ESG: what issuers and market participants should strive for in 2023

Last year continued the exciting trend of Environment, Social, and Governance (ESG) discussions in the municipal marketplace.

These discussions were more organized compared to prior years due to both the request for information that was released by the Municipal Securities Rulemaking Board and updated best practices of the Government Finance Officers Association.

2022 was a transition year that established important steps issuers and municipal marketplace participants can accomplish in calendar year 2023.

As a long-time issuer, I’ve personally noted that ESG discussions prior to 2022 were often challenging on several fronts. Rating agencies were looking for more specific information on environmental, social, and governance risks than issuers and counsels would typically include in disclosure documents.

Conversations often jumped to quantifying a pricing benefit of designation.

Finally, prior to last year, there were varied expectations from investors that led to confusing directions and expectations for issuers. In other words, there was a lack of consistency from investors on ESG matters related to primary disclosure, value of designation, the type of verification provided for any designation, and post-issuance and ongoing disclosures related to use of proceeds.

2023 is the time for issuers and other market participants to demonstrate ongoing cohesive and collaborative steps with all matters related to ESG, making it clear to regulators that the municipal marketplace is proactively addressing any concerns or questions.

Looking ahead, there’s room for continued positive and exciting trends in ESG in the municipal market.

The first is more focus and consistency from investors.

This trend could come from proposed rules or regulations on investment activities and precedents set by regulatory actions — all in ways that can benefit the municipal market.

This trend will lead to standardization and uniformity of what investors need to make an investment decision related to their ESG funds or other ESG-related activities.

The results of this trend will have issuers, municipal advisors, underwriters, counsels, and municipal traders “swinging for the same fences” for what ESG investors require, resulting in more consistency on municipal disclosure and other related matters, especially in the ESG-related designation topics.

The second trend is continued improvement of municipal disclosure on ESG-related risks.

All municipal bonds — even ones that do not carry a designation — need to have a disclosure awareness of material ESG-related risks.

The best practices from GFOA are an excellent starting point for this review.

Another year of practices and experiences of issuers applying these best practices will continue to enhance this part of municipal disclosure.

The city of Chicago continues to be a leader with its disclosure on general ESG matters in all of its publicly offered securities (non-designated and designated issues).

In addition, municipal advisors and counsels to issuers will be able springboard from uniformity of investor expectations in the areas of designation decisions and consistent disclosure content and covenants for bonds that carry an ESG-related designation.

Finally, the municipal marketplace has historically shown its willingness to collaboratively address market issues. GFOA is a leader in this area. They have previously assembled municipal market participants to address disclosure issues in the Disclosure Industry Workgroup (DIG).

They have another group addressing the ending of the LIBOR index and providing guidance on use of a new benchmark rate based on Secured Overnight Financing Rate (SOFR) that will replace LIBOR in certain financial contracts after June 30.

I know myself, issuers, investors, and many others in this industry would join a workgroup tomorrow to address ongoing ESG-related matters in our market, working together to provide market-driven ideas and solutions rather than reacting to regulations.

ESG has grown in the municipal marketplace beyond the green bond designations that started to appear in our market over 10 years ago.

The continued discussions of ESG make it clear that the topic will not be leaving the public finance arena any time soon. This is, in part, due to continued realization that government, public finance and nearly all municipal bonds are naturally ESG as most basic operations of government address environmental, social and governance matters.

I’m looking forward to continued positive trends, further recognition of ESG realities, and, most importantly, collaborative efforts by all participants in the municipal marketplace in 2023.