California panel releases green bond disclosure guidelines

A committee formed by the California treasurer’s office has developed investor-driven guidelines for disclosure on green bond issuance.

The thrust of the guidelines, created by the California Green Bond Market Development Committee, was to help issuers provide more uniform disclosure. It dovetails with the International Capital Market Association’s guidelines, but provides information more specific to municipal bond issuers.

Though the effort was launched in California, the guidelines, released Monday, are intended to be a resource for issuers across the country interested in issuing green bonds, said Ruth Ducret, a senior research analyst at Breckinridge Capital Advisors, who served on the subcommittee that developed the standards.

“This is a way of really trying to standardize and get better disclosure across the muni market,” Ducret said. “The muni market is so well aligned with green bonds. So much more of the market could be green bonds, if issuers were able to provide better disclosure.”

The disclosure provided to investors has “really depended on the issuer,” Ducret said.

“Some will label the bonds as green and provide a good amount of information about the use of proceeds, what the impact will be and how they decided to value the project following the ICMA guidelines and then provide a great deal of reporting post-issuance,” Ducret said. “Others might label the bond green, and then the title will be the only place in the entire offering statement you would see the word ‘green.'”

Since the first municipal green bond was issued in 2014, over $100 billion of green bonds have been sold by municipalities and conduit issuers in the United States, according to background information provided in the 16-page report. In California alone, over 150 green bonds have been issued, totaling over $30 billion since 2014. In providing these guidelines, the committee seeks to help municipal issuers attract larger pools of potential investors that could translate into more orders and lower borrowing costs.

The committee, which grew out of efforts by former state treasurer John Chiang to encourage more California state and local governments to issue green bonds, was formed just before current Treasurer Fiona Ma took office in 2019. She fully embraced the effort.

“We can’t build the California of the future without considering the environment where we built it,” Ma said in a statement. “Green bonds let us do both.”

David Wooley, executive director of the University of California’s Berkeley Environmental Center in the Goldman School of Public Policy, had chaired the committee, but Ma has assumed that role, according to a press release from the treasurer’s office.

The guidelines were developed by a 12-person investor-focused subcommittee, though it also included a banker, insurer and bond counsel.

“We wanted to create something that was concise, easy to read [and] that more directly targeted the municipal bond market,” said Raul Amezcua, a committee member and senior managing director with Ramirez & Co.

The guidelines were specifically designed for small- and mid-size issuers, who don’t have the resources of larger issuers, Amezcua said. The committee was heavily weighted toward investors helping to craft guidelines on what information they need to have to make decisions.

“These are best practices developed by the investor community for the issuer community,” said Mark Capell, a committee member and managing vice president for public finance in Build America Mutual’s west region. “It’s the first to do that.”

The guidelines will be distributed through the treasurer’s office and municipal bond groups.

Capell, president of the National Federation of Municipal Analysts, had planned to mention the guidelines had been released during NFMA’s conference in Florida that runs Tuesday through Friday, though no formal panel had been developed on the topic.

The message from the issuer community, particularly small and midsized issuers, has been, “What information does the investor actually need to make a judgment about what constitutes a green bond?” Capell said.

“This is by no means comprehensive,” Capell said. “This is a best practices paper from the investor community to the issuer community about the kinds of things we want you to think about. So, there will be a lot more to come and we are in early stages of the green bond market, quite frankly.”

The guidelines divide investors into four categories: green focused, those who have a theme of making environmental-focused investments; impact, those who are allocating capital to green projects to make an impact on the environment and want to see measurable impacts included in disclosure; and integration investors, like Breckenridge, which incorporates environmental credit risks into their analysis, to reduce risk over time; and then traditional investors, who don’t care if it’s green and don’t have a specific mandate to focus on green investments.

“We tried to keep it broad enough to incorporate some of the requirements of specific investors,” Ducret said. “For instance, impact investors are interested in key performance indicators and what impact that project made with specific metrics. They may want issuer discloser, for many years to come on how has it changed carbon data. Other investors may not be so focused on that.”

It also teased out what issuers might want to include for a water project versus a LEED-certified building.

It seeks to provide information to help issuers who may have never issued a green bond before, so that the use of proceeds really aligns with the label, Ducret said.