By Emily Swenson Brock, director, Federal Liaison Center, Government Finance Officers Association
Many investors want more information on the impact their investments can have, and many investors have identified municipal bonds as a way to make “impact investments.” Since bond ratings and investor demand have significant bearings on the pricing of municipal bonds, it is generally in the best interest of an issuer to provide disclosures of material information directly to the investment community through primary offering documents.
An area of significant interest in the public markets is ESG factors, which represent areas that show how a municipal issuer’s credit profile affects the long-term sustainability of a community. The three factors are: 1) an exposure to climate risk and other environmental factors (“E”), 2) long-term social factors (“S”), and 3) governance issues (“G”). Public power entities play an important role in that overall assessment by providing specifics about their ESG challenges and action plans and, in doing so, increasing transparency to the entire municipal market.
The Government Finance Officers Association recommends that municipal issuers evaluate the development and disclosure of information regarding the primary ESG risks applicable to municipal issuers and their bonds in their preliminary and final official statements used in connection with bond sales and in other voluntary disclosure.
Identifying Environmental Risks
The increase in the number of extreme weather events in recent years has raised public awareness about climate. In addition to commercial customers who might want to know how a utility’s emission profile can help or detract from their environmental goals, investors and rating analysts are also looking to see what plans an issuer has to address climate risks. Any information an issuer has on the potential economic impact of these risks, and steps to mitigate them, may be helpful to investors and rating analysts.
The first step in developing environmental disclosure information is to identify the primary environmental risks applicable to a public power agency or its bonds. This information will take time to assemble and prepare, so even if a utility is not planning a bond issuance in the short term, it should consider compiling relevant information when practicable in anticipation of a future bond issuance. That process should include:
- Identifying the primary environmental or climate risks for your area. Rather than attempting to identify every risk that could occur in your jurisdiction, start by addressing likely risks and risks with the potential for the most material impact on your agency or the creditworthiness of your bonds. Later, address lower-possibility risks and risks with less impact on the issuer.
- Consulting bond-offering documents of peers. Environmental and climate risks are often regional. Issuers in proximity may already be disclosing environmental risks, which may be used as a guide to identify and inform your environmental risk disclosure.
- Quantifying the risks. Is there information available regarding the impact of these risks on your pledged revenue stream, finances, economy, or other measures that investors might want to know? Any forward-looking data or projections should be accompanied by the appropriate cautionary language because natural disasters are, by their nature, unpredictable events.
In short, determine the risk and its nexus to credit. You should also consider the potential impact for each credit or enterprise, because that impact may be quite different depending on the nature of each credit or enterprise.
When a risk is considered material, you must also identify policy actions taken, which may include any goals established, progress toward meeting those goals, and how these policies and goals are tracked.
A final part of the process is to summarize the information for an investor to gain a general understanding of your response efforts.
Disclosing environmental risks might not be right for you and might be more difficult for smaller utilities that don’t have easy access to bond counsel, disclosure counsel, or a municipal adviser to discuss these matters.
As we move together in an evolving world and investor base more aware of material ESG factors, GFOA is available to equip municipal issuers with basic tools to provide their investors information about the risks, the policies implemented to address the risks, and disclosure considerations. We understand that this is an iterative process, and we look forward to working with our partners as considerations in ESG disclosures continue to evolve. Get more guidance at www.gfoa.org/esg.