- Meet the market demand for ESG-designated bonds
- Help market participants understand how to move forward on the topic of ESG.
Lynn (00:06):
Good morning everyone. Welcome to our panel entitled the ESG Evolution, A look at industry sentiments. So I know there's a little ESG fatigue, perhaps it's become quite ubiquitous these days, but I think I'm confident that our distinguished panelists will offer some insights into why it's become such a large part of the Muni vernacular with us today. I'd like to welcome Nicholai Nikolai Sklaroff Capital Finance Director of the San Francisco Public Utilities Commission. Andrea de La Fuente, Director of Municipal Products Group at US Bank, and Helen Crager, Vice President and Senior Credit Officer at Moody's Investor Service. Welcome to this great panel. We were also supposed to have Chris Jumper from a short guarantee, but he had to had another obligation you had to opt out. So I'm going to give you a brief background here for kind of the basis of this panel. The Bond Buyer conducted an industry-wide survey in the summer that was an update to one that we put out in 2021 on the sentiments of various market participants on ESG factors.
(01:17)
The responses that we collected were used for our latest report, which was actually sponsored by Assured Guarantee, which I hope you all have a chance to read. It's on the Bond Buyer website and there will be a link in a QR code on the presentation. So what's interesting to me is that in the two years since we last conducted a survey on the muni industry on its ESG sentiments, so much has shifted the market itself, the volatility from near negative yields to dramatically higher range in both treasuries and Munis as a really a direct result of somewhat unexpected macroeconomic and geopolitical forces.
(01:59)
Then there's perhaps the less than unexpected political pushback against ESG in the US that was sort of already building when we last queried the industry with efforts that were already underway then in Texas and other states to outlaw doing business with firms that discriminated against the fossil fuel or firearms industries. And since then, there's also been some laws written to outlaw the use of the term ESG in state and local government debt strategies altogether. So these and other market challenges have pushed ESG into becoming obviously a hot button issue that is once viewed as potentially vital to the sustainability and growth of the industry. And at the same time, an ill-defined, costly, politically driven distraction. Those are words that I've collected. Those aren't mine.
(02:55)
But what's interesting is that not much has dramatically changed from the responses that we got in our survey. A lot of them were in the middle, and I think we can agree that maybe a lot of folks are in the middle on most topics these days, but there's a belief that ESG has a place in the Muni market and various market participants are still bullish on both as a catalyst for broadening the investor base and for the asset class and providing those investors with sustainable investment options if they so choose them. So I'm going to give you my main takeaway here before we get into the panelists. Love it, hate it. Still don't quite get it. I think ESG is here to stay. So I'd like to kick off our discussion. I'm going to hand it over to Nikolai and kind of give each panelist a little intro of where they are in the realm of why they're sitting at this table and to talk about ESG. So Nikolai, take it away.
Nikolai Sklaroff (03:50):
Thank you, Lynn. So anyone who knows me well knows that I really love this conference. I love coming here every year. I'll skip my high school reunion. I'll skip my college reunion, but I don't want to miss this conference and I enjoy speaking here as well. But this morning I woke up a few hours after I went to sleep and I realized there was time to come to the conference, like I said, really enjoy this conference and just stared up at the ceiling and asked myself what did I do? I agreed to be interviewed by the executive editor of the bond buyer live in front of everyone I care about in this business. And so looking forward to this discussion. But having said that, with so many San Francisco people here in the room, our city administrator, my colleagues at the airport and office of the controller and my colleagues at the PUC, let me hasten to say that given the topic we're going to discuss, now, I'm not speaking on behalf of the SFPUC or CDIC or the debt committee of the GFOA.
(05:14)
I'm just speaking as someone who's been in this business for quite a few years. Having said that, let me just tell you a little bit about the SFPUC to put this conversation in context for us. I'm very mindful that I'm the only issuer on this panel. I'm also mindful that as the only issuer, I'm not representing a typical issuer in California or the country for us at the SFPUC, I think it's fair to say that ESG disclosure, sensitivity to the environment, sensitivity to social justice are part of our fundamental DNA. It is what we do. It would be hard to appreciate and understand all the things that we do as an agency without those things. So for those of you who are not familiar with the SFPUC, we operate multiple departments in essence and enterprises within the SFPUC. We have water. We have wastewater, which is not only sewer, but it's also flood control here in the city.
(06:36)
And we have power. And then in addition, we also operate the community choice aggregator for San Francisco, which offers clean power for residential customers. So our operations begin in Yosemite National Park. That's where we derive our water, that's where we use water to generate power. And those operations extend all the way here to San Francisco to the gateway of the Golden Gate National Recreation Center. So I think our citizens, our customers, and hopefully everyone would expect us to be good stewards of this environment that we are dealing with. So this is a topic very close to us. I've joined the PUC last year. So for some of the things I'm about to say, I don't take any credit for this at all, but through the years, the SFPUC has been a leader in green bonds. The city and county of San Francisco first adopted a climate action policy in 2004, 20 years ago.
(07:51)
So we're not debating whether climate change is real, we're not debating the causes of climate change. We're addressing it. It's a core part of each of the capital programs that we operate. And so as a result of that, we've been a leader in green bonds. We've also been very focused on disclosure. I wouldn't distinguish ourselves from our peers at the airport and the office of the controller's office. I think if you go back even 10, 15 years ago, the OSS for all of the city's departments have had an enormous focus on these topics. So that's a perspective I'm coming from and look forward to our discussion.
Lynn (08:46):
Excellent. Thanks Nikolai. Andrea, do you want to go next?
Andrea de La Fuente (08:50):
Thanks. Morning everybody. Nice to be here with all of you. I am with US Bank's Municipal Products Group. So we are a national bank, obviously. I have a couple colleagues here, and our municipal products group is one of what we call product partners within the bank. So we are an issuer of tax exempt debt. We purchase tax exempt debt. We sell tax exempt bonds through our broker dealer, and we partner with other groups throughout the bank that have other similar products that serve the muni markets. As a bank, we kind of find ourselves at the intersection of investor demand and corporate or municipal strategy in the ESG space. So we kind of see both sides of the market and we view ourselves as here to bring those two sides together. So we're looking for opportunities to find ESG in the ESG space to find products and structures that both meet the needs of our clients and customers and that meet the needs of investors.
(10:00)
Obviously, as Lynn said in her introductory remarks, that ESG nomenclature has become kind of a hot button in some areas of finance. And yoyo span's perspective is really we don't view it that way. We view ourselves as a partner. We're here to help you find solutions. We're here to look at risk and see ways we can mitigate risk. So that's kind of the angle that we're coming from here in the ESG space, we are very actively involved with many sectors across the Muni spectrum. Nicholas obviously knows that we do quite a bit in public power around the country. That's one of those industries where green bonds, sustainable bonds, they become ubiquitous, and yet they're still in a transitory stage and we can kind of meet everybody where they are and help them meet internal goals and external goals. With respect to green bonds, sustainable finance, renewable energy, as a bank, we really are committed to the ESG space because we feel like it's a path that has opportunity to bring solutions to our clients.
(11:20)
So we at US Bank have a very robust de and I initiative. We have our impact finance group, which is our community development corporation. They are very engaged, obviously in low-income, housing tax credits, renewable energy tax credits, affordable housing finance. We have a very active foundation, and of course we do a lot of CRA work. So there are a number of angles that we're coming at this from. Our goal is really not to pass any sort of value judgment on the ESG space, but just to look at opportunities and products and solutions where we can meet our clients and the investor community where those communities are looking to go. So I know we're going to talk about some of the specific areas later. I'll leave that to after the introductory remarks.
Lynn (12:14):
Excellent. Helen?
Helen Crager (12:16):
Yes, good morning. I wasn't nervous about speaking until Nikolai gave this introduction, but at Moody's Investors Service environmental and social and governance factors have always been incorporated into our credit analysis. And so it's not new for us to start looking at these factors, but by intentionally scoring our rated issuers, it allows us to first of all respond to investor demand of tell us more please of what risks issuers are facing in these areas and how they're mitigating these risks. And it's also a continuing effort on our part to be more transparent in our analysis. So just as we're now publishing scorecards in many of our credit opinions, our efforts to assign specific ESG scores is a further example of wanting to increase that transparency. It allows us two to be very intentional. So we're being very specific. What do we mean when we talk about environmental risk? What do we mean when we talk about issuers, water management strategies?
(13:33)
And then it allows us also a common paradigm to talk about credits throughout our rated universe. So it allows us to talk about the environmental risks facing, for example, US water and sewer utilities as compared with those in the UK or other areas of the world. And to have a common dialogue and language around those comparisons. And then it also allows us very intentionally to talk about the impact on credit. So for each credit, in addition to scoring the different areas of risk, environmental, social, and governance, we're assigning credit impact scores that allow us to tell the market. But for ESG risks, how would these credits be rated? Is it sort of neutral to credit quality or do ESG factors drive the rating up or provide negative credit pressure? So we are proceeding in assigning ESG scores to many of our issuers. By the end of this year, we'll have assigned scores to virtually all of our local governments with over $250 million in outstanding debt. And as we look globally, what we're seeing is about 25% of credits have CIS scores other than two, which is our neutral score. So about 25% have credit impact scores of one four or five meaning, but four ESG factors, this credit rating would be rated differently. Then on top of that 25%, about 30% have credit impact scores of 30 of CIS3, which means that ESG factors aren't changing the rating today, but we see risks that if unaddressed over time could potentially move the credit rating one way or the other.
(15:45)
In comparison with those figures. As we look at credits in California and public finance overall, the credit impact is somewhat muted. We don't face in municipal finance many of the risks that other sectors do, the chemical sector, for example, or extraction sector. And in fact, in some cases, for about 5%, for example, of our K12 issuers, they have CIS scores of one. Which means that if we look at ES and G factors, their ratings are actually enhanced when we look at those things because the social factors are so strong in terms of property wealth and the governance of K12 issuers in the state of California is so robust given county office of education oversight and quarterly reporting and multi-year budget projections. And then about 5%, for example, of K12 issuers have CIS scores of three, which means that we do see risk factors on the horizon that they'll need to address in California. Environmental factors and risks of course stand out among those, but also we see social risks in some areas as well.
Lynn (17:15):
Great. Thank you. Thank you all for the great intros. So the first question I'm going to ask you all, so when we did this survey, if our survey's correct, a majority of the industry does see ESG as an important or at least somewhat important factor for the Muni market and nearly half expected to grow the industry. So I'd like to maybe start with maybe the investor perspective. I know that earlier today we heard from some investors, and I think one of the takeaways that we got from that is that it's disparate desires, right? There's not a standard desire of what ESG is for investors. But I want to start with is there demand, right? That's really the question. Is there investor demand for ESG in the Muni market? Maybe Andrea, would you want to kick us off on that one?
Andrea de La Fuente (18:07):
Sure. Yeah. Thanks Lynn. Yeah, that's a good question and a good starting point to our conversation. I think. So just kind of circling back to my introductory remarks, I think in the banking sector we're sort of matching investors with the sell side and we're looking at products that we can deliver that both meet ESG goals and that are desirable. From an investor standpoint, I think this is an industry-wide challenge. It's definitely become more to the forefront over the last several years. Obviously there are a lot of investors, asset managers that have sustainable funds or green funds, and they're looking for specific products that they can put in those pools. So I think our challenge, one of our challenges is finding those specific products that meet that demand and meeting the investor activity and company strategy. Again, we have clients that have specific needs. They have ESG goals, but they also have perhaps infrastructure needs.
(19:17)
They've got mitigation needs, they have physical risk that they're trying to mitigate, and we're looking for products that we can both help our clients structure around those issues and then find the right investors. So I do think there's, to some degree sort of a buy-side challenge where we need to find the correct investors for the sorts of products that we're offering. Obviously, the Muni market's much smaller than the corporate market, and there is a lot of specific pools of investments that are looking to be filled. So there is this kind of opportunity where investors are looking for the correct credits that they want to put in those pools. We might have products that aren't necessarily a good fit, and so we need to find other investors for those products. But there is a huge range, especially when you get into things like the CRA side or tax credits.
(20:20)
There's a huge realm of investments and equity products and all kinds of opportunities where we can look to match up those investors. Really, it's looking at an opportunities of respond to demand and strategize with our clients on both the sell side and the buy side to bring those two entities, those two sides of the market together. So there's definitely demand there. I think it's sometimes there's a mismatch in how those two come together. So that's another way where I think the banking sector has a unique opportunity to try to find the correct fit in that area.
Lynn (21:05):
Nicolai, did you want to add on there?
Nikolai Sklaroff (21:08):
What's really interesting about this question, do you think this is an important topic? I think the even more interesting question then becomes why, and I suspect that the answer to that is very different for different people in our marketplace. For many out in the audience, I suspect it's because there's a big business opportunity and that's why it's important for others, it's particularly because there is risk to investing in certain products and for issuers it's because we're getting a lot of phone calls about it.
Lynn (21:53):
Excellent. Helen, did you want to add anything there?
Helen Crager (21:55):
Yeah, I guess one of the things that we talked about in preparing for this panel and other panelists have touched upon it too, is there's not really an obvious and immediate pricing differential for a lot of these things, but I agree with you even beyond market concerns or issues and municipal issuers are always in it for the long haul, what will the market look like in 10 years or 15? But I think that it allows issuers to have a different conversation with their constituents too, in terms of why do we need authorization for this debt if I need it from my board, if I'm a utility or if I need it from citizens if I'm a city or county. And I think that sustainability is one of those conversations that issuers are now having with their constituents. So LAUSD, for example, just issued sustainability bonds. They're using a portion of that for purchases of electric buses. And so they might have had a different conversation around the need for vehicles, but for this added element.
Lynn (23:06):
So that's a very good segue then to the next question that I'm going to definitely throw to Nicolai start. And I think it's the question that many issuers in this room and across the country ask, and that is, when am I going to see a pricing differential if I issue ESG debt? And I think one of the questions I'm going to pose here is I think we need to figure out or maybe talk about what is the pricing benefit? Is it lower yields? Is it a broader investor base? What is it exactly? And can it be both things, I guess?
Nikolai Sklaroff (23:44):
Yeah. Well, I'm glad we're having this conversation. I would've loved to have had the conversation with our friends on the investor panel as well. And we've had that conversation in the past. We've seen from this poll, we've seen from the responses, and we saw from their earlier panel with the investors that everyone seems to agree that this stuff is really important, that we really want this. And I don't know if I was the smartest person in my class, but I think I understood that the more demand you have for a product, the better the pricing should be. So I'm frustrated that we're not seeing that differential. I'd like as an issuer to see that differential. I'm fearful whether we will ever see the differential. And here's the reason I think we are a small part of a global investing universe, and this effort with ESG really began in the taxable market and began internationally.
(25:08)
And I think our counterparts in Europe are typically thought to be five to seven years ahead of us in this regard. What is important to understand about how that whole universe got started was that people who wanted to affect change went to investors and said, you can do this without giving up yield. In fact, we heard that in the panel before that we are providing a service to our investors and they don't have to give up yield compared to the other investments. And that's the premise that this has all been promised to for the investing. And of course, we as issuers, and I used to be an investment banker and I was part of these pitches as well, where if only we grow this marketplace, if only we build, the demand will eventually have a pricing difference. And I think there's this enormous collision of these two expectations, and I think that's why we continue to see the conflict on this particular issue.
(26:33)
I really appreciated that earlier panel. David Blair is an important thought leader in this regard, and I've heard him ask the question, why then do you buy green bonds? To which he answered, well, if there ever is a differential, I want to capture that. So I think the investment world sees a value there. When we go out and issue bonds, we typically have green bonds and non-green bonds, and very often have them in the same maturity. And my team, and I'll just point out they're the three guys in the back who've been like this for the last 40 minutes, Edward, Dan, and Eric fearful what I'm going to say up here. But as we watch game day, as the orders come in, almost universally the order flow is coming into our green bonds and I'm getting excited. I think now I'm going to finally see a pricing differential In the end. We get a lot of demand. It gives us an opportunity to adjust yields on all the bonds. But as someone who was an economics major, I still can't wrap my head around having more demand for something and yet not seeing a pricing differential.
Lynn (28:07):
Anybody else want to delve into this? Okay. Well then let me flip the question. Will issuers ever see a penalty if they don't start disclosing more or addressing the E and the S and the G? Is that something, is that possible?
Andrea de La Fuente (28:29):
I won't say that I think that the issuers are going to see a penalty, but just to kind of dovetail on that, I think this whole sector came about what, 20 years ago, sustainable finance as a values investment, not a value investment, right? Investors wanted a way to focus their values in investing, and now it's transformed. But as Nikolai said, unlike in Europe, this is a grassroots effort in the United States, it comes from communities, from corporations, from individuals, not from government regulation. There is obviously some government regulation on some local and state levels, but primarily the investing in ESG, the segment across the different sectors is driven by more values than value. And yes, maybe someday someone will get in and they'll be the first investor to say, I saved five Bips on that one. But I guess that has yet to be determined. But I think your question sort of tied over to disclosure, and I think there's kind of a ladder that we're looking at.
(29:53)
When you look at the disclosure for managing risks, there is definitely demand. There is a need in the investment community to see what the risks are of the credits they're buying. Portfolio managers want to know what the risks are, and they want to know especially the physical risks and how those risks are being managed. Investors also want to know that ESG claims are true and accurate because they have funds that they're putting investments into. They want to know that those are actually being put into these funds with verity. And then if you look at just a little example, if you look at net zero goals, how many companies communities had net zero goals five years ago? Now, I'd say most entities have net zero goals, and that's a big transition in the industry across sectors in just a few years. So I think if we just stay the course, keep looking for that, looking at the additional disclosure, looking for that risk management.
(31:01)
Just today, the United Way of greater Los Angeles put out a post on their affordable housing investment fund. US Bank was the underwriter on a 96 million social bond. It was a racial equity bond. The bond itself, I can't say that it priced at a different level than it would have, but it didn't have that designation. But the end product is one that provides value to the users of the product. So there's kind of two sides to look at it from. The loans that are going to be made from the affordable housing investment are being made at below market rates to the users of those loans. So there's two sides to come at this from. And I think that area will just keep developing as the investor demand grows and the scrutiny in this sector continues to accelerate.
Helen Crager (31:52):
Yeah, we're hearing the same thing from investors and think you said that 15 years ago, the San Francisco PUC had these issues in their disclosure documents and offering documents, and these topics are certainly not new for municipal issuers, but I would say the lens that we approach this with and that investors approach it with has shifted. And the light and the glare on that lens has certainly intensified, and not only with issuers, but as we speak with, or not only within investors rather, but as we speak with issuers, insurers are really changing their discussions with a lot of issuers in terms of property insurance and things like that. It's what we heard from one of the panelists on an earlier panel. And there have been a handful of issuers that have absolutely taken the lead in this DC water, for example, for a few years now, publishes an annual ESG report that accompanies their annual audited financial statements.
(32:59)
San Diego County Water Authority will do a similar report. And I think that we're hearing from investors that a lot of issuers have these in disparate parts, their sustainability plan and their contingency planning around different emergencies, but really a demand to get it all together and give it to us in a synthesized format. And not only is the market, but the EPA, for example, has convened a national panel. They're very concerned, large sophisticated issuers are way ahead of the curve on this, but they're very concerned about the smaller issuers that don't have the staffing capacity to think about these issuers issues and plan for them. And the EPA feels like it doesn't have a really good grasp on evaluating which of the water and wastewater utilities that regulates is adequately prepared for these kinds of changes. And then I always come back to, I think that some of the most important conversations are with your constituents.
(34:12)
I can only really describe it as a heroic investment. And for Foster City in San Mateo, for example, did a major investment in wastewater and climate preparedness and insulating themselves from water level rise that frankly none of the current residents of those cities are going to see material benefits from that. They are making an investment for way into the future. And that's what this conversation facilitated. And it's Sunnyvale, for example, cross trains, it's first responders between police and fire and EMS. It costs them more, but they see it as a very intentional investment in social risk factors, and they feel like they get a better staff retention and better outcomes in those three areas of response as well.
Nikolai Sklaroff (35:10):
If I could just return to your question about penalties for issuers, I would be remiss as a member of the GFOA debt committee who works with counterparts all over the country and as a commissioner for the California Debt and Investment Advisory Commission where I represent the city interests on the commission to let that stand. I think hopefully even those of us who do the disclosure should hope for a reward, not for penalties for our peers. But I am concerned, and I think we need to be very clear in our conversation here about what is it that we're actually talking about? Are we talking about that everyone has to do green bonds? No. What we're talking about is disclosure and particularly disclosure of risks associated with three factors. And one investor has said publicly, look, I regret that we ever started using this three letter acronym.
(36:21)
I want the whole alphabet soup of disclosure of risk. I think all of us, whatever we attribute the causes of these changes in the world to who are experiencing them or will experience them, need to be in a position of disclosing those to investors in our official statements. And the penalty I'm most concerned about is that all of us, whether we've been doing it or not, are going to get wrapped up in regulation because of the people who aren't disclosing those risks properly. And I think what we're hearing loud and clear from the investor community is that they're not getting the disclosure of these risks that they're hoping for.
Lynn (37:10):
Thank you for that. That's actually, that's a very nice segue to the environmental aspect that I was going to get into with you all. And that's the highest level I think that most investors are concerned with and the industry at the large, because it's the most visceral. We see the floods. We see the fires. And actually, just to point out something that you said, Helen, I think it's interesting, some of the changes that issuers are making, you don't see things unless they're broken, right? So you don't see these changes that issuers are making if they're positive and they're helping you only see the broken parts. But that said, so could you all, I want to know, with these extreme weather events, with these large and more disastrous natural disasters that we're seeing in insurance companies leaving California, leaving Florida, leaving Louisiana, do you see the environmental factors that are affecting the industry at large? Are governments prepared or are there, are we able to address these issues? I'm looking at you, Nikolai.
Nikolai Sklaroff (38:26):
Well, I think we have obviously enormous challenges. I think it is not just about the disaster on the six o'clock news and the damage that's caused. It's particularly for agencies like us, the investment that we're having to make over many years to address the fundamental changes. If you have wastewater treatment plants, where do you put those? At the bottom of the flow, near bodies of water? We're in an environment with sea level rise. Our power enterprise is working hard on addressing mitigation upcountry to ensure that we have a resilient transmission system despite wildfires. So I think it's not just the headlines and the disasters, it's the investment that we're all going to be required to address. Another huge project for all of us, and I expect it'll be discussed in the panel later, is for every water agency addressing resilience as drought becomes more pronounced.
Helen Crager (39:54):
I mean, we talk about these things as if they're separate, but they are interrelated. And so environmental risks influence social risks in the sense that insurance premiums influence affordability and additional investment that's being made on utilities impacts utility bills, which impacts affordability and e risk definitely garner headlines, but we're also paying attention to the slow burn of affordability. And the median rent in California is greater than 20% of income, which is high and prohibitive. And as utilities work on, we're looking at responsible production and water quality. So how are the new PFAS regulations going to impact again, their costs? And in healthcare, what is the patient mix doing to hospital's profitability? And so they fit together and influence one another.
Andrea de La Fuente (40:52):
And I think I'll just add that from our perspective, our clients know their communities and care about their communities. And what we need to bring to the table is that suite of solutions, the problems are identified, they're challenging, obviously they're big, they're numerous, but the clients, the municipalities, they are the ones who have already identified this risk and are looking for ways to mitigate the risks. And from US bank standpoint, we have a ESG advisory group that will come in and help look for solutions to some of these problems in the insurance space, in the fire, the climate risk, with respect to wildfires, with respect to rising sea level, and find products and solutions that meet the needs for those local communities from ideation through execution and then on through reporting. None of it is simple, but the frameworks are there for clients, and really the expertise is there at the local level.
Lynn (42:12):
Excellent. Thank you for that. So I have one question that is, I have to ask it. It's unavoidable, and I know it's a challenging one, and that is the politicization. You can't even say the word how ESG has become politicized and Muni industry by its nature, by its nature, is the intersection of finance and policy. And it's definitely affected by politics in many ways. But this one seems to be standing out in these days. And I just want to know, do you think it hurts, it helps, or it doesn't affect it at all? Nikolai, I know you can take this one.
Nikolai Sklaroff (42:58):
Yeah. I'm really interested in addressing this because I think I'm going to offer a challenging response to a challenging question, and I'm going to challenge all of us in this industry to think hard about how we're addressing this topic and talking about this topic. It didn't occur to me until this morning when I was watching the investor panel that we were having the investors talk separately. The investors have been talking amongst themselves. They've published the green bond disclosures and the issuers were involved, and we issuers through GFOA, we did our best practices separately. I think we need to have more conversations together, and I think we need to come together to start being more nuanced in how we talk about this topic because of the market opportunities, the business opportunities associated with ESG. We slap a big ESG label on a lot of stuff. Green bonds, ESG investing.
(44:26)
The young people who are driving this, they do want to change the world. I know many of our private sector partners want to stay away from the politics, but we need to acknowledge there are politics associated with that. There are decisions that are being made by people. I think we need to be very clear and separate labeled bonds from the ESG label and speak about ESG as risk disclosure and really emphasize that that doesn't depend on how you view climate change or all these other issues. It isn't driven by those factors. It's what is the risks to the bonds. I think we need to be very clear and nuanced about those distinctions.
Helen Crager (45:23):
Yeah, you're absolutely right. It seems like our whole world has become politically charged. But at Moody's, we don't view ESG as political. We view it as a practical concern and one that transcends congressional districts, transcends socioeconomic levels, quite literally the volatile weather patterns that negatively impact the ski resort communities and tourism levels of our wealthiest areas in Aspen and Vail and Lake Tahoe trickle down to middle class housing prices in Nevada and Arizona and connection fields, connection charges, and then on down into the agricultural sections, areas of California. So it reminds me of the quote about life that you don't get out of it alive and ESG factors. It would be wonderful if we could ignore them, but they're there.
Lynn (46:22):
Excellent. And we were concerned that we were going to not have enough to talk about on this panel with down one panelist. So we're coming up on time. Does anyone in the audience have any questions for the panelists? They're coming with a mic.
Audience member 1 (46:46):
So maybe we've been thinking about this wrong, which is if we're doing it right in terms of the risk disclosure, you're already getting the best pricing, which is why your bonds Nikolai life price very aggressively. So sort of rhetorically, why should label bonds do better if you're giving investors what they need for fundamental risk disclosure related to these things, which I think if there's one good outcome of these panels is hopefully people's mindset will be reoriented, that this is really all about risk disclosure, right? So just think about why did you get more by slapping a label on it?
Nikolai Sklaroff (47:28):
Well, if everybody was providing the disclosure, maybe there shouldn't be a distinction. I would suggest that for now, while there are people who are providing that high level of disclosure, I would expect the higher demand would be rewarded by better rates.
Speaker 8 (47:51):
But just to continue that, you have the same disclosure for both Syria. So in other words, you gave everybody what they do. Great job. That's why (Inaudible)
Lynn (48:10):
Anyone else?
Speaker 9 (48:17):
As far as I know, investment grade Muni bounds are over subscribed in many cases several times. Oversubscribed. I'd like to know the opinion from the panelist. Could this demand and supply imbalance, AKA, the large demand versus limited supply play a role in not seeing the reward slash penalty for ESD factor? Thank you.
Nikolai Sklaroff (48:54):
Yeah, and I think this dovetails with Rob's point. My objection is less that my green bonds don't price better than my non-green bonds. My objection is that my green bonds should be pricing better than the people who aren't providing the disclosure.
Andrea de La Fuente (49:19):
Yes, there is over subscription in many investment grade issues. I do think it to some degree, comes back to this disclosure question. If we're talking about ESG specifically, and I think Nikolai already kind of hit on that. The point that all disclosure is not created equal, there are issuers who have better disclosure practices than others. And while you may have oversubscription of most series and investment grade, the yields are not all equivalent. They are driven by ratings, by risk, by disclosure, by geographic area. A lot of different factors go into that.
Lynn (49:58):
Yeah, it's an interesting question because thinking about even supply this year with being down again, another down year, ESG issuance has grown. So there's that. But I think I'd add one thing here before we close up, and something I was thinking about is grass fed beef organic, it's expensive, but I pay for that because I know, and it has, it's disclosed, it's grass fed. I'm paying a premium. So I think that there's maybe in the future when there is more supply and maybe there will be more demand, maybe you'll see that pricing differential.
Nikolai Sklaroff (50:40):
I like that analogy.
Lynn (50:41):
We are out of time, so any other questions, just make sure. Alright. Thank you so much to our panelists. We didn't even get to all of our questions.