- Green bonds
- Social bonds – courthouses, municipal services and other projects
- Housing bonds – opportunities to bring together E & S aspects
Kyle Glazier (00:07):
So I think this is a very important and timely panel talking about the way ESG fits into the infrastructure development plan. You may have heard Mitchel Andrew mentioned that we are now a year removed from the passage of the infrastructure investment and jobs act that provided not insignificant funding for some ESG infrastructure, but ESG is also a very expansive topic and one that can be a little bit controversial in some ways as well. So I think it's good that we're having this conversation now. I think since it's the needs of issuers for infrastructure that sort of drive all of this. Right. Maybe you could tell me a little bit, Nancy, about how you're thinking about ESG, what your experiences have been and what you sort envision going forward from your perspective.
Nancy Feldman (01:08):
Well short that from the issuer perspective, it's very interesting how we all say ESG and we all think we agree on what it means. And since I joined Montgomery County now almost two years ago I thought I knew what it was until we actually had to figure out what it is, how you pay for it, how you measure it and then if you want to finance under a label of ESG, right? And so I think that the thing that I have come to understand and would love to share with you is about how Montgomery County has taken ESG and climate in particular, but also social justice into everything that we do. So for those of you who don't know where Montgomery County is, I would say look out the window. But there are none. We are just north of the district here and border. Our western border is Virginia and some of the communities that you might be familiar with are Bethesda, Rockville, Gaithersburg, Germantown, which sort of runs right up the center. And I could have gotten here on the red line today but I failed to do so. Sorry. And for those of you who are gonna take the silver line out to Dulles that will be a field trip for me. I'm looking forward to it. So Montgomery County has a 6 billion operating budget and a 5 billion capital improvements program that we cover over six years. And we incorporate climate into all of that. We also incorporate, and I'll talk a little bit later about, racial equity, excuse me, R E S J and social justice into what we do as well. So the county has had climate GHG goals since as far back as 2007. But in 2017, the county set a very aggressive goal for itself of GHG reduction to 80% of its 2005 level as soon as 2027, which is a pretty aggressive goal and a significant acceleration of our goal from the earlier version and a hundred percent by 2035. Well, how do you do that, right? Well took some time, but a large group of both citizens and county staff and consultants came together and built the climate action plan. And the climate Action Plan lays out about 86 items that were significantly prioritized that will help with meeting the goals of GHG reduction. And some of the topics in that climate action plan include clean energy, transportation buildings, climate adaptation, carbon sequestration, climate governance, and public engagement. So great, you built a plan. Now what we have to incorporate it into your operating budget and your capital budget. And so a number of tools have been put in place to actually do that and to monitor that. And so if you were to in your spare time pull up our recommended operating budget and our recommended capital improvements program, you will see discussion on prioritizing plans and projects that include both climate as well as racial equity and social justice. Some of those things you think, okay, I've got this great plan, what do you do about it? We monitor it annually. We produce an annual report that monitors what was done and what actions need to be taken and then there's a plan for the subsequent year. So those are all really important things. And I guess the last thing on this before I hand it over to my esteemed panel colleagues, is also to talk about the racial equity and social justice. There is a law passed in 2019 in the county where every budget and every capital program has to incorporate tools and measure measurements for promoting racial equity and social justice. So is it done? No. Is it in process? Yes. And are racial equity in social justice office is sort leading that charge with tools and data collection and training and things of that nature.
Kyle Glazier (05:43):
All right, thank you Nancy. So moving over to the business side would somebody like to tell us a little bit about what their experience has been so far and what they expect for the immediate future here?
Nicholas Donias (05:58):
I can get started. So again, my name's Nick Donias. I'm a Vice President in infrastructure finance at SNBC. I think an interesting point is that other than my finance day job, I helped manage the analyst, which part of it is recruiting. And I was going through all these videos at the record about why are you interested in finance? And almost all of them said ESG, the focus on esg. And I was surprised. I was like, how is all these seniors in college interested in ESG? And I took a look at our website and that's like the main thing, the splash page focused, committed to ESG and it's almost on every single institution's website, is this commitment to ESG. So it's really the messaging is getting out there. And how I've seen in my experience putting my finance hat back on is mainly two ways. One, it's prioritizing and emphasizing the need to finance these projects that fit nicely into this ESG category that's like renewables, EV infrastructure, climate mitigation. And I think the second, which is maybe just as important is finding the ESG angles to projects that are traditionally probably don't fit that I'm thinking about airport terminals data centers social infrastructure such as student housing. And so for example we financed the Fargo Morehead Flood Diversion project it's climate mitigation helping to divert flood waters from a town called Fargo and North Dakota. And that got a green label and it was multiple times. And I think this focus on ESG helped to, maybe it didn't get people across the line, but it made people focus more on something that might have been more complicated, more complex. Like this project goes over many jurisdictions and involves multiple components of different cities, counties, and state credits and involves a lot of different finance. So highlighting it helps put the attention on projects that need to get done on the second end on these airport terminals. I would say that it's about finding, being earnest about the ways that you can label something like that. ESG a terminal, what does it do? It goes to finance like jumbo planes emitting CO2 into the atmosphere. But I think there are these airport terminals getting green labels on them. And I think it's because they are looking at other opportunities at the S component focusing on the minority women business own enterprising as part of the contracting it's about the green component by implementing EV infrastructure into the parking structures, solar panels, it's going beyond just getting that lead label but it's more about being earnest to get that label to withstand the scrutiny of green washing as well. So those are to the two main components. I see. It's like the focus on those type of projects, but also finding the angle outside just the core project itself.
Jamael Flemming (09:05):
And I can just piggyback off of that Jameal Flemming SVP at Seabert as an underwriter servicing my clients, some of which are airports. I think we haven't seen a ton just yet of airport ESG issuance. We are seeing more of it. But I think one thing we are seeing a lot of in the airport space is nearly all airports incorporating ESG disclosure in their offering documents. And I think going back to a point that Nancy made, which is what is esg? We all have our own definition and oftentimes when we're issuing ESG debt, our definition doesn't really matter. It's that of the investors and who can actually purchase your bonds. And each investor has their own set of criteria that they believe determines what an ESG bond to be. So I always recommend that issuers include the extent that your disclosure council will allow to include as much ESG disclosure as possible because that's what's gonna determine whether or not an investor typically purchases your bonds. I would say quite frankly most ESG fund portfolios are comprised of bonds or bond issues that don't even have an ESG label quite frankly. So, I think that disclosure is incredibly important because oftentimes issuers are already bonding for projects that do have a greener social element. But because that sort of context is not provided to the investor, they don't even know and have the ability to invest for that particular reason. So, I think you are seeing a lot more issuers in City of Chicago for example, they're about to be in the market with a social bond deal, but their last, which is their inaugural transaction, but their last deal, which was not a green or social transaction, still had about six pages of ESG disclosure in that document. So I highly encourage issuers to continue to do that as well.
Suzanne Mayes (10:54):
I also think it's not an all or nothing proposition and to the extent in order to label issuers need to really scrub their projects and think about them in the context of the ESG principles and it may very well be that a substantial portion of an overall capital building project would qualify. So, you break it out in series and you label the piece that is tangible and kind of readily appreciated as fitting ESG. And maybe you do a second series that is not, if you don't label, then you're leaving the investors to try to scrub documents and figure out what is ESG worthy and what is not is fine, but there can be some benefits to actually doing some of that work for the investing community ahead of time.
Jamael Flemming (11:44):
I think that scrubbing is essential frankly. And I think sometimes people see to being very daunting. But you can use the full financing team to assist you in that process. You can also hire a third party verifier who assists in that as well because sometimes one, there are projects that you don't think qualify that actually do meet certain criteria. And then there are others that you think will actually qualify and then they actually don't. And that the second case there will really depend on who you ask. For example, I know certain issuers and I support this, but they may have a lead silver building, right? That's lead silver certified and they self label and say, oh, that's green. Whereas did a transaction for the state of Atlanta that closed last month and all their new construction is lead silver. And we used a third party verify who said That's not enough for us. We want to see you going above and beyond that. So, in addition to being lead silver, we need to see that you're producing an energy savings reduction of at least 30% over your baseline. So, I think scrubbing those products is essential. And then also whether not using a third party verifier to assist you in that process can save you a little bit of time as well.
Kyle Glazier (12:52):
How would you characterize the importance that investors are placing on things like third party verification adherence to universal standards that are out there? What do you think about that?
Jamael Flemming (13:03):
I think it depends frankly on the investor. I think in the corporate space you see certain investors that require that verification. I'd say in the muni space, quite frankly, the majority of investors will tell you they don't really care that much frankly because oftentimes all third party verifier is doing is they are taking your ESG bond framework that you've produced and then they are just certifying that look, this does align with the green bond principles that you mentioned earlier. It does map to these UNSDGs sustainable development goals as well and that it does comport what we believe to be ESG. So I think frankly does an investor care a whole lot? Not necessarily, but I think it does offer some protection to issuers. I do think it does help prevent against greenwashing for example as well. So I think there is value and especially for first time issuers as well, are those that don't have a lot of resources to dedicate towards the ESG space.
Nancy Feldman (13:59):
Can I jump in on the issuer side? Just to start with Montgomery County has not issued any labeled bonds This past year we issued our first official statement with climate disclosure in it which was an internal process of trying to identify through all the materials I talked about our capital, our climate action plan, our budgets, all the tools and things that we have in place. And looking across ES and G. And we are sitting here in Maryland, Montgomery County, obviously today we're in DC not in California. Our risks are very different. We don't have earthquakes, we don't have wildfires we do have water maybe sometimes more than we need. So our two biggest, if you were gonna try and say what are our biggest issues in the climate space are greenhouse gases and flooding? Not because we obviously have been having intense rainstorms and we have to look at all of our storm water management among other things. So we've not concluded that it was yet valuable to us to go through the process of labeling bonds and seeing if that produced a better investor response or a lower interest cost or a combination of both. Part of that is we issue almost all of our bonds. We issue between three and 400 million a year. So we're kind of a small issuer or smaller issuer in the overall scheme of majors and we issue almost everything competitively. So under that set of factors, we haven't seen a reason to label, which of course labeling when you get there does require some additional staff. Time monitoring could be some cost if you were to have a verifier during the process. And so to this point, it hasn't made sense for us to go there. And that doesn't mean that we don't issue bonds. We have water quality, stormwater quality bonds, we issue affordable housing bonds every single year and of course do other real general government type of work that would potentially qualify.
Suzanne Mayes (16:26):
Just one thing I wanted to jump in on music to my ears that although you've not labeled, you've begun ESG disclosure. I think it's really important for issuers to understand the difference between labeling bonds, which in my view from a bond council or underwriters council perspective is really in the first instance it's a marketing issue and then there's follow through. But the disclosure point has nothing to do with whether or not you're issuing labeled bonds. It's, just one more topic that's become topical in terms of what's material about an issuer and the issuer's story. And there are issuers who will never issue labeled bonds but who should really be thinking a lot about what their various ESG risks are. And they should really think through that framework just like they think through any other disclosure point. It sounds like Nancy's team did a lot of hard work kind of looking internally put programs and policies and procedures in place and I'm sure they helped you evaluate your risk structure and then rather than just kind of knee-jerk boiler plate disclosure that gets pulled from an issuer in another place and dropped into your book, that could be a jumping off place and then you tailor that disclosure to the specifics of your circumstances. So I just wanna point out that disclosure is very different than labeling and they're not tied. You'll see one without the other and I think we'll see a lot more of ESG disclosure over time. The SEC's made it very clear that they're interested in the topic. Don't know that. I don't know if there's anybody from the SCC here today. I don't know that we'll get a lot of guidance from them but of course the framework for that will continue to be materiality, which all of us have worked with for a long time.
Nancy Feldman (18:24):
Yeah, I appreciate the comment on materiality and this is sort of when I give a shout out to the team at GFOA who put out some best practices on ES and G individually and then on labeled bonds separately. So four different best practices and those were really helpful in creating a thought process around figuring out what our risks might be across a number of those sectors that were. So I think it's a good place to start to think about it because yes, I know we're not likely to have a whole lot of earthquakes. Yes, there have been some in this region, but it's not a high risk. Whereas storm water and climate obviously are significant in this region.
Jamael Flemming (19:17):
And I think in addition to those GFOA best practices, we also have seen the MSRB looking at ESG a bit more closely. They released an RFI believe the end of last year and then they release the results of that RFI a few months ago for folks to take a look at the SEC looking more closely at. Also that affects more of the corporate side. However, we've seen that all market tends to lag corporates when it comes to ESG. So whatever we see happening in the corporate space is tend to kind of forthtelling gonna happen with munis as well. And I think you made a really good point also about just the mindfulness in your documents because not only are we thinking about it more, but the rating agencies are also right. And you have folks that are assigning credit scores or ESG scores if you will they're incorporating more ESG factors. You do have certain rate agencies like Fitch for example, at least report back in May. I believe that's the only about 7% of their actual rated bonds are affected by their ESG credit scores if you will. So at the time being, we're not seeing a heavy influence on the credit worthiness from ESG, but we may see that change over time.
Nicholas Donias (20:26):
I'll just add that we're, the label does help that as I stated, many institutions have these ambitious goals of so much of their capital goes to ESG related projects and a label is an easy way for them to do that work to be able to check that box. Yes, this does fit into my ESG bucket snbc as a lender for example, I think our goal is to have 500 billion deployed within the next 10 years to ESG related projects as a direct lender. And so the label helps yet at the same time we don't want to be in a headline saying that like, oh yes, we called a toll road green and being scrutinized for that. But in the end it does go to achieve those goals.
Jamael Flemming (21:11):
I think that's a really good point you made just now about not being in the headlines for certain things. Cause as I mentioned earlier, certain projects that you think may qualify and do not. When we executed the transaction for Atlanta, there were certain projects that were tied to renovations of police stations fire stations, and also diversion center. And that diversion center took individuals that may suffering from mental illness or from drug addiction and took them out of a more strict penile system and put them in more of a center that would kind of cater to their needs a bit more. Folks who were trained to treat their needs. And when we worked at a third party verifier based on their taxonomy, they actually lump police stations and fire stations together and are typically averse to putting a social label on those projects largely for the optics associated with policing and calling that social, if you will or putting a social label on a diversion center, which they effectively call incarceration. So we excluded those projects to your point before and parsed those out from the other social cause we had about 400 million of social projects and then about 40 million that we believed we probably don't want to put the label on necessarily. So doing that scrubbing is very, very important to not potentially end up in the headlines as was noted.
Suzanne Mayes (22:25):
I also think because of the lack of standards, transparency is key. Healthy descriptions of what you're labeling, there will be disagreements on whether something qualifies or doesn't. Sure, there are issuers out there who are doing similar projects that aren't using third party verifiers, which is completely acceptable. And they may be lumping fire stations in, I think right now that's okay as long as it's clear to the market what projects are being labeled. So I think when you don't have strict standards, the prudent thing to do is to be clear and kind of the labor points so that no one is surprised down the road with what they have in their bond fund. Because I do think this is gonna mature any burgeoning industry and five years from now this discussion I expect would be very different. But we all know we do deals that are out there for 20, 30 years. So I think that you have to assume that the scrutiny, the level of scrutiny is going to increase over time with respect to bonds that were labeled in the 2020 era. So that information will be important.
Jamael Flemming (23:39):
And just to that very point, based on the fact that there will be disagreements and whatnot, we actually pushed back on the fire stations and we got them to reverse course. Oh, so they did include the fire station specifically in the social bond component and they said that they would revisit their internal taxonomy to probably change that going forward because we are evolving very rapidly in this space.
Nancy Feldman (24:00):
So one thing that's sort of interesting is to think about whether your bond is labeled or your issuer is conscious of ESG topics. And so the kind of disclosure that we thought about was really it wasn't six pages. Okay, let's start with that. And materiality was sort of the key and we worked with our bond council wasn't used on what was material and we also did not incorporate by reference. We thought about it, but we did not incorporate by reference our climate action plan. We identified that it exists and that as a reader you could read it, but we didn't incorporate it by reference because the due diligence on that would have been very, very complicated for something that was important. But we weren't labeling the bonds. And so as investors, and I don't know how many folks in the room are actual investors in addition to I guess Nick whether or not the issuer is doing the right thing as opposed to the project and the bond is a green bond and a green project or a social bond and a social project, that's a whole other set of rules, if you will, that don't exist either. It's more subjective.
Kyle Glazier (25:36):
Nancy, you mentioned that so far it hasn't made sense to you to go ahead and do a labeled bond. Have there been other experiences here on the panel in terms of people who have seen a very tangible benefit to explicitly labeling or what can you tell us about that?
Jamael Flemming (25:58):
Sure. I've seen a few instances where there has been a benefit. I think the elephant in the room often is there a pricing benefit. And I would say by and large the answer is no. And that's when you look at, which doesn't happen that often frankly, but the simultaneous issuance of green, non-green and then also having overlapping maturities, we don't see that too often cuz if I'm actually structuring your bonds, I would not recommend overlapping maturities. But in cases where we have seen that, there have been a few instances where we've seen a pricing benefit. I did deal last year for Fairfax County where we saw overwhelming over subscription during the pricing period and we were able to tighten up credit spreads on the green series by one to three basis points. I'd say that maybe in the market there have been a handful of deals that have seen a pricing benefit, but I would say by and large what you see, as Nick mentioned earlier, you see more eyeballs on your transaction. It helps with your marketing, ideally that creates greater investor demand. You know, get a bigger book during pricing and you can therefore tighten spreads during that repricing period if you will. That's the greatest benefit that I've seen typically in the market.
Nicholas Donias (27:09):
Yeah, I would agree that it does help with the investor demand. It's hard to put that number on. Okay, how many basis points will you save versus the work that you do to go through this due diligence process to get that second party third party opinion on it to get the label on the bond. The example that I give was Fargo, which I think other than being a big headline type of project, the first P3 for the US Army Corps of Engineers, I do think the green label did help to bring investors that we didn't know were gonna be paying attention to this project similar on some of these airport terminal three projects that we are financing them all like loan first and then there's gonna be the market outside after our takeout, after it's complete will be the bond market. And I think figuring out the angle there will help in the end to get those other investors who have set aside that capital for green type of projects.
Nancy Feldman (28:08):
So I would think, and this is sort of a not Montgomery County specific comment, which is if you're trying to attract green social investors, if you have the label on the cover of your offering document, it might rise to the top of the pile when somebody's planning on what are they going to look at for next week or the following week's investments. Whereas for those who are not labeled and have maybe great climate creds not suggesting that's a standard that anybody knows what that is you'd have to actually read the whole document in order to find it or scan it. And so the idea of labeling, if you believe that you need more eyeballs on your transaction could help move it to the top of the pile on Friday.
Jamael Flemming (29:02):
And I agree with the point on nancy made earlier as well, which was that telling your ESG story is often more important than just the specific project that you're bonding for. Investors want to know where you've been, what are your goals, where are you going? And I think on topic of a pricing benefit, we've largely been discussing it or I have in the context of municipals in the primary market, and I would say in the corporate space, they regularly see a pricing benefit that happens all the time in their space. So if we're saying that they kind of foreshadow what's gonna happen in our space, hopefully over time we see one develop with more regularity. I think we're seeing a lot more fun flows into the muni space as well. And also we've been discussing, again, the primary market. We do see more frequently in the muni secondary market a pricing benefit, which hopefully is a sign that investors are seeing a benefit and wanna see opportunity for the future.
Nancy Feldman (29:56):
Well that would go with the label point too, right? moves up on the Bloomberg screen, not just on the pile.
Suzanne Mayes (30:01):
I'm not an issuer, but my observation is that beyond the primary constituents, the investors, I do think issuers the process of labeling and having a book out there that's labeled it has other benefits to the political body vis-a-vis government citizenry. In today's day and age, I think that governmental entities want to telegraph clearly what they're doing in this space. And so this is just one more way to explain to your constituents that this is top of mind for you as an issuer.
Jamael Flemming (30:48):
100% In Atlanta they have a moving Atlanta forward plan, which is about 750 million dedicated towards green and social projects. So when we were thinking about labeling this deal, because those projects were comprised of both green and social, when you combine those two, that sustainability, but in terms of a marketing perspective saying sustainability bonds versus social bonds has different ring to it sometimes. And a city like Atlanta or in the case of Chicago also showing that commitment to social justice and equality and equity is really, really important. So sometimes just the label in and of itself, whether it be green social sustainability is really, really important.
Nicholas Donias (31:31):
I would think too during, so I do a lot of the p3s and the sector and what I'm starting to see is that in the procurement phase, some form of an ESG angle is becoming more important that where solution involve some type of certification, will your construction team be like at least 30% minority women business enterprises. And so I think more on the sponsor side there, that has to be increased focus of how am I gonna bid for these type of projects because it's already getting implemented early on in the phase of the project.
Suzanne Mayes (32:08):
One thing we haven't talked about related to labeling that I think is worth mentioning is the reporting. So it's not a complete free for all. There is an expectation that over the life of expenditure of the proceeds there would be at least annual reporting of how the proceeds are being spent under what categories and status and the like. And that does raise some interesting issues for issuers who already have their hands full with topics like continuing disclosure. And we all know how well that's gone for those of us in the marketplace. So I think there's a natural reticence on the part of issuers to take that additional compliance obligation on. And I'd be interested, Nancy, how that's weighed in your mind. But it's definitely something to think about as are the ramifications of what happens if you fail to report. We've done deals with best efforts covenants to report as contrasted with a hard covenant to report. You have to think about where that covenant goes. Does it go in a continuing disclosure agreement? We all know they're very hard to amend. Does it go in a loan agreement? If it goes there and there's a violation, what are the byproducts of that? So there are complications to labeling that need to be thought through. I think they're manageable. But I would be interested to hear from the buy side investor and issuer side, how folks are viewing those annual reporting guidelines.
Nancy Feldman (33:42):
So the annual reporting concept is part of our thought process. We have two people who handle debt for the county. We have about 4 billion of bonds and leases and some revenue bonds outstanding. So it's not nothing but it's not New York City, it's not Atlanta, it's not some of our largest issuers who are looking for a number of things when they do their bond issues they're looking for to attract new investors because they're bond, there's so many bonds outstanding. This is sort of my old investment banking hat, sorry there's so many bonds outstanding that they need more people to come in because portfolios, they get saturated with a name. And so we don't have that problem that we can see at this point because of the relatively modest amount of debt we issued. Yes, I'd love to have our affordable housing bonds labeled but I take on some additional costs and additional work for the two people who are responsible for this portfolio and I can't yet point to the value that's been added. And we use things like our AAA bond rating for things other than just AAA in interest rates. We use it as sort of a badge of honor. Apparently we've had the AAA for 30, 40 some odd years or something like that. And so yes, you could use the social or the green label as a badge of honor. And if, I'm sure none of you listened to our county executive do a budget hearing last night that's all he talked about. And this much budget, this much green, this much electric vehicles, this much affordable housing. So it's sort of in the dna but the additional work isn't showing us yet that it's justified to move forward.
Jamael Flemming (35:42):
I think one thing just you mentioned affordable housing is that oftentimes ESG in the early stages just meant green or environmental, whereas now we're seeing a lot more social issuance as well and a lot of the social bond deals that we're seeing all for affordable housing as well. And on the topic of reporting that was mentioned, I'd say we've been very, very careful with our clients to not tie the reporting into continuing disclosure to not be constrained in that way. But one thing that's important to note, and you mentioned the principles earlier, the green and social bond principles, there's four core components of that and two of which I think are the most daunting. Oftentimes issuers are that project selection and evaluation and it's the reporting, the other two being used of proceeds and management of proceeds. Those are a little bit easier to deal with but all of which are voluntary first and foremost. But they are kind of the industry standard and best practice. So everyone effectively follows them. And the reporting once again in the early stages largely was comprised of simply what is your proceed spend down you issued this year, a year later, how much of have you spent? What's the balance? And I think since then we've been seeing seen the incorporation of more metrics more outcomes, more key performance indicators. What are you doing to achieve these green or social goals above and beyond simply what has your spend down been? And that can be somewhat daunting to your point as well. And we've seen issuers do it in a variety of weight because there is no strict rule terms of how to do it. So you can be a bit more gray if you will, and not too strict and rigid.
Nicholas Donias (37:26):
Yeah, I would echo that. That's kind of the first question folks ask when we try to structure a green product is how much more work am I gonna do? What's the consequences of me not reporting this? We try to make it as simple as possible. It's like, oh yes, when you spin something you check that yeah, this is going to proceeds for that type of project for the green type of project. And even then there's significant pushback. No, we do not want to have to report something additional. And then it goes like, well there's gonna be a soft approach then there's not gonna be a capital D default if you don't do that. But then becomes worthless and less if there's no really strength behind it. And so I think the market's right now trying to find a balance between, okay, let's fit under everything under that umbrella versus okay, where do we start to put the parameters around? So means something that when it gets that green label that say 20 years down the line that there's something to show for it as well.
Suzanne Mayes (38:20):
And I've seen underwriters be really helpful to issuers in helping them think through what needs to be reported because there really is a whole process in thinking through what can be calculated, what can be quantified and working through what looks like kind of like a spreadsheet project category by project category with questions to think about whether or not the issuer would be in a position to answer those the tracking of the proceeds and the expenditure. I think we have to remind issuers that they're doing a lot of that if they've issued on a tax exempt basis anyway. So maybe that piece of it is not quite as daunting. I think sometimes the knee-jerk is, oh this is something else I'll have to do. And we like to say, well you're doing this anyway. But there are definitely additional reporting categories here that go beyond what you would need. And there's also when you're doing tracking for tax purposes, that's very hopefully internally facing. We hope the IRS never comes knocking and you do all that work, but it never goes anywhere. This external reporting can be good, but there can be risks related to it In the political sphere we've seen issuers who actually like it because then they then share it with their legislative body. And so it is a report that they would do in some fashion anyway. But then there are others who aren't sure that they want to put this out. So you do have to think more broadly than just in the context of your capital bond program in terms of what it means to be measuring these things, reporting on these things
Nancy Feldman (40:09):
Or going through the process and not quite getting it right and what the ramifications are of that. And I'm not suggesting that I even have any opinion that we would fail because we obviously haven't labeled anything. But all the good is really it's valuable. But if you make a misstep that crazy headline problem comes back at you and you just have to be that you better be prepared to do the work because failure to do so could have ramifications that are more than just, okay, somebody sells my bonds in the secondary market cuz I didn't comply. And they can't keep it in their green portfolio. They have to move it either out or sell it. If you made a big deal about it from a PR perspective, a legislative perspective, we did social bonds, and then you somehow make a misstep, it doesn't look so good later on. So you just have to be prepared to handle it the whole length of time.
Jamael Flemming (41:14):
Yep. I think for that reason, that's why as an underwriter we tend to walk our clients through every step of that process to make sure we can get it as right as possible. And then moreover, we err on the side of caution to say, should we include that? Is it on fence? Let's keep it out just cause it's not worth the downside risk potentially there. So we do work them them very closely on the product evaluation, on the reporting just to kind of relieve some of that burden as well. Cuz not all issuers always have the resources, whether it be financial or just personnel to take on this process. Although as you also noted, oftentimes issuers are already doing this stuff anyway. You're already issuing projects that qualify, you're already tracking your proceed spend down. It's just how do you fit that within the context of ESG.
Kyle Glazier (42:06):
We've all heard everyone pretty much talk about how much this is changing and how much it's likely to continue to grow and change in the coming years looking ahead, just say even 10 or 15 years how different will this landscape be? To what extent will ESG be driving the infrastructure agenda and will we potentially be looking at almost all infrastructure investment through an ESG lens? Will it even be a choice anymore?
Nicholas Donias (42:34):
I was thinking about this question the other day is that hopefully the goal of having this increased focused on ESG is so that there's no longer a need to have the focus on ESG. I think about everyone in the room, most of the projects we finance are going to a public good, going to a social benefit, going to public transportation rail, taking cars off the road or reducing traffic. And so I think it helps to bring the attention light to an issue we need to start to focus on. But hopefully over 10, 15 years, it just becomes the norm that yes, this is an ESG type of project.
Nancy Feldman (43:11):
Is there some thought that everything would be ESG as you said, as the norm and doing something that didn't meet that goal gets penalized as opposed to meeting that goal gets elevated, ie. With a lower interest rate. I mean at the end of the day, maybe the interest rate differentials the same, but the starting point for the discussion is assume your ESG compliant, whatever that word will mean.
Jamael Flemming (43:44):
Right? And I think you're seeing some of that concern with folks that are pushing back against the rating agencies right now for fear of being penalized for not being fully in tune with the ESG wave, if you will. I think one thing that we've seen in terms of the evolution of ESG thus far is that, as I mentioned before, a lot of issues are already issuing and bonding for projects that have an ESG slant to them. But what we're seeing now investors think about more frequently is, well what are you doing above and beyond that? Because everything effectively in our business is ESG in some way. So what additionality are you offering? What incrementality are you offering as well? What are you doing beyond your normal course of business to benefit the environment, to combat social inequality, things of that nature.
Nancy Feldman (44:33):
So the one, I mean there are things that we as governments have to do that may never be truly green or social. We have to get rid of our garbage, right? And yes, you might have the most advanced whatever disposal method you have, but it's still garbage, right? And it's never going to be truly, at least I don't think, but maybe we'll change the rules. I don't know that it's ever gonna be truly green, right? Okay, maybe you transport the waste by train, well that's better than by truck, but you're transporting it to a resource recovery facility or a landfill that is up to speed with regulations, but you're still putting waste in the ground and that's not gonna change. And I think in the utility space, in the electric utility space, there are also ranges of, you are the most, you're at the top of your level from a compliance perspective, but you still have as a backup fuel, a fossil fuel for base load capacity or whatever it may be. So I think it's complicated to think that everything's going to be ESG, which brings me full circle to is your government, is your issuer doing, thinking about it holistically and trying to advance the entity in that context, not just the bond issue.
Kyle Glazier (46:07):
Okay. We are coming up on time, but are there any questions that we might be able to fill?
Audience Member (46:18):
This is really a question for the whole group, but we've been discussing the relative value of the label and I'm curious if you think there's a difference at different ends of the rating scale. So Nancy's representing a AAA issuer with a very long established history, pretty decent size. There's always gonna be somebody who wants to buy that paper. What about when we're dealing with a not as highly rated entity? Is it more valuable then is it less valuable or is there simply not enough data yet to really decide?
Jamael Flemming (46:49):
To me the benefit has less to do with the rating of the issuer and more the context of the projects quite frankly. And I think a point that Nancy mentioned as well was maybe as the county, you guys don't have an issue of saturation with investors, but some issuers do. And we found that because there are so many ESG funds out there now, upwards of 400 if you will, that let's say Neve is one of your top investors, your top holders in their at capacity, well if you're issuing an ESG bond, they may have some additional capacity there as well. So you've seen a benefit in that context, less so from a rating perspective. But I do think improved rent can also benefit you from attracting new investors, whether it be on the retail side and things of that nature also.
Nicholas Donias (47:49):
So a product that we've financed that is not rated but has a green label is the bright line train in Florida. And I think the fact that they did the work to show that they're being thoughtful about what this means for the community, what it means for the environment got us maybe a little closer to over the edge. Of course still it's analyzing the project, making sure it's feasible, but something that was unrated not green versus unrated and green. I think that helps outweigh just on the margins of things.
Kyle Glazier (48:24):
All right. Well we are at time and thank you all for coming to listen to us.