A bond by any other name would smell as sweet
4 min read
On July 1, Florida’s new anti-boycott law, House Bill 3, “An Act Relating to Government and Corporate Activism,” went into effect.
Like similar laws enacted in other states, HB-3 generally bans companies like commercial banks and investment banks from doing business in the state if such companies are perceived as boycotting or otherwise discriminating against certain industries or other companies that are not aligned with their particular environmental, social and governance (ESG) or diversity, equity and inclusion (DEI) policies.
HB-3 goes a step further, however, effectively banning all state and local issuers in Florida from issuing ESG bonds. Under HB-3, ESG means simply “environmental, social, and governance” and “ESG Bonds” means bonds designated or labeled as being used to finance a project with an ESG purpose. The definition of “issuer” is equally broad, encompassing all state and local bond issuers.
Given such broadly worded definitions, Florida’s approach to effectuating and enforcing HB-3 will determine the extent to which its issuers and conduit borrowers are able to obtain bond financing for ESG-related projects. In that respect, on June 29, the Florida Division of Bond Finance released a one-page notice intending to clarify the impact of HB-3 on Florida issuers, rating agencies and other market participants.
Ban on ESG bonds
Generally, HB-3 is intended to prohibit the issuance of bonds characterized in some manner as ESG. Thus, an issuance of bonds designated or labeled as green bonds, sustainability bonds or social bonds, or with similar identifiers, would be banned by HB-3, as this naming choice signals that the bond issue is intended to finance a project with a specific ESG purpose.
Practically speaking, however, most projects financed with the proceeds of municipal bonds have some ESG-related purpose, regardless of the bond issue’s name, including wind turbines, solar panels, hurricane preparedness equipment, affordable housing, public schools, libraries, elderly or youth centers, public safety facilities, or a city or town hall. Assuming the offending designation or label is left out of the name, would HB-3 ban Florida issuers from issuing bonds for such projects?
The Finance Division’s June notice attempts to answer this question, clarifying that the intent of HB-3 is to prohibit the issuance of any ESG-designated or labeled bonds, whether the designation or label comes from an issuer or a third-party. Such prohibition includes paying or using a third-party verifier to certify any such designation or label.
In contrast, un-labeled municipal bonds that are routinely issued for specified purposes including, for example, infrastructure projects, such as storm hardening and resiliency improvements, environmentally beneficial projects, such as stormwater abatement, and housing projects, would be permitted under HB-3. Therefore, in effectuating HB-3, it appears that Florida will target the branding or labeling of the bonds themselves, rather than the specific projects to be financed with the bond proceeds. Nevertheless, given that official statements and investor roadshows typically include detailed descriptions of such projects, Florida issuers and conduit borrowers should proceed with caution when using any ESG-related jargon in a post-HB-3 world.
The notice also encourages issuers to continue their practice of disclosing general environmental and other risk factors to investors, to the extent such information is deemed to be material. As such, HB-3 should not impact the inclusion of general climate-related disclosure in an official statement for Florida bonds.
Rating agency activities
HB-3 bans Florida issuers from entering into contracts with rating agencies whose ESG scores have a direct, negative impact on the issuer’s bond ratings. The notice provides some additional context for this prohibition.
As a general matter, issuers are barred from using rating agencies that transition to a ratings methodology tying ESG scores directly to an issuer’s credit rating. Under current rating agency criteria, however, ESG scores are merely an output of the rating agencies’ general credit analysis of the issuer. Therefore, such ESG scores alone would not independently influence the issuer’s credit rating.
As such, rating agencies may continue to assess the risks posed by hurricanes and other natural disasters, for example, or other risks deemed relevant to an issuer’s overall credit rating, even though such considerations may have perceived ESG undertones.
Additionally, any rating changes following a hurricane or other natural disaster would not trigger the HB-3 contracting prohibition because such an event or factor would not be considered an ESG metric under HB-3. Nevertheless, the Finance Division intends to monitor rating agency criteria going forward, alerting issuers to any changes that might trigger the HB-3 contracting prohibition.
Underwriting Florida bonds
Unlike other so-called anti-boycott laws, HB-3 permits financial institutions (including federal or state banks) to circumvent its anti-boycott provisions in connection with the purchase or underwriting of bonds (other than ESG Bonds) issued in Florida.
The notice confirms this point, stating that HB-3 does not prevent or prohibit licensed financial institutions from underwriting bonds issued within the State.
As Florida begins the process of effectuating and enforcing HB-3, questions will undoubtedly arise as to the scope and impact of its more broadly worded anti-ESG restrictions.
In that respect, the Finance Division’s udpate is a helpful first step in providing some clarifying guidance, short of a full-blown court ruling on the subject.
Nevertheless, it is likely the Division will be called upon to provide further clarifications, as stakeholders begin the process of complying with HB-3’s requirements. For a deeper dive into the particulars of HB-3, see my opinion piece, “Anti-ESG Law’s Impact on Munis May be Far-Reaching,” published in The Bond Buyer in May.
