their fiduciary responsibilities in favor of politically-motivated investing.” Reason, long opposed to defined benefit pensions for public employees, recommended state and local officials examine alternative plans.

Greenwashing, or the act of false advertising or exaggerating the ESG aspects of investments to attract investors or take advantage of municipal economic development arrangements, has become the front facing issue for anti-ESG forces.

“Greenwashing can occur in one of two ways; on the part of the issuer or on the part of the investor,” said Jamiyl Flemming, senior vice president at Siebert Williams Shank & Co., joint senior manager for Atlanta’s social bond deal along with JPMorgan. ” I think part of it could be due to the fact that we are in somewhat of the infancy stages of the municipal ESG market and the everyone’s definition of what’s green or social might be actually different.”

Issuers opting to self-verify for ESG adherence and differing “taxonomies,” even among recognized third party verifiers, have helped muddy the waters around such investments, he said.

“I think as we move forward and we come to a more consistent definition of what ESG actually means, that will weed out some of the potential accidental greenwashing that might occur as well,” he said.

As the market undergoes a quick and tumultuous evolution, Knight remains confident in the city of Atlanta’s willingness and ability to issue future ESG bond deals despite the growth of anti-ESG elements within Georgia’s government.

“There’s positive demand out there for our paper and we’re credit strong,” Knight said. “Georgia paper in general does not come in large volumes other than the city of Atlanta.”

City officials remain undeterred, he said, and are now working with financial partners to chart the future course of the city’s ESG-capital investments into the years ahead.

“We will continue to be diligent about which projects and which elements of financing might be suitable for ESG designations,” Knight said. “Only after sufficient due diligence about that will we make a determination about whether an ESG approach will be the right fit for us.”