Using data for ESG efforts

As environmental, social and governance factors (ESG) continue to take the focus, ESG data becomes more important — and helpful — to the muni industry. Join the MSRB’s Mark Kim and Harvard University’s Lourdes German as they discuss opportunities to leverage MSRB data to help contribute to better understanding in the evolving ESG area.

Caitlin Devitt: (00:14)

Good morning, welcome to our leaders webinar. I'm Caitlin Devitt, infrastructure reporter at the bond buyer. I'm happy to be here today with two great guests. We have Mark Kim, CEO of the Municipal Securities Rulemaking Board, the muni market's chief regulator, as most of you know, and also it's kind of main data collector and repository with its famous EMMA website. Also joining us is Lourdes German. Lourdes is a public finance expert who serves as the director of the nonprofit public finance initiative. She also teaches at Harvard university graduate school of design. Lourdes has a long and impressive bio, but for our purposes today, she's here as the MSRB's newest visiting scholar. The board announced earlier this week that Lourdes is gonna be joining as their second visiting scholar and her focus is gonna be on ESG. Basically, it sounds, she's gonna talk about that, but it's gonna be on plumbing MSRB data for environmental, social and governance trends in public finance, which is what we're here to talk about today.

Caitlin Devitt: (01:17)
ESG and the muni market. A lot of ink is being spilled on this topic, not just in our market, but across all the markets. It's the hot topic. And here at the bond buyer, we're actually in the middle of our ESG week. We have a lot of good articles and events and podcasts, where we're delving into different aspects of it. We're in a very interesting, and I would say sort of uncertain moment with ESG in particular with disclosures, we figure out how disclosure relates to risk factors with vanilla bonds and also as ESG labeled bonds, which I, I think we're gonna be focusing a little bit more on today. ESG labeled bonds have become increasingly popular. In fact, it's one of the fastest growing aspects of the muni market. So I encourage you all to ask questions, just type 'em in and I'll ask 'em and let's get to our panelists. Mark, let's start with you for our non DC-based disclosure attorneys out there. Could you kind of give us a big picture sense of the MSRB's role in the muni market and in particular, how it might shape the direction we're going with ESG?

Mark Kim: (02:22)
Sure. I'd be delighted to and, and good morning, everyone. First, thank you to the bond buyer for inviting the MSRB to participate in your ESG week of events and Caitlin to you for moderating this conversation. And if I could just give one quick shout out to the cast of eight MSRB interns that I know are down the hall watching our session today, we had suspended our summer internship program because of the pandemic for the last two years, and we finally restarted it and we've got a group of eight phenomenal young individuals who are eager and excited to learn about our market and potentially be future public finance professionals. So welcome to our interns and thank you for this opportunity. It is a really exciting time in the muni market, and our market is evolving very clearly with respect to the integration of ESG.

Mark Kim: (03:19)
And so what I, what do I mean by the integration of ESG in our market? Well, we're seeing investors allocate capital towards sustainable investing strategies in the last 12 months, two ETFs have been launched that are dedicated to sustainable muni, ETF investing. So we're seeing an allocation of capital towards this type of investment. We're seeing issuers adopt this evolving practice of designating or labeling their bond deals to appeal to these investors. Labels such as green bonds, social bonds, sustainability linked bonds, et cetera. We're also seeing ESG being integrated in our market through other market participants. For example, credit rating agencies are calling attention to ESG related credit risks and factoring those risks into their underlying credit analysis. We're also seeing the credit rating agencies, several of the credit rating agencies along with other third parties produce ESG scores of issuers along a variety of factors and dimensions.

Mark Kim: (04:45)
We're seeing evolving syndicate practices with respect to the marketing underwriting sales and trading of these types of bonds. So our market is clearly evolving. Caitlin. You mentioned that ESG bonds, if you will, are one of the fastest growing segments of our market and have heard anecdotally that ESG bond issuance comprises now 10% of the total issuance in our market and growing. So clearly our market's changing. I think this is actually a very exciting time to be in our market and, and to see these changes happening and the MSRB for its part as the principal regulator of this market has been monitoring how these changes have been evolving. And as you know, we found it was the appropriate time at the end of last year to issue a request for information in RFI, which we did to all market participants and to solicit information from market participants to better inform not only the MSRB, but all market participants of the different perspectives around how ESG is being integrated in our market.

Mark Kim: (06:07)
As I have mentioned or described before the RFI was a fact finding mission for the MSRB we wanted to hear from you, the market participants and the people who are actively in the market and participating in the market as to how you are seeing ESG being integrated. In particular, we are interested in hearing from the entities that we regulate broker dealers and municipal advisors, whether there are any unique or novel compliance challenges under our current rule book, with respect to ESG that you think we ought to be aware of. We were also interested in hearing from issuers and investors, the entities that Congress charged us with protecting about how ESG is impacting your roles for issuers that are designating their bond deals.

Mark Kim: (07:09)
We were interested in hearing the reasons why, and what benefits those issuers felt they would achieve by designating their bonds, as well as what costs and risks, if any, they perceived in designating their bonds. We also were interested and asked investors, do you have all the information that you need to make your investment decisions with respect to ESG and are ESG factors material or important to your investment decisions? And if so, please provide us with examples of what type of information, what types of metrics, um, do you need, and what is the current state and quality of ESG data that's available in the marketplace? So these were the types of questions that we were interested in hearing from, and that we asked market participants, um, to respond to that, uh, RFI closed. And we are now in the process of preparing a summary report of the 52 comment letters that we received. And my hope is that we will be publishing that report of our, what we felt were the key themes and issues raised by the public, uh, later this summer. So stay tuned more to come. Okay.

Caitlin Devitt: (08:34)
Any sense of what you might do with the report or what the next steps after the report is published?

Mark Kim: (08:42)
Well, we are still in the final drafting phases of the report, but even just based on the preliminary draft and the key themes and the key findings that we felt were elevated by market. My hope and my expectation is that our summary report will generate additional conversation and engagement from market participants around the key issues, the challenges, some of the opportunities that were presented. And I hope will also encourage the continued development of voluntary best practices and, um, uh, other other ways for market solutions to present themselves.

Caitlin Devitt: (09:30)
Okay. Thanks for that Lourdes, let's turn to you. Tell us a little bit about your let's start with talking about your personal and professional connections to ESG and public finance.

Lourdes Germán: (09:44)
Great. And again, I'm thrilled to, so to, and also to be on this webinar, that I've had the good fortune of spending many years in the municipal market wearing a lot of hats that included bond counsel disclosure, counsel, investment banking, and also with an investor doing credit research and serving as general counsel among others. And I've seen ESG through three different roles and hats that I wore throughout my career that I find particularly meaningful. The first was when I had an opportunity to work within what I consider to be a leading investment management firm at the beginning of their ESG sustainability strategy development, a process that really went on to be owned and flourished by staff. And I think became one of the first investment management companies that really took a leadership position and saying, how do we look at these issues and integrate them into a portfolio strategy?

(10:31)
And then I had the opportunity to serve as an advisor to the United nation, specifically UN habitat in the years, leading up to the sustainable development goals and the release of the SCGs. I served as one of the members of the municipal finance policy unit to actually help shape the agenda and help shape the specific municipal finance policy framework to help the UN think about how do member countries and cities within them think about the implementation of the SCDs and actually finance them in a way that least the sustainable outcomes we all hope for over the next 20 years. And then in my current role at Harvard, I'm developing the first class in taught last semester, focused on public finance and the integration of ESG and sustainable outcomes for the students who are planning the futures of cities at the graduate level, and also lead the public finance initiative and organization committed exclusively to thinking about the integration of public finance programming in the frame of ES and G and how we think about social outcomes unified with the fiscal outcomes.

Lourdes Germán: (11:22)
We hope for both in the bond market, but also really expansively thinking about every source of money that goes in and out of the community. So I'm thrilled to, to bring that lens and expertise as a researcher to the MSRB, to really do the first comprehensive market study, leveraging EMMA Labs and understand what's happening within ESG. And what's been happening as we've seen markets mature, both green bonds, sustainable social, and the many other labels that are proliferating, but also taking a look at what's happening with the non labeled issuances that we all know might have a natural overlap to what we mean when we talk about sustainability ESG, that's a whole other segment. That's also growing and often classified and some important questions that I know we can delve into later in this webinar.

Caitlin Devitt: (12:04)
OK, cool. Very interesting projects. You you've been in this space for a long time. It sounds like. And Mark, you have too, actually, let's talk a little bit about your background. You were an issuer before you came to the MSRB I think you even won an award or two for some of your ESG deals. So why don't you tell us about how that might influence your, how that background is an issuer might influence your perspective at the MSRB.

Mark Kim: (12:31)
Absolutely. I'd be happy to, and I, um, I do think my prior experience both as an issuer and as a banker has helped inform my current role as a regulator, um, specifically with respect to ESG. Uh, I did have the privilege of serving as the CFO of DC water, our local water utility here in the nation's capital. And back in 2014 I was involved in the issuance of DC water's inaugural green bond issue that in my mind, in my humble opinion, that transaction was notable for a couple of reasons. It was the third labeled green bond deal in the municipal market. Um, it was the first green bond that carried a verification. A third party verifier had, uh, provided an opinion that, um, uh, the bond was issued according to international standards, uh, with respect to ICMA, uh, green bond principles. We also were the first issuer, rather DC water was the first issuer green bond issuer to make ongoing reporting and continuing disclosure commitments to the investors and holders of its bonds.

Mark Kim: (13:57)
It included the publication of an annual green bond report, which I'll give my former colleagues over at DC water a shout out too, that if you go to DC water's website, you can find their green bond reports dating back to 2015. And these reports, um, I think are, uh, really set the standard for disclosure, uh, with respect to ESG and impact reporting. I was actually very pleasantly surprised. I went back just recently and looked at DC water's most recent green bond report, which was for fiscal 2021. And I see that DC water is now including and disclosing scope one and scope two carbon emissions from the projects that it's financed with its green bonds. And so I think there are really great examples out there of issuers who understand the potential of ESG and the value of ESG, both in terms of capital formation and attracting new pools of capital to your program, as well as the value in communicating, uh, the outcomes of these investments that we're making, which are all for the public interest, the public good.

Mark Kim: (15:33)
I might note too, that DC water adopted one other leading practice in my personal opinion, which was in addition to having a third party verifier DC water retained its outside its independent accounting firm to perform an audit and to provide an attestation letter, which verifies that the proceeds from the green bonds were actually spent on the projects described in the green bond documents and that the target metrics and outcomes for environmental pollution reduction and sustainability that were laid out were in fact measured and reported on and accurate. And so these, all of these this information is available in that green bond report that I referenced earlier and it carries an independent attestation from DC waters, independent accounting firm attesting to the veracity of that information. So I think there are a lot of really exciting emerging best practices and some model issuers who, uh, really understand the potential and value of ESG. And it's exciting to see, I think it's a positive for our market. I think it is attracting more capital into our market, which I think is a good thing. So again, uh, these are exciting times in our market for sure.

Caitlin Devitt: (17:21)
So just out of curiosity, because one of the things that we talk about is the lack of a clear pricing benefit in the primary market, at least the tax exempt primary market. When you, do you remember when you, when you go back to that 2014, did you guys see, did you see something that you thought was advantage or is it still sort of the way it is today where it's sort of issue by issue or it's difficult to tell?

Mark Kim: (17:44)
So that's a great question. And I think there's always been, I think a little bit of confusion around that and, and some ambiguity around that and, and I think there's two reasons for it. The first one is to really have the perfect test and issuer with theoretically need to issue two identical bonds structured in the same way. Same maturities, you know, so on and so forth, same call provisions, um, and then same credit structure and they'd need to price those bonds side by side and see if there is a differential and, and that, to my knowledge really hasn't been done. Um, and I think the reason why is it's actually inefficient to do that and it's a whole other probably right series to talk about why it would be inefficient to do that. But I think that's the reason why it hasn't been done.

Mark Kim: (18:49)
And the second reason is some confusion over the price of a bond, which is based on the underlying credit and for every green bond issuer that I am aware of the underlying credit structure of their green and non-green bonds are identical. It is the same source of funds that are gonna be used to repay both the green and the non green bonds. And so presumably there's the same credit risk associated with the green and the non green bonds. And logically in my mind, they should price the same. They are the same bond from a credit standpoint. What is the risk of, and the probability of the issuer's willingness and ability to repay timely payments of interest and principle. Those are the same for those. If an issuer were hypothetically to create a different source of repayment for the green bonds, then naturally that would be a different credit profile and that would price differently.

Mark Kim: (20:06)
So I think that that question, um, around pricing benefits is a little bit of a red herring and, you know, that said, that assumes that markets are rational and perfectly efficient. And we know that there are not, we know that there is growing demand for ESG related investments. We know that because we see capital being allocated specifically and targeted specifically to these types of investments. So to the extent that there's a supply and demand imbalance, regardless of underlying credit structure, if you can generate a supply demand imbalance, then yes, you should see a pricing difference. In that scenario. So there's, it's a complicated question. And I think that you know, really the opportunity here is around creating best practices and market based solutions for advancing this market.

Caitlin Devitt: (21:13)
Yeah. Well, just as an aside, that idea of how difficult it is, because of the apples to apples comparison. I did a podcast that's up this week where I talked to somebody from the Minnesota higher education facilities authority, and they came to marekt and they actually had that sort of experience, which is really rare where they had two different deals, same structure, same maturity, same everything, and one was green and one was not the third party. So okay. Lourdes, let's get to you. I'm very excited to hear about sort of what you're doing and your work. So from an academic perspective, tell us a little bit about some of the ESG trends that you think are worth exploring in muniland and what are some of the interesting projects underway.

Lourdes Germán: (21:55)
Sure. And I'll, I'll pick up on the point that you and mark were just discussing, I think beyond an apples to apples comparison. One way to one question that I'll be exploring is at a pricing level, is there greater investor diversification that issuers are seen by labeling ESG or even having non labeled issuances that bring other investors to the table over time that grow basically the pool of capital that's available to them because even if there's not a quantifiable benefit deal to deal, is there a benefit over time just from having greater investor diversity of who's looking at your bonds?

Caitlin Devitt: (22:26)
And that's exactly what that's exactly what this issuer said. He said from the outside, you wouldn't necessarily see a price and difference, but it widened our investor base just like you're saying.

Lourdes Germán: (22:34)
Yeah. And that's a really hard question. Cause I think as Mark said, like how do you quantify that? How do you say there is a premium there and particularly with the issuer, their level of sophistication market participation. Um, and in addition to that, um, that kind of the, the deeper black box is the secondary market. You know, what happens when we look at trading patterns for ESG label bonds and even the bonds that are being pulled in by investors to ESG funds, even without a designation because they see a natural overlap either in the use of proceed or perhaps cause the issuer has made such a stated commitment at a policy level to having a robust program or at either social equity or something that is environmentally focused or governance. And that's an even deeper question to quantify because the definitions are so unclear.

Lourdes Germán: (23:14)
One of the key trends that I'll, that I'm looking at is sort of a precursor to the research is examining is how does the market even understand and speak about ESG? Because it is not uniform, there are many investors. And I remember even working within one where ESG is a credit focused story saying, you know, how do we amplify the way that we think about portfolios by looking at non-financial factors across the ESG spectrum, to say that we are thinking about surfacing poorly managed liabilities, and that's a very different conversation or a slightly different conversation than an impact focused investor. Who's looking at an ESG issuance and saying, how is that going to change conditions on the ground in place? And where is the outcomes and impact story and how is it being told by the issuer? And I think part of how that ties into the questions I'm examining is because the character of disclosures responds to that, what the issuer say at the preliminary, you know, point of sale, what they say in a post issuance compliance world, we'll speak to both of those narratives depending on which investors are bringing to the table, what, what they're cultivating and also their own view of what it means to actually, you know, think about the materiality standard, you know, are they reporting credit focused data or are they taking that deeper step towards impact?

Lourdes Germán: (24:23)
And the trends at a preliminary level are really heartening and surprising, particularly with the robustness of disclosure. So that's sort of the heart of the question that I'm examining is what does the market look like today and how is it changing over time? Particularly when we think about disclosure trends, issuer patterns, issuer practices, and what are issuers on a voluntary basis already doing that shows different trends to speak to market leadership and where issuer grown and peer driven practices really could be heartening and give us insights about what the future could look like. And in addition to that, attempting to examine the elusive pricing question, you know, once we see which issuances show remarkable differences in the way that they're structured, think about the data and think about the storytelling and also the disclosure is the market placing a premium on those issuances or are we still seeing just anecdotal evidence? Um, and are there different outcomes that matter too at a social level that aren't quantifiable and that aren't measurable and where issuers are making that commitments because it matters to them to really see again, changes in place and, and bond markets really can serve as an engine for that kinda disruption.

Caitlin Devitt: (25:26)
Hmm. It's very interesting. Do you have any preliminary findings? You kinda alluded to it a little bit. Do you have any preliminary findings you could share?

Lourdes Germán: (25:33)
There are some including one that surprised me and looking over and use, it was a beneficiary user of EMMA Labs very early on, which is a platform that I know we're gonna talk about soon, but it actually enables just kind the free text identification of deals that otherwise you couldn't find on EMMA easily just saying like, you know, what are all the green bonds that were issued in, in X period? What are all the social bonds C C and even doing free text searching of official statements and what assures are saying around disclosure and non designated authorings, and one heartening trend that is still very much a work in progress is that over percent of the issuances that I've been analyzing, um, have what I call a high degree of disclosure, which includes not just at the, the official statement level designating bonds and speaking about the designation, including metrics, but actually committing to voluntary post issuance compliance that either is just on an annual basis voluntarily on Emma or external websites, but even some issuers who are bringing in that disclosure to their rule, 15-C2-12 continuing disclosure requirements saying we are committing to this at this level.

Lourdes Germán: (26:32)
And there's some sector based differences that speak to that, including housing and particularly where some deals know the low income housing tax credit and other federally mandated reporting elements that have to continue. Um, there's also a high degree of refundings that are being designated where the use of proceeds are already done. And it's really interesting to see the disclosure patterns that are different across those issuances. And there's a high degree of issuers who are also doing their own stories outside of the traditional labels. We see that speak to greater policy questions and that I think stand to change the way that we approach, you know, defining what is an ESG issuance beyond the traditional conversations I see us having.

Caitlin Devitt: (27:09)
Hmm. So you're looking at you're looking primary, secondary, you're looking at disclosure with the OS, POS and you're looking at post issuance disclosure, you're looking at it all basically. And it sounds like your focus largely on labeled bonds, ESG labeled bonds.

Lourdes Germán: (27:26)
Yeah. But then progressing to also identify what is the criteria for what you would say is an ESG unlabeled bond, you know, is it investor, or is the reason I'm pulling that deal into my, even though it doesn't carry a label or are there other markers and indicators that we should look at too, that speak to where the market is going and where issuers are leading, that isn't captured of those practices.

Caitlin Devitt: (27:50)
Okay, cool. So you've mentioned EMMA Labs a couple times. Um, Mark, maybe you could kinda give us an overview, tell us what it is. I'll tell you that, you know, I've been aware of it. I think you guys unveiled it in January. And so I was looking at it the other day and I have to say, I thought it was great. I mean, the searchability of it, it was very friendly, really, you know, for somebody like me, it has to kind of be user friendly. And you know, there's been a sustainability linked bond that was issued in the market by Arizona IDA. And I wanted to, I think it's the only one there might be others, but it's the only one that I'd heard of. So I kind of wanted to look it up and I went to old EMMA typed in sustainability linked and, you know, I mean, I could have eventually found it, but it would taken me a long time to go through a lot of filters, but then I went to EMMA labs, typed it in boom, first thing that came up right away, it was the first thing that came up and then a lot of other stuff came up too, a lot of other that terms and a lot of other, um, so I thought it was great, but Mark, you wanna kind of lead us through a little bit more about it.

Mark Kim: (28:57)
I would be happy to. I always get a smile on my face when people have the opportunity to go to EMMA labs and have a good experience. So I'm really grateful that you have that opportunity, Caitlin, and that you have that experience. There that's exactly why we created EMMA labs. It is a data analytics platform that's built in the cloud and takes advantage of the latest cloud based tools and services. With respect to data, there's really two purposes in my mind for EMMA labs. The first is to make our existing data more accessible. So to your point, help you find what you need easier and quicker. Um, and second it is to prepare for the future of data in our market. And, um, I wanna unpack that a little bit because, uh, I'll share a story about the market data pre EMMA.

Mark Kim: (30:01)
And EMMA been with us a little over a decade now. So maybe like for the old timers who are watching our interview maybe 15 or even 20 years ago, you may remember that, uh, bankers used to FedEx printed, official statements over to the MSRB to meet the deadline for submitting the official statement. And every morning we would open up the FedEx packages, we would take out the official statements we would, and this is a true story. We would cut off the spine of the official statement. And then we would take that stack of 200, some pages, put it into a Xerox copier and press scan, and then it would start scanning and, you know, pages would get stuck together. Pages would feed in crooked, you know, so you, you know, everyone's been there and done that. And then we would take that scan, stick it on a microfiche. And if you needed it, you could physically come on over to our offices and search through a card catalog like at the library when we were kids to try to find what it was you want and bring that card over to our teller who would then go back into the microfiche and try to find it and give it to

Caitlin Devitt: (31:20)
so is everybody wearing green visors and smoking cigarettes?

Mark Kim: (31:27)
That was data pre EMMA. And you can imagine what was the value of that data? How accessible was that data? The answer was it wasn't. Um, so then with the advent of EMMA, it really was more of a revolution than an evolution. It was a sea change. It moved us from paper to electronic. And so we no longer accepted paper submissions. They must be electronic under our, and it's codified in our rules. You can't send us paper trades, you can't send us a printed OS anymore. And that vastly improved the availability, accessibility, and transparency of current state of data. But now EMMA has been with us over a decade and we now know while the quality of the data that we have is vastly superior to what it was in the old days. Uh, it's not nearly as good as what it can be and what it needs to be and what it will be in the future. Mark Kim: ( 32:43) I kind of think of the data that we have today, much of the data that we have today is kind of like an acorn where you've got like the, you know, nut in the middle, but it's got a really hard shell that you've gotta crack if you want to get that nut. And going over to what you called this old EMMA and our chief technology officer is probably crying back in his office hearing you call it old EMMA. He, he corrected me, he prefers to call it classic EMMA, um, while we're architecting the future EMMA today. Um, but if you were to go to classic EMMA, just like you were experience, it's really hard to crack that nut and get what you want.

Mark Kim: ( 33:37) So EMMA labs is our answer to that problem. It's part of the solution for being able to leverage technology, to impose structure on unstructured data, to allow and facilitate data analytics and analysis. Um, that's the goal for par, one of the goals with respect to data for EMMA labs and, um, we are prototyping technologies like artificial intelligence, machine learning, natural language processing. Um, we're using the same boolean logic that Google is to crack the nut and get the information that you need and want out of the data that we have. We know that it's hard to do that in our existing systems. And so we're redesigning and we're rearchitecting our systems to leverage cloud computing and to take advantage of new tools and services to make that data more transparent, more accessible, and ultimately more valuable and more insightful, um, which is why it's the perfect playground, if you will, to invite academics like Lourdes to come and apply their trade and to pursue rigorous research on important market structure questions, and to have access to the data that you need to do that analysis.

Mark Kim: ( 35:16) And so we're thrilled to be welcoming Lourdes as our visiting scholar and partnering with you Lourdes to really bring that academic rigor and focus on some of the most important questions facing our market. And, you know, I'm so excited that when Caitlin asked you about your current kind of research agenda and, you know, kind of where are you poking and prodding, and you're looking at the questions, you know, examining questions like the quality of ESG disclosure impacts on pricing. Those are the questions that we need answers to. And I guess we'll have to wait till your research report gets published, but we're excited that you're tackling those questions and we're excited to support your efforts to, uh, leverage data, to help inform the market and help advance the market's understanding of how ESG is evolving in our market.

Caitlin Devitt: ( 36:11) So Lourdes, how are you using EMMA labs and MSRB data in general?

Lourdes Germán: ( 36:17) So I'll give you one example similar to the one that, that Mark mentioned in me with Arizona IDA, you know, one key question that I've had as part of one signature project that we're doing for the Johnson Foundation, which is focus on examining and growing the degrees to which issuers consider their role in leveraging racial equity and particularly United with bond market investments, as an engine for change is considering, you know, where is that activity happening? Is it only happening within designated bonds that are social? And one thing that we've been able to find that was impossible to identify before EMMA labs in order to kind of learn before even kinda structuring and finalizing our strategy is that there's a lot of activity within green bonds. When we think about the definition of disadvantaged communities and how that's being integrated as part of a framework of analysis to support a green labeled issuance that otherwise would never be designated as social and that often isn't coming under the sustainability linked or sustainable label.

Lourdes Germán: ( 37:07) And it opened up a whole new universe of considering the important role that SRFs are playing in addition to cities and towns with states and other units of government that we wouldn't think about that often play an integral role in, in the way that we think about, um, social equity, racial equity, and other factors in the chain of municipal bond financing. And otherwise we might have excluded, but for that research avenue, um, so it's been a, a really significant way to open up what otherwise is mark said is sort of like data that lives within an acorn and that you really can't see and to see it at scale and to then think, well, what does this tell us about the market? What does it tell us about under practices and areas that are high points of leverage for future strategy in, you know, in a number of directions?

Caitlin Devitt: ( 37:47) So what do you think are some of the challenges or information gaps that still that remain?

Lourdes Germán: ( 37:53) I think, and everybody will know this. We have a highly fragmented market that lacks any kind of homogeneity and that's critical. And also issuers who are speaking to two different types of investors, investors who care about credit. And that's how they're looking at ESG and investors who care about impact and are gonna look for a more elevated and expansive data story that actually talks about something that's really difficult to measure, which is not just what did you do with the proceeds, but also how did the pro proceeds change that place? And how did those outcomes evolve over time in an area that we know is extremely complicated, like social equity or the environment where there are multiple factors that come into impact climate change, or the, the level of inequities that we see in a place. And one of the things that I hope to do is sort of cast it an eye towards what are peer practices that are already showing leadership in that area.

Lourdes Germán: ( 38:40) As I mentioned, there are a number of issuers who are doing this great, and who are speaking to both sides of the equation, despite, you know, whatever their through line might be to focus on credit or impact. They're certainly cultivating those stories and they're showing market leadership in the way that that's being integrated to the, do you know the official statement in either appendices their own frameworks? Things have push us beyond the boundaries of understanding principles like ICMA that are definitely some of the most cited to, but also where issuers are taking steps even further. And I think that evolution of peer practices are gonna be really, I think, heartening stories to see in a market that's evolving really quickly and particularly where I think the innovation is going really rapidly.

Caitlin Devitt: ( 39:19) Hmm. Mark. What about you? What do you think are some of the challenges. We've seen some pushback politically from some of the, you know, from some states, I know that was one of the responses you got, I think it was a group of 24 states kind of pushing back. I don't know if that's something you wanted to mention or just any other challenges or information gaps that you see.

Mark Kim: ( 39:42) Sure. So I think one of the challenges that was identified and called out by a number of the respondents was around some general confusion in the marketplace, just even in our own language and terminology and making sure that we're talking about the right, the same thing and describing the right thing. And Lourdes is building off something you just said, I think is one of the critical areas of confusion that would benefit from greater clarity and precision in the dialogue going forward around ESG and that's, um, within the broad topic of disclosure, um, there are ESG factors that may impact credit. So an issuer's ability to make timely repayments of principle and interest on their bond. And I think there's universal consensus that if there is an ESG factor that presents a material risk to credit, it must be disclosed under current securities law. So that's established in my mind, the confusion is as we move from credit related ESG disclosures that are mandatory and required to other ESG information, that might be very important for, uh, an investor that's interested in ESG investments, these, this type of information, and these types of ESG related disclosures are not credit related.

Mark Kim: ( 41:27) They might be focused on the use of the bonds proceeds, what types of projects are you financing, or they might be focused on what the outcomes are likely to be from the financing. So what impact will that investment in infrastructure deliver and how are you gonna measure it and how are you gonna quantify it? How are you gonna report it? And I think that there has been some confusion in talking about the broad topic of disclosures and jumping back and forth between those two buckets, those are required and those that are desired, right.

Mark Kim: ( 42:08) And I think I hope that going forward, we can put those topics in their respective buckets and, and talk about them separately because I think that would be constructive and helpful. I think also another area of confusion in the marketplace that was raised by a number of commenters to our RFI was when we're talking about disclosure, many people also start talking about designating or labeling bond deals and that practice. And I think that's another area that it would be valuable to make sure that we're all talking about the same thing and we're not confusing or bringing over concepts from a different conversation into this conversation, because I think that just has everyone talking over each other or talking at each other without actually being on the same page. So I think there are some important areas, challenges, or gaps or areas of confusion that, uh, I hope will be able to draw attention to when we publish our summary report of the responses, because the respondents did a really nice job of calling out some of those distinctions and, and how to really move forward in a constructive way.

Mark Kim: ( 43:39) So we hope to highlight those

Lourdes Germán: ( 43:42) I agree with you a hundred percent. And I'll know those points and sort of like it gets at like, what, how is materiality being considered in kinda this new environment? What does it mean to different folks?

Mark Kim: ( 43:52) Absolutely.

Caitlin Devitt: ( 43:54) So, Lourdes, you were saying earlier off camera that you're visiting scholarship ends in December, I think, at the end of the year. Right. And so what are some of your goals. It sounds like you're putting out a paper you'll release kind of a paper. Can you talk a little bit about what you hope to achieve and when we'll see it with the paper.

Lourdes Germán: ( 44:20) So, part of what I'm doing is sharing preliminary findings with the MSRB team staff and other experts to kind of vet, you know, what are some of the trends that I'm seeing expanding the research universe and scope of data, you know, again, with the collaboration of the MSRB team and then hope to put out a two part study later this year, including in the summer near the end of the year, that would address, oh, market based questions around disclosure, and then also the potential for examining pricing questions at a deeper level, for both designated and non designated issuance and talking about some early preliminary findings around the way that we're labeling. And speaking about both that show, both as Mark said, areas of confusion and areas of consensus

Caitlin Devitt: ( 44:57) And Mark how's all this data gonna end up being used.

Mark Kim: ( 45:04) Well, we hope by researchers like Lourdes and other academics, um, you know. Lourdes is our second visiting scholar under this new program that we launched, um, actually during the pandemic. So hopefully Lourdes will be able to get you on site a couple of times between now and the end of your stay with us. But this program is just one of a number of ways that the MSRB has tried to advance market transparency and, and thereby create a more fair and efficient market. The history of this program actually goes back a little over 10 years ago with a former board member of the MSRB. Professor Bart Hildreth, who's a professor at Georgia state university and who served on our board, um, Bart had really called and raised awareness to the fact that the MSRB really cares about market transparency, it should do more than just make that data available.

Mark Kim: ( 46:09) It should actually proactively be working with market participants to, um, to provide them the data that they need and, and to help shape some of those most important research questions that would add the most value to our market. And so in large part credit to Bart, the MSRB has created an academic data product. And so to any academics that may be on the line listening, um, you are welcome to come to the MSRB and, um, share with us your research interests and, and request access to our data. And, and we will work with you to provide that data to you for free, um, in kind of the format and the way in which it would be most helpful to your research efforts. So we've created an academic data product that's really targeted towards facilitating academic research.

Mark Kim: ( 47:13) We've also established a partnership with upends Wharton school to provide our trade data to academics, free of charge, and they can access that data through the words program, which is Wharton research data services. It's, no one else knows it, but academics know it, that's where you go for financial data. And so you can access our trade data there. And our most recent program was the launch of this visiting scholar program. And you know, again, we're, we're thrilled to have Lourdes be working with us and to be partnering with Lourdes to try to try to crack the nut of our data and really answer some important questions in our market.

Caitlin Devitt: ( 48:08) So we got a bunch of questions. We've got a few minutes left, let's go through 'em. Um, from Dave Erdman, the outgoing actually today, I think, is his last day as Wisconsin debt manager, he's having a party later today, Yvette Shields, and I, the other reporter are thinking about road tripping to Madison for it. He says, Emma labs is a great tool to find data and kudos to the MSRB for this tool. From an issuer perspective, ask that MSRB with the issuer community to develop EMMA changes that help make filing ESG and other voluntary disclosure information, easier making EMMA filings easier will only promote these filings for the betterment of the muni market. That's sort of a comment more than a question. I dunno, either if you wanna say anything.

Mark Kim: ( 48:58) I'd love to address it and you know, uh, I guess this is, this is my broadcast of shoutouts, but shout out to Dave Erdman, sorry, I'm gonna miss your party. I didn't know you had one.

Caitlin Devitt: ( 49:12) Regulators...

Mark Kim: ( 49:14) I think that's a great, well, that's about, as you know, that's about as funny as regulators can get. So,

Mark Kim: ( 49:22) Um, but seriously, I think Dave makes a fantastic suggestion about making it easier to get the data to us. We've been talking for the last hour about how you can get the data from us, but just as important as how do you get the data to us. And, uh, we are absolutely focused on that. And in fact, even as part of the responses that we received from the ESG RFI, there was a consistent theme voiced by the issuer community around the ability to improve the way voluntary disclosure are submitted to the MSRB. And we hear you, that is a top priority in the rearchitecting of EMMA for the cloud. Um, so that is something that is absolutely in the works underway, and we look forward to engaging with the issuer community on how to create the kind of functionality that would make it just as easy for you to submit a voluntary disclosure as it was for Caitlin to search for that voluntary disclosure.

Caitlin Devitt: ( 50:33) Okay. Thank you. Um, from Mike Stanton at BAM is there any discussion going on to harmonize the very different definitions of ESG in investing used by equity investors and fixed income investors.

Mark Kim: ( 50:49) I know Lourdes, if you have a thought there on, on, on standards and converging standards.

Lourdes Germán: ( 50:57) Um, at least from a research standpoint, one of the key areas of the study is gonna be of sort of crosswalking market definitions and actually analyzing even like within fixed income markets, what does it mean to call something ESG, for example, that's trading on NASDAQ and their sustainability bonds platform versus, um, others. Um, so at least from a research standpoint, there will be attention to that question.

Mark Kim: ( 51:17) Interesting. And I might just add if I may just, just one thought on top of that, that with respect to disclosure and municipal disclosure in particular, um, neither the SEC nor the MSRB has the statutory authority to be a standard setter in that area. That authority in that jurisdiction, uh, resides with GASBY in terms of financial disclosures. And GASBY is the standard center for financial disclosures. I know the question was broader and talked about ESG standards and so on, but again, the MSRB is not a standard setting body where a regulatory rule making body and, um, that is outside our jurisdiction.

Caitlin Devitt: ( 52:05) Does the MSRB plan to evaluate the true interest cost savings associated with ESG issuance? And if so, what methodology would be set in place to accurately model the variance between ESG and non ESG offer? Sort of what we were talking about at the top a little bit, I'd love to hear your plan to look at that Lourdes or Mark

Mark Kim: ( 52:29) Research

Lourdes Germán: ( 52:29) Paper, I'll say stay tuned for the study. Cause I think a lot of what is in the early methodology that I vet with the MSRB includes just what Mark said before. You have to think of the perfect comparison is sort of like a multier issuance where there's one designated one non designated series, but you can actually control for almost every other element, including credit quality use of insurance, the maturity, the duration, and looking at all of, you know, the call features. And actually then thinking about what do you, how do you control for those factors from a secondary market trading standpoint, where you have less of kinda the, the, what can happen at the, the point of sale. Um, and you're also looking at market yield, curves and movements that could impact, you know, why that traded in a different way than, than a counter that would look identical.

Caitlin Devitt: ( 53:14) And I guess we'll take this as our last question, besides, and Lourdes. You had mentioned some issuers that were showing some really great practices, um, besides DC water, what are other issuers with exemplary reporting practices you would point to as models to follow.

Lourdes Germán: ( 53:31) There's so many, I think one that comes to mind for me is California CS CDA. And this is in looking at different patterns across the three years of the growth of the social bonds market. In the affordable housing realm are a repeat issue. And one of the things that sets them apart in my mind is they have beyond CI to ICMA and the robust disclosure they do around metrics. They have their own framework that they publish and incorporate by reference in the official statement. And their framework specifically includes explicit post issuance compliance, reporting of metrics and key performance indicators that speak to impact and credit risk. So they're actually speaking to both sides of investors and setting their own standard for how they do that. And of course there are some, some other pieces on why they report certain key performance indicators that are statutory driven outside of the, you know, let's say tied to just the affordable housing sector, but they, um, the fact that they do those two things sort of, I think puts them at the top of my list of one of the many issuers who are sort of standard setters on their own in their peer practices.

Caitlin Devitt: ( 54:31) Okay. Well, thank you both. Thanks to all of our listeners, everybody who attended Lourdes, I'm really looking forward to reading and continuing to follow you and see what some of the research you come up with. So thank you both. Thank you, Mark. Thank you, Lourdes, and thanks to all of our listeners.

Lourdes Germán: ( 54:46) Thank you. Thank you

Caitlin Devitt: ( 54:47) Everyone.