As environmental, social and governance factors (ESG) continue to take the focus, ESG data becomes more important — and helpful — to the muni industry. Join the MSRB’s Mark Kim and Harvard University’s Lourdes German as they discuss opportunities to leverage MSRB data to help contribute to better understanding in the evolving ESG area.
Caitlin Devitt: (
Good morning, welcome to our leaders webinar. I'm Caitlin Devitt, infrastructure reporter at the bond buyer. I'm happy to be here today with two great guests. We have Mark Kim, CEO of the Municipal Securities Rulemaking Board, the muni market's chief regulator, as most of you know, and also it's kind of main data collector and repository with its famous EMMA website. Also joining us is Lourdes German. Lourdes is a public finance expert who serves as the director of the nonprofit public finance initiative. She also teaches at Harvard university graduate school of design. Lourdes has a long and impressive bio, but for our purposes today, she's here as the MSRB's newest visiting scholar. The board announced earlier this week that Lourdes is gonna be joining as their second visiting scholar and her focus is gonna be on ESG. Basically, it sounds, she's gonna talk about that, but it's gonna be on plumbing MSRB data for environmental, social and governance trends in public finance, which is what we're here to talk about today.
Caitlin Devitt: (
ESG and the muni market. A lot of ink is being spilled on this topic, not just in our market, but across all the markets. It's the hot topic. And here at the bond buyer, we're actually in the middle of our ESG week. We have a lot of good articles and events and podcasts, where we're delving into different aspects of it. We're in a very interesting, and I would say sort of uncertain moment with ESG in particular with disclosures, we figure out how disclosure relates to risk factors with vanilla bonds and also as ESG labeled bonds, which I, I think we're gonna be focusing a little bit more on today. ESG labeled bonds have become increasingly popular. In fact, it's one of the fastest growing aspects of the muni market. So I encourage you all to ask questions, just type 'em in and I'll ask 'em and let's get to our panelists. Mark, let's start with you for our non DC-based disclosure attorneys out there. Could you kind of give us a big picture sense of the MSRB's role in the muni market and in particular, how it might shape the direction we're going with ESG?
Mark Kim: (
Sure. I'd be delighted to and, and good morning, everyone. First, thank you to the bond buyer for inviting the MSRB to participate in your ESG week of events and Caitlin to you for moderating this conversation. And if I could just give one quick shout out to the cast of eight MSRB interns that I know are down the hall watching our session today, we had suspended our summer internship program because of the pandemic for the last two years, and we finally restarted it and we've got a group of eight phenomenal young individuals who are eager and excited to learn about our market and potentially be future public finance professionals. So welcome to our interns and thank you for this opportunity. It is a really exciting time in the muni market, and our market is evolving very clearly with respect to the integration of ESG.
Mark Kim: (
And so what I, what do I mean by the integration of ESG in our market? Well, we're seeing investors allocate capital towards sustainable investing strategies in the last 12 months, two ETFs have been launched that are dedicated to sustainable muni, ETF investing. So we're seeing an allocation of capital towards this type of investment. We're seeing issuers adopt this evolving practice of designating or labeling their bond deals to appeal to these investors. Labels such as green bonds, social bonds, sustainability linked bonds, et cetera. We're also seeing ESG being integrated in our market through other market participants. For example, credit rating agencies are calling attention to ESG related credit risks and factoring those risks into their underlying credit analysis. We're also seeing the credit rating agencies, several of the credit rating agencies along with other third parties produce ESG scores of issuers along a variety of factors and dimensions.
Mark Kim: (
We're seeing evolving syndicate practices with respect to the marketing underwriting sales and trading of these types of bonds. So our market is clearly evolving. Caitlin. You mentioned that ESG bonds, if you will, are one of the fastest growing segments of our market and have heard anecdotally that ESG bond issuance comprises now 10% of the total issuance in our market and growing. So clearly our market's changing. I think this is actually a very exciting time to be in our market and, and to see these changes happening and the MSRB for its part as the principal regulator of this market has been monitoring how these changes have been evolving. And as you know, we found it was the appropriate time at the end of last year to issue a request for information in RFI, which we did to all market participants and to solicit information from market participants to better inform not only the MSRB, but all market participants of the different perspectives around how ESG is being integrated in our market.
Mark Kim: (
As I have mentioned or described before the RFI was a fact finding mission for the MSRB we wanted to hear from you, the market participants and the people who are actively in the market and participating in the market as to how you are seeing ESG being integrated. In particular, we are interested in hearing from the entities that we regulate broker dealers and municipal advisors, whether there are any unique or novel compliance challenges under our current rule book, with respect to ESG that you think we ought to be aware of. We were also interested in hearing from issuers and investors, the entities that Congress charged us with protecting about how ESG is impacting your roles for issuers that are designating their bond deals.
Mark Kim: (
We were interested in hearing the reasons why, and what benefits those issuers felt they would achieve by designating their bonds, as well as what costs and risks, if any, they perceived in designating their bonds. We also were interested and asked investors, do you have all the information that you need to make your investment decisions with respect to ESG and are ESG factors material or important to your investment decisions? And if so, please provide us with examples of what type of information, what types of metrics, um, do you need, and what is the current state and quality of ESG data that's available in the marketplace? So these were the types of questions that we were interested in hearing from, and that we asked market participants, um, to respond to that, uh, RFI closed. And we are now in the process of preparing a summary report of the 52 comment letters that we received. And my hope is that we will be publishing that report of our, what we felt were the key themes and issues raised by the public, uh, later this summer. So stay tuned more to come. Okay.
Caitlin Devitt: (
Any sense of what you might do with the report or what the next steps after the report is published?
Mark Kim: (
Well, we are still in the final drafting phases of the report, but even just based on the preliminary draft and the key themes and the key findings that we felt were elevated by market. My hope and my expectation is that our summary report will generate additional conversation and engagement from market participants around the key issues, the challenges, some of the opportunities that were presented. And I hope will also encourage the continued development of voluntary best practices and, um, uh, other other ways for market solutions to present themselves.
Caitlin Devitt: (
Okay. Thanks for that Lourdes, let's turn to you. Tell us a little bit about your let's start with talking about your personal and professional connections to ESG and public finance.
Lourdes Germán: (
Great. And again, I'm thrilled to, so to, and also to be on this webinar, that I've had the good fortune of spending many years in the municipal market wearing a lot of hats that included bond counsel disclosure, counsel, investment banking, and also with an investor doing credit research and serving as general counsel among others. And I've seen ESG through three different roles and hats that I wore throughout my career that I find particularly meaningful. The first was when I had an opportunity to work within what I consider to be a leading investment management firm at the beginning of their ESG sustainability strategy development, a process that really went on to be owned and flourished by staff. And I think became one of the first investment management companies that really took a leadership position and saying, how do we look at these issues and integrate them into a portfolio strategy?
(
And then I had the opportunity to serve as an advisor to the United nation, specifically UN habitat in the years, leading up to the sustainable development goals and the release of the SCGs. I served as one of the members of the municipal finance policy unit to actually help shape the agenda and help shape the specific municipal finance policy framework to help the UN think about how do member countries and cities within them think about the implementation of the SCDs and actually finance them in a way that least the sustainable outcomes we all hope for over the next 20 years. And then in my current role at Harvard, I'm developing the first class in taught last semester, focused on public finance and the integration of ESG and sustainable outcomes for the students who are planning the futures of cities at the graduate level, and also lead the public finance initiative and organization committed exclusively to thinking about the integration of public finance programming in the frame of ES and G and how we think about social outcomes unified with the fiscal outcomes.
Lourdes Germán: (
We hope for both in the bond market, but also really expansively thinking about every source of money that goes in and out of the community. So I'm thrilled to, to bring that lens and expertise as a researcher to the MSRB, to really do the first comprehensive market study, leveraging EMMA Labs and understand what's happening within ESG. And what's been happening as we've seen markets mature, both green bonds, sustainable social, and the many other labels that are proliferating, but also taking a look at what's happening with the non labeled issuances that we all know might have a natural overlap to what we mean when we talk about sustainability ESG, that's a whole other segment. That's also growing and often classified and some important questions that I know we can delve into later in this webinar.
Caitlin Devitt: (
OK, cool. Very interesting projects. You you've been in this space for a long time. It sounds like. And Mark, you have too, actually, let's talk a little bit about your background. You were an issuer before you came to the MSRB I think you even won an award or two for some of your ESG deals. So why don't you tell us about how that might influence your, how that background is an issuer might influence your perspective at the MSRB.
Mark Kim: (
Absolutely. I'd be happy to, and I, um, I do think my prior experience both as an issuer and as a banker has helped inform my current role as a regulator, um, specifically with respect to ESG. Uh, I did have the privilege of serving as the CFO of DC water, our local water utility here in the nation's capital. And back in 2014 I was involved in the issuance of DC water's inaugural green bond issue that in my mind, in my humble opinion, that transaction was notable for a couple of reasons. It was the third labeled green bond deal in the municipal market. Um, it was the first green bond that carried a verification. A third party verifier had, uh, provided an opinion that, um, uh, the bond was issued according to international standards, uh, with respect to ICMA, uh, green bond principles. We also were the first issuer, rather DC water was the first issuer green bond issuer to make ongoing reporting and continuing disclosure commitments to the investors and holders of its bonds.
Mark Kim: (
It included the publication of an annual green bond report, which I'll give my former colleagues over at DC water a shout out too, that if you go to DC water's website, you can find their green bond reports dating back to 2015. And these reports, um, I think are, uh, really set the standard for disclosure, uh, with respect to ESG and impact reporting. I was actually very pleasantly surprised. I went back just recently and looked at DC water's most recent green bond report, which was for fiscal 2021. And I see that DC water is now including and disclosing scope one and scope two carbon emissions from the projects that it's financed with its green bonds. And so I think there are really great examples out there of issuers who understand the potential of ESG and the value of ESG, both in terms of capital formation and attracting new pools of capital to your program, as well as the value in communicating, uh, the outcomes of these investments that we're making, which are all for the public interest, the public good.
Mark Kim: (
I might note too, that DC water adopted one other leading practice in my personal opinion, which was in addition to having a third party verifier DC water retained its outside its independent accounting firm to perform an audit and to provide an attestation letter, which verifies that the proceeds from the green bonds were actually spent on the projects described in the green bond documents and that the target metrics and outcomes for environmental pollution reduction and sustainability that were laid out were in fact measured and reported on and accurate. And so these, all of these this information is available in that green bond report that I referenced earlier and it carries an independent attestation from DC waters, independent accounting firm attesting to the veracity of that information. So I think there are a lot of really exciting emerging best practices and some model issuers who, uh, really understand the potential and value of ESG. And it's exciting to see, I think it's a positive for our market. I think it is attracting more capital into our market, which I think is a good thing. So again, uh, these are exciting times in our market for sure.
Caitlin Devitt: (
So just out of curiosity, because one of the things that we talk about is the lack of a clear pricing benefit in the primary market, at least the tax exempt primary market. When you, do you remember when you, when you go back to that 2014, did you guys see, did you see something that you thought was advantage or is it still sort of the way it is today where it's sort of issue by issue or it's difficult to tell?
Mark Kim: (
So that's a great question. And I think there's always been, I think a little bit of confusion around that and, and some ambiguity around that and, and I think there's two reasons for it. The first one is to really have the perfect test and issuer with theoretically need to issue two identical bonds structured in the same way. Same maturities, you know, so on and so forth, same call provisions, um, and then same credit structure and they'd need to price those bonds side by side and see if there is a differential and, and that, to my knowledge really hasn't been done. Um, and I think the reason why is it's actually inefficient to do that and it's a whole other probably right series to talk about why it would be inefficient to do that. But I think that's the reason why it hasn't been done.
Mark Kim: (
And the second reason is some confusion over the price of a bond, which is based on the underlying credit and for every green bond issuer that I am aware of the underlying credit structure of their green and non-green bonds are identical. It is the same source of funds that are gonna be used to repay both the green and the non green bonds. And so presumably there's the same credit risk associated with the green and the non green bonds. And logically in my mind, they should price the same. They are the same bond from a credit standpoint. What is the risk of, and the probability of the issuer's willingness and ability to repay timely payments of interest and principle. Those are the same for those. If an issuer were hypothetically to create a different source of repayment for the green bonds, then naturally that would be a different credit profile and that would price differently.
Mark Kim: (
So I think that that question, um, around pricing benefits is a little bit of a red herring and, you know, that said, that assumes that markets are rational and perfectly efficient. And we know that there are not, we know that there is growing demand for ESG related investments. We know that because we see capital being allocated specifically and targeted specifically to these types of investments. So to the extent that there's a supply and demand imbalance, regardless of underlying credit structure, if you can generate a supply demand imbalance, then yes, you should see a pricing difference. In that scenario. So there's, it's a complicated question. And I think that you know, really the opportunity here is around creating best practices and market based solutions for advancing this market.
Caitlin Devitt: (
Yeah. Well, just as an aside, that idea of how difficult it is, because of the apples to apples comparison. I did a podcast that's up this week where I talked to somebody from the Minnesota higher education facilities authority, and they came to marekt and they actually had that sort of experience, which is really rare where they had two different deals, same structure, same maturity, same everything, and one was green and one was not the third party. So okay. Lourdes, let's get to you. I'm very excited to hear about sort of what you're doing and your work. So from an academic perspective, tell us a little bit about some of the ESG trends that you think are worth exploring in muniland and what are some of the interesting projects underway.
Lourdes Germán: (
Sure. And I'll, I'll pick up on the point that you and mark were just discussing, I think beyond an apples to apples comparison. One way to one question that I'll be exploring is at a pricing level, is there greater investor diversification that issuers are seen by labeling ESG or even having non labeled issuances that bring other investors to the table over time that grow basically the pool of capital that's available to them because even if there's not a quantifiable benefit deal to deal, is there a benefit over time just from having greater investor diversity of who's looking at your bonds?
Caitlin Devitt: (
And that's exactly what that's exactly what this issuer said. He said from the outside, you wouldn't necessarily see a price and difference, but it widened our investor base just like you're saying.
Lourdes Germán: (
Yeah. And that's a really hard question. Cause I think as Mark said, like how do you quantify that? How do you say there is a premium there and particularly with the issuer, their level of sophistication market participation. Um, and in addition to that, um, that kind of the, the deeper black box is the secondary market. You know, what happens when we look at trading patterns for ESG label bonds and even the bonds that are being pulled in by investors to ESG funds, even without a designation because they see a natural overlap either in the use of proceed or perhaps cause the issuer has made such a stated commitment at a policy level to having a robust program or at either social equity or something that is environmentally focused or governance. And that's an even deeper question to quantify because the definitions are so unclear.
Lourdes Germán: (
One of the key trends that I'll, that I'm looking at is sort of a precursor to the research is examining is how does the market even understand and speak about ESG? Because it is not uniform, there are many investors. And I remember even working within one where ESG is a credit focused story saying, you know, how do we amplify the way that we think about portfolios by looking at non-financial factors across the ESG spectrum, to say that we are thinking about surfacing poorly managed liabilities, and that's a very different conversation or a slightly different conversation than an impact focused investor. Who's looking at an ESG issuance and saying, how is that going to change conditions on the ground in place? And where is the outcomes and impact story and how is it being told by the issuer? And I think part of how that ties into the questions I'm examining is because the character of disclosures responds to that, what the issuer say at the preliminary, you know, point of sale, what they say in a post issuance compliance world, we'll speak to both of those narratives depending on which investors are bringing to the table, what, what they're cultivating and also their own view of what it means to actually, you know, think about the materiality standard, you know, are they reporting credit focused data or are they taking that deeper step towards impact?
Lourdes Germán: (
And the trends at a preliminary level are really heartening and surprising, particularly with the robustness of disclosure. So that's sort of the heart of the question that I'm examining is what does the market look like today and how is it changing over time? Particularly when we think about disclosure trends, issuer patterns, issuer practices, and what are issuers on a voluntary basis already doing that shows different trends to speak to market leadership and where issuer grown and peer driven practices really could be heartening and give us insights about what the future could look like. And in addition to that, attempting to examine the elusive pricing question, you know, once we see which issuances show remarkable differences in the way that they're structured, think about the data and think about the storytelling and also the disclosure is the market placing a premium on those issuances or are we still seeing just anecdotal evidence? Um, and are there different outcomes that matter too at a social level that aren't quantifiable and that aren't measurable and where issuers are making that commitments because it matters to them to really see again, changes in place and, and bond markets really can serve as an engine for that kinda disruption.
Caitlin Devitt: (
Hmm. It's very interesting. Do you have any preliminary findings? You kinda alluded to it a little bit. Do you have any preliminary findings you could share?
Lourdes Germán: (
There are some including one that surprised me and looking over and use, it was a beneficiary user of EMMA Labs very early on, which is a platform that I know we're gonna talk about soon, but it actually enables just kind the free text identification of deals that otherwise you couldn't find on EMMA easily just saying like, you know, what are all the green bonds that were issued in, in X period? What are all the social bonds C C and even doing free text searching of official statements and what assures are saying around disclosure and non designated authorings, and one heartening trend that is still very much a work in progress is that over percent of the issuances that I've been analyzing, um, have what I call a high degree of disclosure, which includes not just at the, the official statement level designating bonds and speaking about the designation, including metrics, but actually committing to voluntary post issuance compliance that either is just on an annual basis voluntarily on Emma or external websites, but even some issuers who are bringing in that disclosure to their rule, 15-C2-12 continuing disclosure requirements saying we are committing to this at this level.
Lourdes Germán: (
And there's some sector based differences that speak to that, including housing and particularly where some deals know the low income housing tax credit and other federally mandated reporting elements that have to continue. Um, there's also a high degree of refundings that are being designated where the use of proceeds are already done. And it's really interesting to see the disclosure patterns that are different across those issuances. And there's a high degree of issuers who are also doing their own stories outside of the traditional labels. We see that speak to greater policy questions and that I think stand to change the way that we approach, you know, defining what is an ESG issuance beyond the traditional conversations I see us having.
Caitlin Devitt: (
Hmm. So you're looking at you're looking primary, secondary, you're looking at disclosure with the OS, POS and you're looking at post issuance disclosure, you're looking at it all basically. And it sounds like your focus largely on labeled bonds, ESG labeled bonds.
Lourdes Germán: (
Yeah. But then progressing to also identify what is the criteria for what you would say is an ESG unlabeled bond, you know, is it investor, or is the reason I'm pulling that deal into my, even though it doesn't carry a label or are there other markers and indicators that we should look at too, that speak to where the market is going and where issuers are leading, that isn't captured of those practices.
Caitlin Devitt: (
Okay, cool. So you've mentioned EMMA Labs a couple times. Um, Mark, maybe you could kinda give us an overview, tell us what it is. I'll tell you that, you know, I've been aware of it. I think you guys unveiled it in January. And so I was looking at it the other day and I have to say, I thought it was great. I mean, the searchability of it, it was very friendly, really, you know, for somebody like me, it has to kind of be user friendly. And you know, there's been a sustainability linked bond that was issued in the market by Arizona IDA. And I wanted to, I think it's the only one there might be others, but it's the only one that I'd heard of. So I kind of wanted to look it up and I went to old EMMA typed in sustainability linked and, you know, I mean, I could have eventually found it, but it would taken me a long time to go through a lot of filters, but then I went to EMMA labs, typed it in boom, first thing that came up right away, it was the first thing that came up and then a lot of other stuff came up too, a lot of other that terms and a lot of other, um, so I thought it was great, but Mark, you wanna kind of lead us through a little bit more about it.
Mark Kim: (
I would be happy to. I always get a smile on my face when people have the opportunity to go to EMMA labs and have a good experience. So I'm really grateful that you have that opportunity, Caitlin, and that you have that experience. There that's exactly why we created EMMA labs. It is a data analytics platform that's built in the cloud and takes advantage of the latest cloud based tools and services. With respect to data, there's really two purposes in my mind for EMMA labs. The first is to make our existing data more accessible. So to your point, help you find what you need easier and quicker. Um, and second it is to prepare for the future of data in our market. And, um, I wanna unpack that a little bit because, uh, I'll share a story about the market data pre EMMA.
Mark Kim: (
And EMMA been with us a little over a decade now. So maybe like for the old timers who are watching our interview maybe 15 or even 20 years ago, you may remember that, uh, bankers used to FedEx printed, official statements over to the MSRB to meet the deadline for submitting the official statement. And every morning we would open up the FedEx packages, we would take out the official statements we would, and this is a true story. We would cut off the spine of the official statement. And then we would take that stack of 200, some pages, put it into a Xerox copier and press scan, and then it would start scanning and, you know, pages would get stuck together. Pages would feed in crooked, you know, so you, you know, everyone's been there and done that. And then we would take that scan, stick it on a microfiche. And if you needed it, you could physically come on over to our offices and search through a card catalog like at the library when we were kids to try to find what it was you want and bring that card over to our teller who would then go back into the microfiche and try to find it and give it to
Caitlin Devitt: (
so is everybody wearing green visors and smoking cigarettes?
Mark Kim: (
That was data pre EMMA. And you can imagine what was the value of that data? How accessible was that data? The answer was it wasn't. Um, so then with the advent of EMMA, it really was more of a revolution than an evolution. It was a sea change. It moved us from paper to electronic. And so we no longer accepted paper submissions. They must be electronic under our, and it's codified in our rules. You can't send us paper trades, you can't send us a printed OS anymore. And that vastly improved the availability, accessibility, and transparency of current state of data. But now EMMA has been with us over a decade and we now know while the quality of the data that we have is vastly superior to what it was in the old days. Uh, it's not nearly as good as what it can be and what it needs to be and what it will be in the future. Mark Kim: (
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