Green bond issuance may not provide any pricing benefit to municipal issuers, but some evidence suggests green issuance is producing a broader investor base for those localities.
That’s according to panelists at the National Association of Bond Lawyers' conference on Thursday.
“There's no systematic, or mathematically proven study out there that shows that you're getting a premium for a green or ESG-labeled bond,” said David Hodapp, director of market regulation for the Municipal Securities Rulemaking Board. “But we are hearing anecdotal evidence that those that have been in the market for some time and have established designated bond programs, that they're potentially seeing benefits if not directly in the form of price, in the form of an investor book that's deeper and broader than their non-labelled bonds.”
Hodapp addressed those issuers who are resistant to environmental, social and governance factors. But the fact that the issuance of a green bond offers virtually no pricing benefit, should still be a concern to issuers, Ben Watkins, director of bond finance for the State of Florida said.
“There is no discernible pricing benefit to green bonds,” Watkins said. “Until there is a benefit, it doesn’t make sense.”
Watkins went even further to address those issuers who do issue green-labeled bonds by self designation, urging those issuers to have an explanation ready for how you’re going to spend the proceeds.
“An explanation is required and sufficient,” Watkins said. A bond is designated green or social based on certain criteria put forward by independent organizations, which could have little to do with the bonds in question.
“Thinking about it from a regulatory perspective, self designating with no explanation is ripe for regulatory action,” Watkins said.
Securities and Exchange Commission chairman Gary Gensler has made the topic of ESG-related disclosures a hallmark of his tenure, singling out materiality as a tentpole that all ESG disclosures should be grounded in. The SEC is on the precipice of issuing ESG disclosure guidance for public companies.
Panelists went even further to identify materiality and nexus to credit as two basic requirements to follow when attempting to follow ESG guidelines or designating bonds, which were outlined in the Government Finance Officers Association's best practices on ESG.
“Materiality and nexus to credit,” Watkins said. “This is not about just making stuff up because somebody asked for it,” he added.”If it doesn't have those two things, then you really don't need to be saying anything about that.”
“That's what we're telling the issuer community,” Watkins said.
The MSRB
“It's fair to say that the board is thinking about this topic in a holistic way, they're thinking about this topic both in terms of the internal fairness, efficiency, resiliency, and other dynamics within the municipal market itself,” Hodapp said. “But I think it's also fair to say that the board is thinking about this, in terms of the broader competition for access to capital.”
But it doesn’t come without its detractors.
“Two things that I would be critical of in terms of the RFI is that it conflates two separate and distinct issues, which is risk based disclosure,” Watkins said. “What risks are you confronted with? Are they material to your credit, and what are you doing to address that?”
“Growing a market, looking for standardization criteria and metrics is an entirely different issue and really deals with marketing bonds,” he added.
While this is still an “evolutionary” process, Watkins said, one that we’re still in the first phase of, there may not be much time until we reach the next phase.
Green, social and ESG bond issuers are taking a deeper and
