Join Sean Kidney, CEO of Climate Bonds Initiative and Mike Brown, manager of green bonds and climate finance initiatives at the San Francisco Public Utilities Commission, as they talk about the importance of ESG in the muni market, where it has been and where it is headed. The Bond Buyer's Innovation Editor, Lynne Funk, moderates.
Transcription:
Lynne Funk: (
Hello everyone. And, uh, welcome to today's leader session. I'm Lynn funk innovation editor at the bond buyer. And today I am very happy to welcome John kidney, uh, CEO and co-founder of climate bonds initiative and Mike Brown manager of green bonds and climate finance initiatives at the San Francisco public utilities commission. Welcome to you both.
Mike Brown: (
Thank you. Great to be here.
Lynne Funk: (
Good, good and happy. Valentine's tip date, everybody out there. Um, so our topic today is, uh, ESG climate. Um, you know, while ESG considerations, uh, have grown around the globe, the us MUN market, uh, somewhat just beginning to delve into the space in varying degrees. Um, but it's very clear that any conversation you have with any various market participant in Munis, uh, it's on the radar. So I guess really quickly to start, perhaps Sean, um, would you give for our listeners who may not be familiar? Can you talk to us a bit about CBI, what it is?
Sean Kidney: (
I'm the CEO of this organization called climate bonds. We're the global go for green bonds and, and related to make instruments. So what the hell is a green bond? Well, it's just an ordinary bond, except the proceeds go to something that qualifies as green. We're gonna talk a little bit about that, but what you need to know is this market has gone from about $2 billion outstanding, 10 years ago to 1.7 trillion outstanding. Now. So it's the, it's the, the market for bullet globally. Um, and of course the us muni market with all its uh, work on green infrastructure. When you talk about green infrastructure from energy to rail to water infrastructure is one of the key markets in those space.
Lynne Funk: (
Great, great. Um, Mike,
Sean Kidney: (
I, I, I could go on lead if you want, but, but, uh, but, but, but I wanna hear about Mike,
Lynne Funk: (
Of course, of course. And we have, we have lots to talk about, so thank you for the, for the intro, for the brief intro. Um, Mike, you know, why don't you just give us a quick overview of what you do at the San Francisco public utilities commission. So
Mike Brown: (
Of all, thanks so much for having having me here today and, uh, great to be with you honored to be on a panel with Sean. Um, uh, so at the PUC we, we operate, we're a municipal utility. We operate water wastewater, uh, and power, uh, utilities and combined. We have about a billion dollar a year capital infrastructure budget, which is, uh, largely, largely, uh, paid for through revenue bonds. And, uh, beginning in, uh, 2016 or 2015, 2016, we began issuing green bonds, uh, aligned with and certified under the CBI, uh, water criteria. And since then we've issued both new money and refunding bonds, you know, in excess of 2 billion, we're probably close to 3 billion now in, in issuance and certified green bonds. And it's become a key, uh, um, strategy for us in terms of investor relations and even capital project selection we are now. And I'll, I'll like to talk more about this later, but we're now really focused on prioritizing projects that also meet not only could be issued as green, but also will help us meet our climate goals. Um, so it's becoming really critical, you know, radi agencies are taking notice, investors are taking notice, so it's become a real priority for us.
Lynne Funk: (
Great. So, so how did, how did you, sorry, I cut somebody off.
Sean Kidney: (
Yeah, I, I was, I was just gonna say to pick up on, on Mike said, cause we've been talking about this for so many years now. And one of the things that we've tried to do with the green bond market is to highlight the work that's been done, which is consistent in fact climate goals. But you know, a lot of people don't realize that what we're talking about climate goals, it's not just solar panels, which is sure important. It's actually infrastructure that consist of the future. It's around, uh, the resilience and adaptation measures that we make to prepare, you know, California, where Mike is. We we've really experienced the, the challenge of adaptation the last years with droughts. And so how do we prepare infrastructure to be future fit, to be ready for that? Well, that's actually a climate investment and the in raising capital around that is a green bond, but it's a lot more than that.
Sean Kidney: (
You know, the LA bar for sorry, the San Francisco bar system, the rail system, that's a climate vestment, New York, metropolitan transit authority issues, green bonds. That's a climate investment. You know, I have this dream limb that we can walk around the city and we'll see a sign everywhere, which says this is a climate investment. So we know because we don't know half the time, what are the things we've gotta do? And that's one of the things we're trying to do with this market cut of the world in green, where it really is green, but the exciting thing about this, the investors love it. At least in our experience, I globally, this is a market with demand outs supply by an extraordinary Cerro subscription. Now, of course it varies from issue to wish. You know, what happens with San Francisco is different to what happens with, um, in, in Australia or in South Africa, but it is global. It's every everywhere. And it's about investors concerned about the future and about where they can match their liabilities and assets long term. And if they can find investments that both meet their short term risk yield requirements and also address these long term risks, they're just in seventh seven, and that's why this market's booming.
Lynne Funk: (
Great. So Mike, that actually is a good way to ask you, you know, well first, uh, I believe you were one of the first issuers to use CBI in your deals. Um, how how's this relationship evolved and really, you know, to kind of go on what Sean was just talking about. It's pretty clear that, you know, there's a dire dire need for infrastructure, investment, not only new investments, uh, but also upgrading current infrastructure. I mean, a bridge just collapsed in Pennsylvania, you know, a week or so ago. Um, so yeah, Mike, what, how did this, how did your, uh, how did this start?
Mike Brown: (
Yeah, I I'll, I'll say just, just to follow on something Sean just said is that I think that, and then I'll get to your question. Um, Lynn, I think that, um, investors and radi agencies are starting to view resilience as a strength as a, you know, to, to reduce. And it's a credit strength from a radi agency per perspective, and we've, we've gotten that feedback. So it's not only, um, uh, just doing something good, but the investors view it as a reduction in risk because the, uh, issuer the, uh, utility that's investing in resilient infrastructure is gonna be a, a more able, ongoing concern into the future and, and better, uh, able to meet the challenge of climate change change in the future. Um, in terms of, um, our relationship with CBI, it began, I think it was 2015, uh, maybe even 14, Sean visited us and, uh, in San Francisco and, um, got, uh, uh, everyone excited, including our CFO and, uh, very excited about being part of this global effort, uh, to, uh, be part, to be part of building more resilient infrastructure. And I think we also saw it as an opportunity to ensure we were meeting our duty as, as, as fiduciaries to ensure that we're our infrastructure is in fact climate resilient and, uh, part of, um, um, this car, low carbon economy future. Yeah.
Sean Kidney: (
And, and I better explain Lynn cause I did earlier is that this one of our projects, we work with investors around the world governments, but we also run a certification scheme, which allows issuers to confirm the credentials meters that are global or picture of what's got what's consist of the climate change, which is what the San Francisco public corporation did and many other MUN issuers in the us use. So it's a simple thing you, in this market have to get an independent review of your environmental credentials. Under the certification scheme, you get an licensed verifier that reviews your bond says bingo, it's right. And then that they submit that to a public board of a made up of investors who review the credentials and then you get a chance to have marketing stamp. So it's a tool make it well, I wanna stress. We're concerned about money going to the right place.
Sean Kidney: (
The certification is a, is a tool to help the market. It's not an end game, but many people are like market use them, which is great for us. Uh, I think, I think about, um, it's about 220 billion of certified climate bonds around the world gives you a sense of the scale of the market in the muni market. There's been quite a lot on the transport and water sector that have done everyone from Arkansas water to the LA Metro have used it. Um, so it's a useful way of just sorting out the due diligence. If an investor sees certification, they can generally say, okay, environmental stuff sorted, let's move on to the liquidity shoes going forward. That's, that's how it works. So one of, one of our schemes and I have to say, it's been very cool working of San Francisco public killed this corporation. I still remember that first meeting.
Sean Kidney: (
I was a bit nervous. You know, I went in out, I been the CFO and, you know, we're, we're a tiny organization at that point. The market was in its infancy and they were keen and they understood climate. Like that was the most amazing thing. And they were doing investments that were consistent, where we have to put how we have to prepare ourselves. And, you know, we all know the story of PG and E we wish they had done more investments to prepare for the future that might have saved the bankruptcy at the time. Well, as if PUC had done that. And you know, I, I, I got really excited about the idea of, you know, how can we promote, how can we help them come back and show the world what they are doing, which is, you know, it's a story, it's a story of how we're we are being future fit. And, um, it's a really fabulous story. So, you know, it's been a lovely partnership over the years.
Mike Brown: (
Yeah. I'll just, sorry, go ahead. Sorry, Lynn. No, I'll just say, I mean, um, it's been very, very positive for us as well. So, you know, be able to communicate to our stakeholders, our payers and investors and rating agencies and others that are the projects we're investing in, have been screened for climate. They qualify to be certified as CBIS green bond. That's all been very positive for us. And in terms of a, an investor related benefits, I think with each transaction or nearly each, we are attracting new investors, additional investors with an ESG, uh, mandate. And, um, and especially with the taxable refundings advanced refundings that we're required to do, that's been very interesting to open our potential investor base globally. And, uh, so that we we've also, uh, put some energy into that as well. Um,
Lynne Funk: (
So that's actually a good, I was gonna ask you this, uh, uh, Mike, you, you know, from a global, um, investor perspective, um, you know, one of the, I think one of the, the concerns in the us, in the us meaning market is that there is no real universal Al perhaps. Yeah. You know, we, we have CBI, we have, um, UN sustainable development goals, which a lot of all this is intertwined. Um, you know, how, how do you see the muni market telling that story to global investors? And, and what's your view on that?
Mike Brown: (
Well, you, you know, you're right, there is no standardization yet. There might be, um, MSRB is looking into something you, you know, and, um, investors are kind of coalescing around different standards. Um, I think that the us MUN bond market, which is about 400 billion in issuance a year is, is largely an ESG market. So probably 60, 70% of those bonds would be eligible to be labeled green. Um, but in fact only I think 20 billion or less, um, are, so there's a huge opportunity there terms of disclosure and the standards. I, I think that in our case anyway, we haven't really worried about that so much. We're really just trying to communicate the impacts of each project. So if we have a project that's gonna reduce, um, emissions, if it's renewable energy project, we will just, just disclose those metrics and not, and, and make them available.
Mike Brown: (
We, we do align our impacts with the UN sustainable development goals. Um, but that's, that's sort of an after, um, that's done afterwards. Really. We just want to communicate what the projects are intended to do, what the positive impacts are, uh, are intended, uh, to be. And, and, um, at this stage we, um, we don't try to, uh, force them into any kind of, um, standardization, um, because I think as, as issuers, as project develop investors, uh, developers, you know, we, we can, we have all that data. We work with the engineers, we should make that data available to investors. And, uh, obviously we'll facilitate them in, in, in evaluating it. And yeah, so, um, at this stage, that's, that's really what we've done is just try to disclose a lot of information.
Lynne Funk: (
So you also, I think, I know you were the first issuer and I don't know if anybody's followed suit to list on the London stock exchange. How did that go? And you foresee that happening again, and yeah,
Mike Brown: (
Yeah. We want, we wanted to be closer to Sean in, uh, uh, um, that was very, um, interesting. Um, we learned a lot, we learned that, um, and we knew this going in, but we learned that the, uh, there's, I mean, we've the reason why we did, I'll just probably write a little context is that we know that there's a green premium or green, um, uh, in Europe for, uh, green bond issuance. And, um, so we wanted to basically, uh, and there's a lot of demand for green bonds in Europe. So we wanted to issue, um, our bonds in a manner that would make, uh, our bonds more attractive. So we also to know, I, uh, that a lot of institutional investors in Europe require that that bonds be listed on an exchange in order for them to be eligible for their funds. So we wanted to list on a, on an exchange, we, and we did this, um, but there's many other, um, sort of factors that, um, uh, we need to still refine and order to make our bonds truly attractive to the European market.
Mike Brown: (
For example, you know, we, um, we like cullable bonds in the muni world. So, uh, like, like corporate investors, they're not, they're not interested in cullable bonds. So we need to either make our, uh, uh, term, you know, less than 10 years so that we can kind of stay consistent or, uh, you know, or, or get rid of the call feature, which I don't know if we'll actually do that. It seems like, you know, that's very valuable for us, um, in the, in the MUN market. Um, but in the taxable world, it's not very common. Um, and then the other thing is, um, they're used to term bonds or, or bullet maturity. So there's some things that we are not really, um, used to doing that are, that is more common there in Europe. So we, I think, and then also just understanding our credit.
Mike Brown: (
So there's a lot of work still that needs to be done, but I, I still think that there's a massive opportunity once we can build that bridge between us meat, green munies and, and European investors. And we're still very much looking at, at, at doing it again. Um, and, um, but, uh, we'll need, I think, to just keep talking to investors there to understand what they need to see in order to make, to actually make a purchase. Um, it also seems, I'll just say last point is that, you know, even on a, on a taxable basis, maybe we're paying three and a half percent or percent interest, it's still a lot better. It seems to me than what European in investors can earn buying, um, European, uh, bonds. So it does seem like a really good opportunity for us, if we can just figure out the translation,
Lynne Funk: (
Sean, we're gonna see that. Yeah,
Sean Kidney: (
We think we're gonna see more of this Lynn, you know, the, the us MUN market has a surprisingly low default rate. You know, we've heard the big's headlines in the past, the orange counties of the world, but actually it's a pretty safe market overall, given the returns in it. So, and, and it's largely undiscovered by the European investor market, but we now have a lot of institutional investors poking around and saying, you know, this is a good place to park our money. Uh, and so, so therefore we see it open. Now note that European investment bankers, uh, institutional investors, I should say, are very keen on the green factor. So it's an extra benefit for them. Um, they, uh, I think in, um, November of last year, we had a high point 40 of all bonds issued in Europe had an ESG or a green flavor.
Sean Kidney: (
Like that's pretty amazing, which is, which is ahead of the us. But I think the us will be there in two or three years personally now. So in that context, there's a circuit of capital. We've got savings luck globally. Um, they're looking for places to market and they want green, well, where could they find? And that us MUN market has a lot of this now. So we, we are very keen to try and encourage that opportunity, the sort of thing that S F PUC did in, in London, subject economics and exchange at risk and all those sorts of things, um, because it would seem to be an obvious thing, right?
Lynne Funk: (
So this is a good, this is a good question then to start to ask you by. So there is a green in Europe, it's, it's, it's very, it's well known. Um, a lot of people would argue, we haven't seen that Munis. Haven't seen that pricing differential. Um, is it, is the muni market lagging? Is there a reason for that or, or is there some, some benefits to issuing a green bond as opposed to a not green bond?
Mike Brown: (
What do you go ahead? Well, yeah, I'll make a comment. Yeah. Um, so you really have to break it out between tax and tax exempt. So taxable, we've done a number of taxable advanced refundings, uh, recently, and there is an, there's no doubt a pricing benefit. There's absolutely a pricing benefit. We think it's about five basis points. It's difficult to prove because you're not in the market with necessarily with a green and an green, you know, kind of same day. But if we compare it to, um, what else is in the market peers and stuff, we, we, we believe we're, we're getting about a five basis point benefit tax exempt. It's a lot more challenging. We had an issue where we did have a green and an non green back to back about a year ago in the market. And we had a one basis point savings on one maturity.
Mike Brown: (
So it's hard to measure. It's also hard to tell because there's this idea of a halo effect that you get as an issuer, that since, since most of the debt we issue is green, um, does do all of our bonds benefit from that to some degree. And I think they might, um, unless you are, uh, your investor is it must buy a green labeled bond. Um, so we might be viewed as ESG, even our non-green bonds might be viewed that way. So it's a little hard to tease out, but, um, I think clearly there's a pricing benefit, um, with the taxable advanced refundings. There's no doubt, um, because you know, you're accessing this much larger market taxable market.
Sean Kidney: (
A and I, if I might Lynn a, uh, not only a us story as, as Mike says, European, it's not in European, it's a us story as well. And a story in multiple other currencies, you know, the, the Chilean government, when it did its first screen bonds got the lowest interest rates they've ever got in us dollars in euros and in Chilean pesos, they had three drawn the time they're finished, even I was a panel before, you know, if the, a few weeks ago with the deputy mayor of Moscow all a bit amusing given the current geopolitical tensions, but they issued a green bond in Moscow to finance the Metro rail system, 700 million in rubs. And they got a 20 basis points benefit to the vanilla bond. So it's popping up everywhere. What we see in the secondary market is very clear, beneficial performance in the non-taxable bonds.
Sean Kidney: (
So in Europe, it ranges for AAA issuer around five basis points and goes up depending on the credit rating. Um, what, why is this happening? Well, if you look at the performance of bonds over the last few years, whenever there's a downturn in Inwood markets, they hold value. People tend to, um, uh, continue to have confidence in the value of the green bond while they lose confidence in vanilla. And there's a, this, this departure between green and vanilla drives the value of the vanilla of the green and say, which is extraordinary, really, even in the middle of the crisis in March of 2020, when bond markets froze for a couple of weeks there, when COVID went mad, uh, we saw green bonds staying liquid. You know, we had investors reporting in New York saying, no, no, no, no, it's amazing, but we can still trade them.
Sean Kidney: (
Uh, this makes them a premium product. We have investors in the secondary market who are there because of the value retention, characteristics of green versus non green and all of that drives primary. So the primary benefit, well, the German green bond, this is the government bond. They they've got a negative interest rate. You pay them to park the money there. And they've got a two basis points benefit for green, even at negative interest rates. And we're seeing that sort of idea being reflected across the board. So we do see in us markets with the, the, um, uh, tax bonds, I should say, so, and it's pretty established. Now, it's been there for about, uh, three years, I would say, as the market has got to a certain stage of liquidity and we see an adequate price discovery in the secondary market. Now I've had a couple of questions talking about the cost of doing this.
Sean Kidney: (
So there a cost of doing this, I let Mike go through the details, but I wanna stress that. And this has been a challenging for a lot of municipal issuers because, you know, there are many municipalities, many muni issuers who are legally constrained as to what they can spend on bond in terms of the return. But now that we have very clear price benefit, the cost of doing this just disappears and to the equation. And so there's a clear, straightforward net benefit. Uh, maybe that's a good point to get Mike and tell us what, uh, it costs from PUCs point of view.
Mike Brown: (
Gosh, uh, maybe an initial issuance, uh, you know, $25,000 or less, I think between mean the, the, um, independent secondary party opinion and, and the, and the, uh, very modest fee to CBI. Uh, I'll say, um, so not, not, not very expensive at all. And, um, you know, we view it as also a communications tool. Uh, it's a, it's a way for us to kind of highlight all of the, uh, direct environmental be benefits that, uh, our projects provide, but also the indirect benefits like workforce development and investment in education, in the community, things like that. So it's really, um, it's, it's, it's more than pays for itself, um, in, in, um, in, uh, lower interest rates, but also media, um, attention from rate agencies and, and our, um, payers, et cetera. So, um, but I would say, uh, getting into specifics. So when you do issue a green bond, you'll, you'll, uh, that's certified say under CBI, you'll want to get a, a second party opinion or third, third party opinion.
Mike Brown: (
And those providers, like there's many, uh, you can look on CBIS website, um, and those, depending on the complexity of the program, maybe 10 or $20,000, and then CBI has a small fee, what we've done on. And I would recommend this to other issuers is, um, uh, we are, uh, we have we've, we've received programmatic approval because we have a large, too large capital programs where we're gonna have recurring issuances for the same set of projects funded over a long period of time and getting this programmatic approval really saves on time and cost. So I would, I would also, I would explore those, um, who can do this to do it because it's been great for us, cuz it's very efficient. Now, whenever we need to do a green bond or a refunding of a, of a green issuance, it's quite straightforward and, and, and, um, and not expensive at all.
Lynne Funk: (
So that's, you know, that this is a quite, I think so many, so many issuers have, right? What is, what's the cost benefit? But I guess the question I'll flip it, is there gonna be a penalty if issuers don't start labeling or, uh, at least acknowledging various ESG factors. I mean, as this, as the investor base kind of, uh, has, has evolved, I think, you know, you have this lens focus on ESG factors. So for those issuers who don't partake, will they eventually face a penalty? I don't know if you guys wanna answer that.
Sean Kidney: (
So, so let me have a shot. There, there are two kinds of penalties here in the question, the you Q and a, there's been a few questions about the costs of making your stuff green. Let's call it, let's call it that, you know, if you've got a school district, what do you do to get your buildings? The standard, a lot of those costs need to be understood, not as costs of certification or getting green bond, but as costs of reducing the risk of problems you're gonna face, you know, the PG and E story versus San Francisco public utilities, we need to prepare for all the future. And we need to make sure that we're managing heat stress, that we're managing fire risk and so on. And so there are necessary risk reduction costs, which then you can expose to the market or at least expose your asset to the market through a body once.
Sean Kidney: (
But you need to be doing those anyways, what I'm trying to say now these are costs of school districts, uh, utilities, train systems have to face on the mitigation side stuff that reduces emissions. A lot of that is gonna be part of the direction by regulators or energy efficiency, guidelines and so on. Anyway, so that's gonna come through. So again, you're looking at expose that I, I wouldn't say that people are gonna make a decision to put solar cells on a roof, uh, necessarily because they're gonna get a slightly lower cost of capital. They should be making a decision to put solar on the roof because it's gonna actually better for their long term balance sheet or their long term expenditure or so on those other things they've gotta tackle, but if they do it, they can also get some benefit here. I guess that's the way to frame it.
Sean Kidney: (
So there's that kind of cost issue. But when it comes down to your primary question, let me quote a report by the Australian government treasury that came out at the end of the climate change conference in Glasgow. And they announced a net zero plan Australian. Government's a, a state that's been pretty skeptical of climate country, been pretty skeptical climate change. So a little, little bit like the Texas legislature, if you like. And, uh, they did announce at the cop N zero plan in the, an extra buried nexus was a long discussion by the treasury, which said global bond markets are shifting towards a strong demand for green and climate proof investments, Australia risks, losing access to preferential bond markets. If it doesn't adopt the net zero plan, the borrowing costs for the Australian government, AAA issuer have the potential to go up 100 to 300 basis points.
Sean Kidney: (
If they don't start talking to those investors in a positive way about their, what they're doing on climate. And as a result they're doing at zero plan, and my prediction is they'll come out with green bonds and sometime in the near future as well. And that, and I think that sums it up. You know, the global capital markets are saying, guys, there are real risks here. We'd like to know that people are addressing it. And this goes to the halo effect that, um, Mike mentioned too. We've seen a couple of research studies around this, certainly in, in Europe, if you issue as a corporate agree in bond, you get a stock price bounce and it stays up there or another, uh, muni issuer. The city of Malmo in Sweden tells me that when they issued their green bond program, quite large, like San Francisco PS, they saw a rise across their whole bond program.
Sean Kidney: (
Sorry, improvement reduced spread across their whole bond program. A bit like San Francisco for exactly the reason that we are saying, because people are saying, oh, they're doing something they're getting outta the curve. That's a safer bet than this group over here. Doesn't seem to be doing anything. In fact, in Sweden, if someone issues a bond nowadays, and they have an issue of green bond, according to one of the big pension funds, they ask them, is there something we should know about you? Is there a reason you haven't done a green bond? And I think that's the way it's going. I think that's, what's gonna happen to the market in the us in coming years.
Speaker 4: (
Yeah, I would add Mike.
Mike Brown: (
Yeah, I would agree. And, um, I, I think it, it kind of folds into the whole ESG, um, interest right now. I mean, it's a, it's a, it's an indication of governance and environmental obviously, and, and social, but, but certainly governance, if you are, if you're an issuer and you're not factoring in climate into your capital planning, uh, that's, that's, that's a clear sign of mismanagement and environmental of course is, is obvious. Um, there's an issuer in the Southeast. I don't know if it's Northern North Carolina or South Carolina. That was, I think downgraded or, um, uh, there was a risk of a downgrade because of its, um, poor action on, uh, climate. So I think this there's definitely gonna be a, um, a kind of a weeding out and, um, maybe issuers like San Francisco will stay, uh, with a good access to the market and, and reasonable, uh, interest rates and other cities that are not doing that, uh, will be penalized. Yeah. We've been lucky. We're complacent in the us muni market. The tax muni market is, you know, we have it pretty good, but I think it's gonna, there's gonna be a lot more scrutiny and expectations on us going forward.
Lynne Funk: (
Yeah. So do you think, do you think Mike then, you know, I think the hard part right in, in particularly the muni market is you've got you and then, you know, a tiny issuer who maybe doesn't have the same staffing and really the, the money. Um, uh, some of the questions coming up in the audience too, are on the cont, uh, continuing disclosures and how that's a, you know, that's generally a, a, a issue is called a burden. So how does, how do those two, how do you, how do you explain to maybe to those issuers, what the value is, or, you know, I, is it that much of an added cost?
Mike Brown: (
Um, I know, well, I guess if you don't have the capacity period, then it's a problem. Um, you know, we're lucky we have a three person staff in the debt group, the capital finance group. So we, we were able to do it, um, in the, uh, uh, and, and we bring in interns and stuff and I would, I would encourage everyone you that as well to, to help. Um, I, um, but it is an issue. I mean, CAPA, even for us, it's an issue. So, and we did, we participated in a survey of California issuers through the California green bond market development committee. And we surveyed issuers who we thought could be issuing green, green bonds, but weren't to find out why they weren't and capacity is, is a recurring theme among us media issuers. And we all know there's, you know, tens of thousands of issuers that range from, you know, tiny, um, shop and maybe the person has many other responsibilities like treasury and payroll and all kinds of stuff to, um, a department like mine, where we have a dedicated team.
Mike Brown: (
So it's, it's, there is really a huge range. I will say, you know, the, the, the ongoing disclosure requirements for us are, are really just spending down, uh, reporting on the spending of the bond proceeds. So that's very minimal we've, we've, we've, um, we've chosen to report more, um, and that I think, uh, is on the projects themselves, the project impacts themselves. And I think almost any issuer could do that if they were just to maybe include that in the, um, bidding requirements. Uh, so for the engineer that designed the project, um, they could include that information that could then flow into a report. Um, so I really don't think it's terribly difficult. And I know, like in, in our, in state of California, for example, school districts, when they build buildings, they have to report to the state each year anyway, on the buildings. So there's a lot of reporting that we're already doing that can kind of serve also as green bond disclosure. So I think, um, you, it is difficult. There's no doubt about it, but it, it, I think it's not so difficult, um, that we, and, and many of us are reporting or collecting this data already, so it could serve sort of double duty.
Mike Brown: (
Yeah.
Lynne Funk: (
So, uh, this actually is a good question. You know, the, um, this comes from the audience, the Ms R B is currently asking for, uh, request for information about ESG and, um, uh, the listener would like to know what you would tell the SRB, um, in terms of ESG, what they, what the, what the SRB should be looking at in regard to it.
Mike Brown: (
Well, Sean, do you wanna start there or you want, you want me to,
Sean Kidney: (
Well, look, I, I'm gonna say clearly what we are proposing from our perspective is transparency around where the people are addressing future risk, um, there, but there is two kinds or multiple kinds of risk. One is the risk of resilient, it's adaptation, uh, the impacts of climate change. That's one, there is also risk about, um, whether you doing enough on the mitigation side, given investor demand and given regulatory and policy drift and changes, which is happening around the world. You know, the Biden administration has very strong climate goals. There's gonna be a flow on effect to requirements for organizations in the future. Um, people it's useful people to get ahead of it. Um, there's also, uh, a utility in addressing positive in transparency around positive moves around sustainability in the Europe, the, uh, in the implementation of the task force, climate finance rate and disclosure, which is a risk, um, uh, dis uh, discussion has been around asking people to address their sustainable investors, disclose their sustainable investors as well.
Sean Kidney: (
What they're doing in a positive kind of way. You know, there's a good chance that'll happen in the us, but generally it's a sensible thing that investors would like to know like that investor in Sweden I talked about, and we see this in the us with many institutional investors now, too, saying we wanna know what the bond issuers that we are doing and whether the bonds are supporting that. And it's one thing I'd say to the small issuers who have the transaction costs, uh, challenge that we're talking about. Look at the end of the day counts is how you use use the money. If you align with, uh, a general picture of what's required on the client bond taxonomy, by the way, is a free online guide to the sort of things that qualify here. And you can get certification if you want to go to that extra road, but there's already guidance out there, then just be transparent, let people know what you're doing and explain it to them.
Sean Kidney: (
And that's already a good start. And for MSRB, encourage that, encourage that disclosure, give people guidelines about the sort of things that are useful going forward. Now that's just not a, a cost, um, manner because the you're doing it anyway. You should be doing it anyway to prepare, preparing for the future. You're simply letting people know you're doing it. And when it comes down to the ongoing reporting for a certified bond, it's pretty straightforward. You know, there's a lot of discussions about carbon saved on something. And so on, we try and simplify it. We say, look, it's a solar film, or it's a, you, it's a water investment. Once you work out it qualifies. It's just there. Just tell us each year, it's still there. It's as simple as that, you don't need to do a complicated metric on top of it, unless you are in a tricky area, like, you know, green buildings where you do have to show evidence. It just, the building is still performed well, which you could do from the energy bills basically. So you try and keep it simple. You make it simple enough that someone issuing a $5 million muni bond can do it, plus someone doing a $500 million bond. And that's why the market's growing. I think now, because we've been reasonably successful at keeping those transaction requirements, you know, uh, mini to, to a minimum, but to still being material
Lynne Funk: (
Mike, before you answer, if you had a follow on, I, I, I'd actually a good audience question that I probably should have asked earlier was what about self labeling? What about not having a certified label? What, what does that mean for should issuers do that? Does it, does it greenwash or have a chilling effect perhaps on those folks who actually do certify,
Mike Brown: (
I'll say we, we chose to have our bonds certified for water and our and waste water, uh, because we were not sure initially, which for projects would qualify and which ones wouldn't. So it was helpful for us in that initial screening. And then we ended up getting this programmatic approval. So we don't have so long as the project's mixed doesn't change. We don't need to get reviewed again. We actually self-certified on a recent power enterprise bond, and that was largely the result. And this is a something I'm bare a about, but this is the reality of working in the public sector. We could not get our contract in place in time. Um, so it's contracting is, is, is also kind of a, I know it's an impediment for other issuers too, to, um, you know, to hire that, um, independent verifier in, in time for your transaction.
Mike Brown: (
Um, so that was, that was disappointing. We wanted to get that, uh, done as well, but, but when it was for, uh, when it, if it's for clearly in our case clearly, uh, renewable energy projects, uh, we felt confident that we could, um, cert self-certify it. But, um, yeah, I think, uh, Sean probably has a lot more to add on, on the certification question, but to me it seems like, um, a, an easy and low cost way to get, um, verification that what you're doing is, um, meets market standard. And, and I know a lot of larger investors have their own in in-house analysts that, that evaluate it, but maybe the smaller investors don't or retail investors don't so, uh, I think we're happy to that we're that we're doing it. We'll continue to certify them. Oh yeah. And if Sean wants to say something
Sean Kidney: (
In, in, in the, this, I get confused by the pause we're trying to get for the audio. Um, my apologies. Um, no worries. You know, what, what, what, what I would say is that, um, uh, for small issues, self labeling is better than nothing. So letting people know what you're doing, linking it to some independent review about what the right thing to do by the way, while you're at it, which there's there's support on the web or this, but letting people know what you're doing is really what this is primarily about. And there is a certain degree of caveat EOR in the us market. At the moment, that's fine with climate bonds, we provide a guidance through a taxonomy as we call it, which is specifically to help people figure out what are qualifying investors, particularly in areas where they might be uncertain, like what's his green property, for example, which is a, you know, challenge people to figure out sometime.
Sean Kidney: (
So these are straightforward rules, but let just dispose it, say you're doing for the say, you're doing it. Let people know, and investors can make a decision based on that. I wouldn't say it's a good practice, but it's not mandatory in the us to get an independent review. Now you can get independent review of all sorts. Yes. It's a bit of a wild west in the moment in the sense there's no regulation governing it. Europe's bringing in some governing regulation, but I don't see that this is the biggest issue in the us at this stage to be quite honest, our biggest issue is actually getting people to think about what needs to happen, what we need to be doing to make sure we're future fit. And of course, getting the support we're getting, which the, hopefully the federal government's infrastructure bill will help put in a little bit of support to make sure that we address our infrastructure deficit and it's especially great infrastructure deficit.
Sean Kidney: (
You know, we need to focus on railways more than freeways. We need to focus on water investments that have been done with the future in mind, rather than forgetting the fact that the world is changing now because of the impacts of climate change, et cetera, et cetera. So for me, that's the hard part, the challenging part, if you are disclosing to what you're doing, you're at least allowing a conversation, the investor about what you're doing and what's going on and they can query, they can get help. They can advice if they're interested and if you're gonna label something as green, then you're only gonna get the interested investors realistically. So do it. Uh, and if the transaction costs are impossible before you go for it, but do bear in mind that in this market, we are seeing a tiny bit of price point, which should generally be able to cover the costs, the transaction costs to do it, you know, depends on what you're issuing and appreciate.
Sean Kidney: (
There's lots and lots of variables here. Have a look around at that first, before giving up on that, because an independent reviewer will be able to help you with those questions as well. And there's a bunch of them. So, so we run a scheme with about 60 independent reviewers around the world, including a whole collection in the us at various price points, depending the organization. If you Google, you pay something to different to if you're the city of, um, Carmel, um, there's choices here, um, have a look get away. You know, I, I remember talking to the, um, city of Lawrence in Kansas who weed a green bond, they issue a tiny one and they just did their due diligence, had to look around on the internet and did a, a, you know, um, I think they did a self labeled. Initially it was a good bond. It was going to some good things, you know, and we, in our tracking of the market, cuz we provide raw material for investors and in seats in terms of what's going on in the market, we them, because they'd done a good job, they'd looked at it. You know, the disclosure made that clear. I think that's the key point about this regulations will help, um, formal guidance will help they'll come through eventually, but um, don't let that stop. You just go ahead and, you know, fix things up.
Lynne Funk: (
Well, we're coming up on time. Mike, did you wanna, do you wanna add on to that a little? I just wanna add closing thought,
Mike Brown: (
Oh, maybe this is a closing thought. Uh, I'm not sure. Uh, but maybe John can comment on this, but one thing that, and maybe MSRP, if they are listening, might want to think about is how do we conform our standards to what's happening globally so that investors outside of the us will understand what our green bond means and what our you means. So that I think there's an opportunity there and that, I dunno if you wanna comment in on that, Sean, but, um, but I, et cetera. Yeah.
Sean Kidney: (
For those large issuers that, um, have the potential to go to the European market, for example, this is obviously a really important issue. You know, if you issue in European, you have to meet the European guidelines or regulations and so on to a certain degree, understanding what they are and what it looks like. So you know what the work that PUC is doing meet it, but they got to show evidence. They made it. So there's a bit of paperwork involved in doing that. You've gotta know all those sort of things. Now what's happening in Europe is does new regulation coming in to govern by corporations, banks, um, and, uh, investors and that flows on to have an effect on the MUN issue bond program. Um, so you, you know, you need to show if you're a water utility and you wanna call yourself green or sustainable, how you are addressing adaptation risk.
Sean Kidney: (
And as I said, PC's doing that, but a lot of people aren't. So there's, you know, knowing what the points are and making sure you properly dispose data points will allow you to be, um, play in that market. If you want to in the longer run, there's no doubt that harmonization let's call between the major markets will make things easier for the shift of capital, for larger issues. You know, investors in New York, uh, split their portfolios between multiple geographies, right? If they've got a common rule set across those multiple geographies that makes life a hell lot easier. We're working at that at the G 20, there's a sustainable finance working group, looking at also harmonization. I'm speaking at that forum in a few weeks time. Um, it's coming through the us is a bit behind on this. Um, for reasons I'll leave you to figure out, uh, I hope over the next couple of years that we will see more work at a federal level.
Sean Kidney: (
And with some other states, you know, we, we have some, some great happening in places like California and New York on guidance and supporting, uh, state authorities about how to take advantage this market. So it'll happen. But in the meantime, like I said, no one needs to wait. You know, at the end of the day, all we're talking about here is letting people know what we're doing around sustainability and around green. There are some different flavors of bonds in here. You can do blue bonds folks. If you're focusing on, on coastal protection, they're all the same. It's, they're all flavors of GE flavors of ice cream, but they, and they're marketing themes, but they are out there, have a perk out and have a look. We've got a ton of reports, including one we did on the north America market last year, um, which gives people guidance about on our website or client bond.net. Um, it's just an exciting space. And with this little benefit is that there's a almost very useful price benefit, which accrues to treasury that we are seeing now relatively consistent in the market, um, subject to Mike going. So, so you know, what's not to look if you, if you already look at doing something what's not the like, is I'm gonna say, if you're not looking at doing something, then you should, because otherwise you're probably being negligent.
Lynne Funk: (
Well, great. Um, thank you both so much for your time and your insights. This was a really nice conversation. I don't think, think it's, uh, gonna stop today. That's for sure. Um, thank you both again. And uh, everybody enjoy the rest of your day and see you soon. I hope.
Sean Kidney: (
Thank you. Thank you. Thanks,
Lynne Funk: (
Bye now.
