ESG, cyber, rates dominate Cal Public Finance Conference survey

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ESG. Cybersecurity. Rate direction. Climate.

These were just a few of the dominant themes at The Bond Buyer’s California Public Finance Conference panels and breakout sessions this week. During a live survey and panel hosted by S&P Global Ratings, led by Kenneth Gacka, Senior Director, Analytical Manager, conference participants and panelists gave their reads on several questions that were posed.

The most striking though unsurprising result, given the rapidly changing marketplace, was that technology is affecting the public finance space in a real way and gaining visceral traction in the minds of market participants of all stripes. Of course while these surveys aren’t necessarily scientific, it gave a sense of what the industry as a whole thinks the direction it is headed.

When asked what will happen with interest rates in the near term, respondents voted 57.5% that they will decrease, 32.5% said they’ll remain steady, while 10% said they will increase.

“In a global macro environment, with a deceleration in global growth, with parts of Europe effectively in or headed into an industrial recession, all of those things and a negative interest rates across the globe. Low rates, negative rates, a decelerating pattern of global growth — All that to me leads me to believe rates in the states will be relatively steady,” said Glenn McGowan, director of municipal underwriting at RBC Capital Markets.

In another rate-related question, about 74% said rates will not go negative, while about 15% said maybe and 11%, yes.

“I am more inclined to be bullish. I want to say that rates will fluctuate, but it’s more likely that they’re going to drop,” said Vikram Rai, Head of Municipal Strategy at Citi.

And what of ESG, or environmental, social, and governance criteria? Will green bonds continue to become a more important part of the public finance space via credit and investor demand?

A whopping 87% of respondents said they would. And did they expect that a spread differential will emerge as a result of including ESG into credit considerations? Not so fast. That was a bit more split and the panelists themselves were mixed. From the audience respondents, 46% said yes, while 54% no.

“I’m in the 'yes' camp on this,” McGowan said, though he said he was speaking on whether ESG/green/impact bonds were gaining traction broadly with issuers, adding that “To date, there has not been a real discernible price difference. If we get into an environment where interest rates stabilize, perhaps we could see a basis point differential.”

However, “we’re going to see more of the ESG conversation play out going forward.”

“Our market is going to rise to the occasion,” McGowan said.

He also noted that investor sentiment is changing and that the ESG designation could gain more traction. “If you have two bonds with the same rating and one is green and the other is not, I think you’d see most investors opt for the green bond.”

McGowan noted that part of the problem is that generally climate change as an issue has been tainted by partisanism.

“It’s unfortunate that climate change has been politicized in Washington and that the burden and responsibility will likely fall to state and local governments,” he added.

In at least the near term, Rai was a naysayer that issuers will pounce on the ESG designation broadly and pay for third parties to give it to their deals. Nor did he expect investors give up yield because of that designation any time soon.

“A resounding ‘no,’ ” Raid said. “Why would they pay an extra 10 basis points with rates so low?”

And what of cybersecurity? This topic was discussed at length and brought up at many panels throughout the three-day conference.

How serious of a concern will cyber risk become? "Significant and we need to plan now" — 76%. "Issuers will adapt and this will become background noise" — 24%.

Jason Pollack, CFA and vice president of government and institutional banking at Wells Fargo Bank, said, “It’s real. This threat is very real. This is not your old-school email that it is very clear that it’s fraud. Hackers are targeting junior members of an organization, with the subject coming from their CEO,” which is making it all the more difficult to handle.

Pollack said it’s difficult for issuers to plan because it’s hard to calculate the costs they might incur. “It’s not a budgeted number," however, “everyone really needs to plan.”
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Rick Kolman, managing director and head of the Municipal Securities Group at Academy Securities, said the issue with cyber security “how are you going to pay for it?”

He pointed out that 23 issuers in Texas were targeted, leading to the governor to call for a state of emergency.

“Issuers need to be serious about planning and actually put money aside to address this,” Kolman said.

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