The Evolving ESG Landscape

As demand for and pushback against ESG grows in the municipal space, market participants will discuss the risks and opportunities surrounding ESG for both investors and issuers.

Transcription:

Bernard Bailey (00:09):

Hi, my name is Bernard Bailey. I'm with Assured Guaranty, and I want you all to know that we do believe in climate science and we have in fact hired a climate scientist who if he doesn't take a hard look at everything in a $2 million school district out in the middle of nowhere, then he at least takes a walk by everything and offers an opinion. So we do believe that a climate science is big part of risk in our business today, but the evolution of ESG market is a topic that's a tall order to cover in 45 minutes, but we're going to give it a shot. Some would say that the beginnings of ethical considerations in financial decisions had its root with Quakers in the 19th century and with their reluctance to invest in industry such as tobacco slavery, weapons. But the modern concept of ESG investing really began in the sixties when endowments, corporations began to question their investments in tobacco, carbon related products, South Africa and apartheid then came the UN Principles for Responsible investment in 2006, which first encouraged investors to consider ESG factors followed by the Paris Agreement in 2015, which emphasized the importance of environmental sustainability.



(01:32)

So in the years since the Paris Agreements, environmental funds have grown enormously, enormously significant growth, but that surely slowed last year actually in 2023 when more than 13 billion flowed out of designated funds in this country, 5 billion of that in the last quarter. Greenwashing, green, hushing politicization are all in the news every day. So where are we now? We've got a great distinguished esteemed panel here with us today. It's going to bring us up to speed on these things. Ben Watkins, director of the Florida Division of Bond Finance, Michael Gaughan, Executive Director of the Vermont Bond Bank. Adam Barsky, who's the CFO of New York State Power Authority, and Nora Wittstruck, Managing Director and head of housing and cross practice sector leader at S and P. So Ben, let's start with you. The state of Florida. Lemme get this thing. We established the Florida Preservation 2000 program in 1990 and started the Florida Forever Program in the year 2000. Before that, there had been programs to acquire recreation lands and environmentally endangered lands. You've issued billions of bonds in order to pay for these programs. Would've never seen the need to label any of these issues in any way, although they would absolutely qualify in many ways. So how does the state of Florida look at this type of issuance and why does it choose not to apply any label at all? So what it does in this regard?



Ben Watkins (03:18):

I see you've done your homework



Bernard Bailey (03:20):

A little bit.



Ben Watkins (03:21):

That's going way back. That's even before my tenure. So I heard New York, the resiliency officer from New York talking today, talking about acquiring conservation land and water quality and resiliency infrastructure. And I think probably one of the things that gets very confused is we've been doing that for three decades. So that's what I leaned back and told Arlene. We've been doing this for a very long time, so we're not anti resiliency. And I think that's probably something that Nora and I could agree on, but it's been a really, really difficult exercise to get to where we are today. And what I mean by that is a whole ESG label and what does it really mean is what we've wrestled with I think for the last three, four, maybe five years.



(04:22)

And at least from where I sit and what I believe is we're in a pretty good place because we can leave the things behind that are meaningless and tend to be more ideological and political statements and move on with the substance of what it really means to be resilient. So cynical, my tenure in the business is long. So my remarks are going to be imbued with a healthy degree of cynicism. And as I grow older, I learned that most of that cynicism is more true than not. And so I think back about how this issue has evolved in our marketplace, and it is, when you said ESG, we didn't really know what we were talking about. We didn't know whether we were talking about impact investing. We didn't know whether we were talking about asset managers using a label to gather assets to remunerate themselves or whether rating agencies were pursuing their commercial interest in looking to capitalize on the movement and exactly what it is that they do, which is evaluate risk and rate things.



(05:35)

So it was a very confused conversation for the last three or four years. And where we've landed and where we've come in Florida is to embrace the positive aspects of it that are going to help us on a go forward basis and rejecting things that tend to be more hot air with no substance behind them. And so what does that mean? We don't do labeled bonds in Florida, we outlawed labeled bonds. We're fine talking about resiliency and talking about infrastructure that's being financed, but we don't feel the need to be marketing something that's not substantive.



(06:24)

And it really was more of an issue for the investment community than it was in the Muni finance space. And what it says is, from a policy perspective, the only factors that are appropriate consider for investment of pension fund monies or pecuniary factors in making investment decisions. And so that was a more important element of the change in law in Florida expressing a policy more so than the public finance space where a sidelight relative to the main thrust of the policy initiative, but in what it meant in terms of the Muni space was no label bonds in Florida and a warning to the Raiders that you can do what you want with respect to evaluating and scoring environmental issues, but there should be no direct impact on an issuer's credit rating. And if it becomes a crosswalk of this means this, then we're no longer going to do business with you. So we wanted to preserve the status quo we didn't do. And then there's qualified public depositories that simply says you can't discriminate against certain industries in your lending practices. And if you do, you will not do business. You're not a qualified public depository in the state of Florida. But we have an exemption for underwriting municipal bonds. So we are a little bit nuanced. Because we don't want to impair our ability for liquidity in participating in the market. So that's the landscape in Florida. And I'm going to shut up for a minute.



Bernard Bailey (08:15):

You made a couple comments I'd like to get back to in a minute, but now I'd like to ask Michael, in past conversations we've had, you said that you don't like labeling bonds, but believe in very thorough disclosure can accomplish what others might see as a need for a label.



Michael Gaughan (08:33):

Yeah, perhaps strange bedfellows and having a decidedly blue state, although Republican governor have something in common with our friends down south. I think that the green bond labeling has never really made sense to me. The bond bank did do one shortly, a green bond shortly before I arrived, but in my thinking, the compliance risk wasn't worth the very ambiguous pricing benefit. Folks will sort of bend themselves in a pretzel describing a couple of basis points of benefit, but what does that mean? So I think we can get to the same place in terms of potential benefit by having really good disclosure on what it is we're doing. And so I think we have excellent disclosure, and I'll take this moment to just highlight VT bond bank.org/investors. We will be in the market in a couple weeks and invite your orders, but we do have excellent disclosure.



(09:34)

I think one of the best, and we talk very specifically about those projects, what their impacts are. Just backing up for a second, I think that we're at an inflection point. I do agree with Ben very much in that ESG, what the meaning of ESG is changing. And I think the way I characterize this as ESG is dead long live ESG, because ESG 2.0 is really about actual risk analysis rather than impact analysis. The lead parking garage doesn't mean much of anything, but your exposure to physical climate risk certainly does. So our landscape is evolving and I also think programs coming out of things like the, excuse me, the IRA will force very meaningful impact investments that have tangible, very real standards that they have to meet in terms of carbon reduction. And so that's where I think we're headed in the ESG landscape.



Bernard Bailey (10:29):

Thank you, Adam. As EVP and CFO of the New York State Power Authority, you operate under a mandate that requires you by 2030 to produce 70% of your power from renewable sources. So by definition, you're sustainable, you're green, you're environmentally sound, and in fact, your last issue publicly sold in the fall of last year was titled Green Transmission Revenue Bonds. How do you feel this label helps you and takes us a little bit further into how you look at the social and governance, which are also a part of necessary part of what you do and those aspects of labeling.



Adam Barsky (11:09):

So I don't disagree with some of the comments that were made, especially where it was all the rage a few years ago and now the pendulum has shifted the other way. Now there's a lot of pushback. I think that it really comes down to what is the substance of it? Are you really doing things that really matter in this area, whether you're achieving an environmental goal, social goal, governance goal? So how do we think about ESG? Everything we do is geared towards that because we're helping the state and our customers reach these goals. It's not an ideology or religion, it's the law. So we have to comply with that law to reach those goals. Right now, NYPA over 88% of our generation is all renewable power. And we continue to work on projects that will not only enable the state to reach those goals, but provide resiliency by doing a lot of transmission upgrades that are underground versus above ground, which will be more resilient against extreme weather events and things of that nature.



(12:10)

When it comes to ESG in general, yeah, it goes beyond the E. So what is ES? The ES is sort of what are you doing in your communities that you are doing your work in? What are you doing about disadvantaged communities? What are you doing about job and worker transition, providing opportunities for small businesses, veteran owned businesses, minority owned businesses, what are you doing to have a social impact in the areas in which you're working and having those projects? On the governance side, it's about your board composition, independence committee structure activism there as well as your risk management framework, your structure from a risk management standpoint, do you have independent risk management? And then really one of the big issues in governance is around cybersecurity, which is on the front of everybody's minds these days. And investors rating agencies and others really want to know what are you doing in the area of cyber protection and cybersecurity.



(13:11)

So these are things that are very important. We do a long-term climate risk study. So people said that that is pertinent, right? So how are you addressing, how does your asset management plan thinking out 10, 20, 30 years, how is that being informed by changes in what you perceive to be the climate risk over time? If you're operating near water levels that are going to rise, do you need to raise embankments? Do you have to harden your assets and the infrastructure around it? So all of these things to me really matter. It matters to rating agencies, it matters to investors, and it certainly matters to us in terms of how we think long term. And when we say about labeling or the disclosure, I do believe that labeling is just a first step. So it gives some people an indication. Again, we're out there trying to provide as best information as we can to investors, but we're also competing, right? We are marketing, we're competing. We want to say, if you're going to look at our bond versus somebody else's bond, all things being equal. If you're convinced that we're thinking forward and we're taking actions that are going to make us a better institution 20, 30 years out in the future versus somebody else, or we're avoiding potential liabilities or we're less likely to have a major cyber event, I want them to invest and pick my bond versus somebody else's. So for me, it's a purely competition issue.



Ben Watkins (14:36):

So following onto that and just getting to the crux of the matter for my perspective, labeling of bonds is green bonds or social bonds at best is a marketing gimmick. And in its worst case is just a political statement. There's no real tangible benefit that to the issuer, like Michael said, it's ambiguous at best. But what I will say the positive side of all of this has been the focus on risk assessment because really at substance, what it's all about and what it was intended to be all about, when the rating agencies set up their scoring system, it was really around risk assessment and a focus on that. And not so much they didn't realize, they didn't have the foresight to see they were going to find themselves in the middle of a political firefight when they started down this road. And if they did, maybe they wouldn't have.



(15:34)

That would've been hard to see. But I think Nora and I would agree, and what it did for us, and I think tangibly for the marketplace was a focus on the question of what programs and what policies do you have in the space to address whatever the risk is of confronting the issuer. So in a very constructive way, we took that to enhance the disclosure because that's a fair question. When you're making a long dated investment, where do you expect yourself to be? Especially when you live on a peninsula with three feet is high if three feet above sea level is a hill in Florida. So if you're talking about sea level rising, it's something to be concerned about. And so those are very fair questions which we embrace. So we worked with my friend George Tabac from Broward County. We put together a working group of resiliency officers in Broward County, Miami-Dade to understand what they do substantively, how they think about it, what they care about emergency managers, and then put together disclosure around all of that that are things that I would not have traditionally and conventionally thought about, which is how do you guide, what are your policies and what programs do you have?



(16:57)

Well, in Florida it's statewide building code post hurricane Andrew, which was in 1993. So that would fall under the rubric of hardening infrastructure in today's far lands. So which requires elevation, flood maps, coastal setbacks, inland flooding, holding ponds for inland flooding and stormwater treatment. So there's an array and we invented emergency management. And that's another element to it when you live in a hurricane pro state, is you need to know how to protect your citizens in space and confronting hurricanes. And so we do that really, really, really well. And like I said, we've been buying, as you pointed out, we've been buying conservation land since I was in high school at 300 million a year before it was cool. And currently what does that mean? A resiliency program that's a match, 500 million match funded between the state government and local governments to harden infrastructure, 125 million for coastal mapping, very sophisticated models to be able to understand where water moves in a particular jurisdiction so you can plan accordingly. Also, consensus estimates on sea level rise and other important attributes that go into planning. So there's an awful lot being done, but that's not what gets reported and talked about and we're all in on that, but we're all out on the green bond thing.



Bernard Bailey (18:34):

Well if you would label them, they would know.



Ben Watkins (18:37):

Hopefully they're smart enough to figure it out themselves.



Nora Wittstruck (18:40):

Well, maybe I could just interject a little bit here on risk management. I think that's a really important part of what all of the panelists have said so far. And I think that we have always considered these risks, which is interesting why Ben was very clear like, oh, you can't cross rocket, we won't do business with you. We don't crosswalk it. But we've always talked to Florida about hurricanes. We've always talked to California about wildfires. And so now that for transparency purposes and for investors that are interested in either, sorry, investors who are either are hedging their risk by maybe not buying those bonds or investing in even Florida bonds because they know they're addressing those risks, I think it's not different. It's not a different thing that we're talking about. It's transparency of what's happening. But I will underscore my remarks by saying that the World Economic Forum did a recent survey and in two years they had 10 risks in two years, severe weather and severe events like that were number two on the list in 10 years it was number one on the list.



(19:52)

So clearly some of the things that states are doing at the state level, but a lot of municipalities, Broward County is probably one of the best in the US in this, is thinking about adaptation and how they can protect their communities and their infrastructure with different types of techniques. Whether you're going to preserve open space or making sure there's a buffer when there's a storm surge, whether you're thinking about voluntary buyouts to protect the people that live in those areas, whether you're thinking about evacuation and making sure that you are very clearly communicating with communities about the evacuation route. And so I think adaptation and resiliency in my mind is something that rating agencies, including S and P is going to be talking to issuers more and more about. And I think that partially comes from better disclosure, but it also comes from what we can get out of management teams because we are lucky enough to speak with them.



(20:53)

So I think when we had the poll about why is ESG so frustrating in the market is because you have people like Ben and I on the same panel and we're talking about it from two different points of view. But I listened to a panel recent Bernard and there was a portfolio manager who conflated impact investing and climate risk in this same sentence. And so I think a lot of it is we are just not used to this language in the US as much as maybe our global counterparts are. And so it's who in my view, it's part of my job to try to help educate the market on what is adaptation, what does it look like, what is resiliency? Why is adaptation different than mitigation? Mitigation is about reducing greenhouse gas emissions. Adaptation is protecting your communities and your infrastructure against your exposure. So I think all of that is sort of encompassed in the rating in terms of your governance and your risk management as Adam pointed out.



Michael Gaughan (21:51):

And I think to build off what Nora is saying, those measures that she described are interesting in this context because it's going to really add value to the rating agency process. And I think in a way that will be new for issuers in that folks like Nora are actually going to take the time to understand what your capital plan looks like, what your resiliency plan is, the hydraulic modeling that went on in your community and how you're responding to it. My fear is that as we move building on the last panel, is that as we move more to a data-driven type of analysis on credit, that story becomes muddled and there's less opportunities for issuers to describe the story that's going on. And in a place coming from a rural state, that's a particular concern. We're a bond bank, there's only about three public ratings in the state.



(22:45)

Even as a bond bank, we sometimes have new money issuances that are around $30 million. And so are we going to get the attention that's necessary to tell that story or is it just going to be a data-driven credit analysis? And I think that's going to be a real challenge for us in this sort of ESG 2.0 because now more than ever describing our responses to climate in terms of climate resilience and adaptation are extremely important. And so I guess I've sort of said my fears, and I think this is just exacerbated by the loss of market makers like Citi group or others, that there's less liquidity here. There's fewer eyes on the market and more bots, if you will, that are doing the credit analysis.



Bernard Bailey (23:35):

So Nora, your position at S and P to get a little help from you, you come at this from somewhat a unique perspective, and I'm sure that the focus is largely on climate and I want you to speak about that, but how does social and governance get factored in to the analysis and what is different in how you assess ESG risk disclosure items versus ESG qualifications and labeling bonds? Right.



Nora Wittstruck (24:06):

So number one, as a credit rating analyst, ISS credit risk, I write credit opinions. I talk to issuers about their plans, not only their forecasting plans, but their capital plans, their reserve policies. And so whether or not the bond is labeled has no value. I mean not no value, but it does not affect the way we analyze credit.



Bernard Bailey (24:30):

You said that right?



Nora Wittstruck (24:33):

Okay, Ian slip. But anyway, it has no bearing on whether or not you're going to have your rating affirmed, have your rating upgraded, have your rating downgraded or whatever. So we will put that aside. Second of all, climate is an acute risk and I think that that can be the most disruptive, disruptive to credit quality. So I think we sort of prioritize climate. Everyone I think in the market is very interested in how those types of exposures can affect your credit rating. But I think Adams sort of talked about it, but also social. When you think about the higher costs that issuers in the market are absorbing, that's all around workforce and human capital. Those are all what we would consider an S credit risk, if you will. The healthcare industry has had a ton of human capital issues with after the pandemic, it's squeezed our operating margins. It's been very hard on that particular sector, but also just generally people like Ben, we hope they'll retire soon.



(25:48)

And so there's working that way. There's a lot of people in Ben's shoes that are going to be taking their knowledge and experience out of the market. And how do we adjust to that? For a very long time, local governments have struggled with public safety positions. I think it got worse after the murder of George Floyd. But all of these things, this is all human capital. And then you think about demographics. Demographics are important to any sector that you are looking at in the muni market, whether it's your service area, whether it leads to additional jobs, whether it leads to people coming into your community, leaving your community. All of that is fundamental to a credit rating. If the woman from Goa this morning, she was saying, well, Orlando's growing, that's great for the airport. Yeah, that's great for the credit rating. And guess what that's called social capital in this world.



(26:46)

I think S is pretty fundamental to what we're thinking about at the credit rating, and it can be factored in into almost any piece of our analysis. But I'll just wrap with governance quickly. And that's like every day what issuers are doing. They're governing, they're protecting their communities, they're thinking about long-term strategies. They're governing, they're using risk management techniques, they're thinking about what their interaction is with the state or with the school district, and they're governance structure around that. So governance is really just like the sort of setting the table when you're thinking about muni issuers.



Ben Watkins (27:29):

So my view of that is a little bit more pedestrian. So I'm all in on the E because that's relevant to us as a practitioner and is a fair question, which I don't mind answering at all. And when I was talking before about formulating this group, the tangible benefit that the marketplace derived from that was a GFOA best practice on how to think about climate disclosure, and it was more like a due diligence questionnaire, questions you should ask yourself, who you should go to, how to compile the information necessary to answer the question. That's a very tangible best practice to advance the cause in the business in terms of environmental risk. But I have to tell you, the S and G is lost on me. It's squishy at best. So I leave those behind and for smarter minds to grapple with those.



Adam Barsky (28:27):

Yeah, so I'll just chime in on the S. So give you some practical examples as to why it really does matter, whether you're looking at it as being the issuer or the entity that is having to undertake major capital projects or whether you're looking at it from a rating agency, investor standpoint, underwriter, what have you. If you don't have the S figured out, look what's going on. Anybody living in New York area of trying to do offshore wind, we're talking about digging up streets, putting in underground transmission lines. If you don't think you're going to just do that without communities having a lot of issues, and if you're not figuring out how to make them part of it, whether or not opportunities for jobs, businesses, as I mentioned before, looking out for all those other issues, providing community benefits, looking at that, what we call the just energy transition or seeing if there are ways to take excess revenues from community solar to provide benefits and credits to low income people.



(29:30)

If you're not thinking about those things, how in the hell are you going to get these projects approved? You need a permit in order to build a project, and it requires a lot of community support. So if you're not showing how you're being a good corporate citizen in your community, you're not getting your projects approved. It's as simple as that. So if I was an investor, if I was a rating agency, I'd really want to know how this entity goes about trying to get their projects approved. And it's all about execution risk. So you can't underestimate that as it sounds soft. It doesn't really mean soft. It means how are you going to execute and how are you going to overcome the many obstacles we have here, at least in this country to be able to get projects built and approved.



Michael Gaughan (30:15):

Yeah, our S that we're dealing with in Vermont is an aging demographic and a shrinking workforce. And this is perfect opportunity to just advocate for bond banks because I heard the last panel and some of those same S considerations came up as technology as a potential solution. Well, I look at a bond bank as being a similar form of technology where I think Emily from GFOA was here earlier, but they've produced some reports on the lack of workers in government finance. You can't just grab somebody from the corporate world and expect that they'll know what arbitrage yield is right off the bat or all the other nuances into Ayn Sies our business. So one of the ways which we address that is by reducing the need for highly sophisticated debt management at the local level through a bond bank concept on the E, we provide diversification throughout the state.



(31:08)

So even in the last summer's flooding, we have a diversified portfolio where there was high impact areas and there were areas that weren't impacted either. And then I already spoke about this, although we face liquidity concerns, we nevertheless get a better cost of capital than those entities would and equalize the cost of capital from an equity perspective because our smallest and worst borrowers getting the same rate as our biggest and best bar thanks to the credit enhancement of the state. So just kind of a variation on a theme there, but that's one idea in which we play in this what I'll call ESG 2.0 landscape.



Bernard Bailey (31:46):

Thanks Adam. And Michael, I mean you both obviously think that disclosure is a very important aspect. Some believe in labels, some don't, but you believe that it's a very important aspect of what you do and you as issuers take it very seriously. But I wanted to ask Nora, how is the issuer side of our market in general in dealing with the disclosure responsibilities that they have and are they being taught? Are they willing to learn? How do you feel about how they feel regarding ESG?



Nora Wittstruck (32:22):

Yeah, I mean it's an interesting conundrum because the muni market is wonderful because you have people very experienced and sophisticated like New York State Power Authority and the state of Florida coming to market, and their disclosure is amazing. You have bond banks where you have various sophisticated people heading those up and their disclosure is amazing. And then you have a Texas municipal utility district who probably is located in Harris County where there's some credit risk and some exposure around flooding, around storm surge, et cetera, and you may not get a lot of disclosure from that particular document. So at S and P we're neutral observers of policy. So I won't necessarily say that we would love better disclosure, but we would love better disclosure. We're credit rating analysts, we want everything. We want to know it all. And so I think it's a struggle. I think it's a burden.



(33:25)

I think we have some entities that have a lot of people on staff that can handle that particular requirement for entering the municipal market. And you have some issuers that need a lot of help with it, and that can be costly if they have to work with outside people to help them on that. But at the end of the day, disclosure has evolved over time. There used to be no real disclosure on pensions in OPEP, and I worked for Ben when that all came to fruition, and I remember all the conversations we had about it and how we would disclose it for the state of Florida. But I think as people evolve and really as market participants potentially demand more, I think issuers will potentially have to put it out there. So like I said, I'm kind of in a weird position because I don't want to advocate for more disclosure from my position at s and p, but I think credit rating analysts generally would like to have better disclosure of risks. And there's a whole section in the offering document about cyber breaches. So why is climate potentially left out of that particular risk section in some cases?



Bernard Bailey (34:52):

Thank you, Ben. I'm going to give you an opportunity to slap me around a little bit because I'm sure you're going to straight me out. You're going to straight me out. But go ahead. I was curious as to how you said only pecuniary things are to be considered, and I'm trying to figure out how can climate risk not be a pecuniary consideration?



Ben Watkins (35:13):

It's a risk and has to be considered, but it can't be. ESG mandate cannot be part of the investment thesis of people who manage money for the state of Florida. It's pretty simple. It's very straightforward. Environmental risk can be considered if it's a business risk affecting the business.



Bernard Bailey (35:36):

I'm not talking about social or governance now.



Ben Watkins (35:38):

Just talking about climate one, scope two, scope three, what does that do for anyone other than being a regulatory burden? And so it's that kind of ilk in terms of environmental considerations that are not important to us and we believe inappropriate for purposes of making investment decisions in a fiduciary capacity on behalf of retirees. That's the difference. Or when the should we name names or leave the who shall not be named, not named.



Bernard Bailey (36:19):

You can name me.



Ben Watkins (36:20):

So BlackRock. So when Larry says, I care about ESG, this has been five years ago, right? We go say, okay, well if one of the largest fixed income asset managers in the world says he cares about this, I need to go learn about it. And then you start do your diligence on it.



Bernard Bailey (36:37):

But he's also under a suit for greenwashing. so-called greenwashing right now as well. Well, there you go, Mr. Fink, your friend.



Ben Watkins (36:45):

Exactly. So he says one thing, but he's talking the talk but not walking the walk. That's what I would call it.



Bernard Bailey (36:52):

Seems that way.



Ben Watkins (36:53):

Right? And so we don't believe, and that would be a great example of maybe a personal point of view that ought to be a leapt up to the personal decision and not advocated for by the largest asset manager in the world inappropriately using the power of the capital that he has under his management in order to effectuate change. That doesn't have anything to do with the benefit of the people who were investing with him.



Adam Barsky (37:30):

But some of this is a little bit of a self-fulfilling prophecy in terms of its impact because I hear what Ben is saying, but at the same time, you got to take a look at what's going on around you. So on the investment side, like the pension side, I manage one of those as well. You have to think about those companies that you may be investing in. And there's a lot of forces out there in terms of the fact that the public at large, including investment community is considering ESG relevant. So first and foremost, you have the proxy agents, right? ISS and their sort of peers. They're not voting for directors because of poor cyber policies or execution or risk management or not having a good well thought out ESG program or not addressing climate risk. So there's an impact you're going to get, and they control a significant amount of the market in terms of their proxy voting, but it goes to, again, choosing one company versus another.



(38:37)

How does that company present to consumers? How does that company present to employees who want to either work there or come to work there or to be retained and working there? And you do see it today that people who are looking for employment, when they look at a company to go work with, they are taking into account some of these factors as to where they want to work. So all of that has some factor into what's the ultimate valuation between one company that seems to be getting it right and the other one that's not. Again, some of this can be vague and squishy, but it does have meaning if you're actually backing it up with real things and people believe in sort of what you're doing and how are you going about it? So it was the same issue. We had the same issues with tobacco stocks, apartheid, the McBride principles, all of these been hotly debated, but there is impacts for all of those things, and they have resolved themselves in a favorable way over time.



Michael Gaughan (39:32):

In some ways. It's interesting. I mean, part of what we're reacting to is really like everything else in our market in capital markets generally, the low interest rate environment or zero interest rate policy because clearly that drove the need to distinguish yourself in some way when rates were absolutely on the floor. And so I don't really look at the outflows from green funds or ESG funds skeptically. I just see it as it's easier to just park your money in money market and receive a pretty good yield and call it a day. But that is unfortunately, I think perverted this conversation in some ways. And so you get the conversation that they're having in Florida, which I think is a difficult conversation because it's very difficult to disentangle these things. Transition risk is real. And so if you're saying, well, we're not going to look at E and we don't care about greenhouse gas emissions, you're also saying, well, we're okay with taking on the risk of petroleum and what that means for stranded assets and various other things that fall out from there. And I think that's a really difficult conversation to have and take some gymnastics to get around it mentally.



(40:40)

So now I think we get to look at this afresh in this sort of new environment, and that's why I think we're going to be having these more real conversations about what ESG really means. And it's really going to get down to brass tacks with the risk discussion.



Bernard Bailey (40:55):

That's a good one to, I want to segue in here what you said. What does ESG really mean? And I think that Nora, you see coming from your seat, you see of this coming from all different directions. But what is your outlook for ESG as an acronym for all three of these things? Is it going to stay that way? I mean, obviously I think we'd all agree that climate was probably the most one that might affect our air situation greater than the other two. But what do you think about that? Is they going to be divided up? Are they going to be separate categories? Do you feel like they'll be the same?



Nora Wittstruck (41:33):

So one afternoon, I actually spent some time trying to google synonyms for ESG because I was like, sustainability is also very opaque and not specific. And I think what we have decided internally at s and p is we just have to be very clear and specific when we're talking about credit risks. We can't just say Florida's exposed to environmental risks. That's not helpful. So what we're trying to do is be like, okay, they're obviously very exposed to physical climate risks, including flooding, storm surge, high winds, all these things that can be damaging to their communities, to their infrastructure, to their economy, at least on a near term basis. If we're talking about declining demographics, which is affecting a higher education institution because there's low birth rates and nobody's moving to Pennsylvania or wherever. We talk about it as social capital. If we're with healthcare when they see debt service coverage and covenant violations and squeezed margins because they're having to pay nurses or they're having to hire traveling nurses, which are three times as expensive, we talk about human capital. So I think what we are really trying to message internally and across practices is just be specific, like talk in specificity so that people are not confusing what we're saying, which also then helps to sort of drive education in the market. So market participants can kind of get used to how these credit risks are being discussed with rating agency analysts.



Ben Watkins (43:20):

So we're ding for having a lot of old people in Florida. People are coming to Florida and coming to Florida to die, and as long as the weather stays warm that is going to continue.



Bernard Bailey (43:29):

Wealthy people are coming to Florida.



Ben Watkins (43:31):

And that's our growth business. So if they want to think that's a bad thing, have at it. If that's a negative on social, have at it. We're happy with where we are.



Bernard Bailey (43:41):

And you're fortunate.



Michael Gaughan (43:42):

We're happy to take lorida's fun flows up in Vermont. We take ESG seriously.



Bernard Bailey (43:48):

Well, you got a lot of wealthy people coming down there too. Some of those old people, Ben, we're getting near the end.



Ben Watkins (43:55):

It's our growth business. Yeah.



Bernard Bailey (43:58):

Does anyone have any questions? And I see one hand over here.



Audience Member 1 (44:05):

Hi, Pam Frederick. I'll stand up. So I think part of the problem is that what we have not seen over the last several years as ESG has become more important is a price differential driven by demand for the earmarked bonds. So there's no clear quantitative, I think data that supports that there's a price differential. What we also haven't seen is that whether there is a state like Florida that has excess environmental exposure, are they being priced from a credit risk perspective worse than a state that has less? So I think that is what part of the problem in moving G Forward is that there's no price differential. So there's no incentive to designate bonds ESG, but have states like New York that Adam is representing that is very supportive and it's a core interest and strategy that they address environmental risk and are they being priced appropriately for taking that head on and investing and to protect the environment. So if you guys, Ben, if you address pricing differential and whether that would a difference to you?



Ben Watkins (45:43):

Yeah, absolutely, it makes a difference to me, but I don't see it. And if I saw it, I would care about it. And so we distinguish ourselves based on credit, not based on the ESG rubric. I mean, let's face it, everybody in the room, Munis, finance, public infrastructure, every project that we do virtually is a poster child for ES or G. So why are we even having the debate? A reasonable ask would be an expanded use of an expanded discussion on use of proceeds, fair ask. And I would do that. That makes total sense to give investors and analysts an opportunity to have a more thorough understanding of what's actually being financed. But putting a label on it doesn't make it sad, and that's been part of the issue in my judgment.



Nora Wittstruck (46:44):

And I'll just say from the rating agency perspective and the credit rating, the credit rating is not black or white. We don't rate Florida lower because they are a peninsula state. We actually see their AAA as being a combination of their risks, but also everything that they bring to the table, which is a lot of risk management around climate. Ben referred to a lot of them, but a lot of municipalities in the state of Florida are benefiting from the fact that the state does take adaptation and resiliency pretty seriously. And I would say the same for the things that Michael does. I would say the same things for what the state of New York is doing. A lot of states do take this very seriously and do have state building codes to help with that. And we have to factor that into the rating as much as we have to factor in the risks.



Michael Gaughan (47:39):

I think the buy side is probably a little bit behind and pricing some of the actual risk. And so then the question becomes, particularly going back to that conversation I had about data driven analysis, this isn't my term, but I think it's interesting and intriguing, but potentially environmental redlining where specific communities might have responses to climate risk, but that isn't being recognized by the buy-side. And so those communities for which they've adapted or can communicate their message, there's no pricing differential, but then there is yield penalty for those communities that aren't able to communicate their adaptation or resilience measures. And that's my real fear kind of about the future, particularly as liquidity is low and it becomes harder to gain market access. We had one more question. I was just



Audience Member 2 (48:29):

I agree, Michael. I think that's the point. I think we haven't caught up yet. I think you haven't seen pricing differential could wait for it and you will. And I also want to point out, this is my 27th year Rick at s and p, my 27th year at s and p and ESG or governance has been a qualitative consideration in our ratings analysis, in the ratings analysis for those 25 years and before that. So it's not a new consideration, it's not a flavor of the month. And the other, talking about innovation ai, earlier in Orlando this year at the Muni conference, there was a lot of talk about doing things differently. We heard that today not doing things the way we're used to doing them. So maybe when that silver tsunami hits and we're all cynical and retired, the younger people for whom ESG is absolutely a concern. Maybe more on the social and less on the E and G for the younger generation, I think we'll see. We will absolutely start to see a differential in pricing ultimately.



Adam Barsky (49:38):

And also just in terms of getting your bonds sold and why distribution. We heard this morning from David Womack from New York City about how he is trying to sell taxable debt. He has to, and he's looking for European investors. Well, they take this very seriously. They're way ahead of where we are. So if you're not able to articulate where you are in some of these issues, you're not going to be able to get to those European investors. And to key off the points that were just said by the person from S and P is that I believe that is true that the ratings process has always had a quantitative aspect, has been a qualitative aspect, quality of management, but it was very subjective. If you start articulating the way you look about the future, the way you manage your governance, your risk, and other things like that, and you put that into a document that explains all of it, you then can differentiate yourself to the rating agencies and to investors as to what is your quality of management beyond the numbers. And it gives them something to evaluate you on versus others. I would say.



Ben Watkins (50:51):

Accumulate enough money to make a difference, I'll care. We really have to, I'll be Retired by then. By the way,



Adam Barsky (50:58):

I thought there weren't kids in Florida.



Bernard Bailey (50:59):

So we really have to stop here. I know 45 minutes or we got to about 55 or 60. But I'd like to thank all of you guys on the panels for very thoughtful considerations.