ESG backlash not deterring buyers

As politicians and legislators attempt to reign in the appeal of municipal bonds that fund ESG-friendly endeavors, the market is mostly ignoring them.

Data from academia, rating agencies, consultants and buyers indicates that appearing to do good still has an upside despite an apparently increasing backlash against ESG labeling in states such as Florida.

"While the combination of market and political volatility has caused some distractions, we have not seen indications of backing off and reversing their path toward ESG integration or impact investing," said Kestrel CEO and founder Monica Reid. Reid indicates that 77% of the green, social, and sustainability bond transactions that Kestrel has been involved in have experienced increased demand from investors for the ESG impact information the firm has provided. 

A recent report from S&P Global Ratings reveals that in Q1 2023 sustainable municipal bond issuance, which includes corporate issues, grew 13% from $7.94 billion in Q1 2022 to $8.96 billion in Q1 2023. During the same period overall muni issuance dropped by 22% from $100.6 billion in Q1 2022 to $78.1 billion in Q1 2023. Green bonds accounted for the biggest spike with issuance up about 40% and accounting for 46% of the total. State issuance leaders include California, New York, Oregon, Massachusetts, Pennsylvania, and the District of Columbia. The housing sector was the largest player with $3.4 billion pumped into the market. 

Vince Ready

Buyers trying to sort out which metric best defines ESG might want to stick with fundamentals.

"Financing eligible projects can lead to risk-adjusted returns that are just as competitive as any other investment opportunity," said Jason Hoody, senior vice president of LPL Financial Research. "A focus on the use of proceeds would be beneficial to help align investor interests with investor opportunities." 

While blue states ride the ESG wave, Florida Gov. Ron DeSantis refers to ESG as a "radical ideological agenda." Indiana recently passed a balanced budget along with anti-ESG legislation. A similar law went into effect in Kansas after sailing into approval without the governor's signature.  

Buyers listening to anti-ESG messaging can find themselves on the wrong end of an academic argument. "If early data is any indication, there is an economic consequence that is starting to become visible and measurable in some cases where states are imposing anti-ESG measures," said Lourdes German, executive director of the The Public Finance Initiative. 

German points to a Wharton analysis showing that after Texas passed anti-ESG legislation the state had to pay an additional $303 to $532 million extra in interest costs for the issuance of $32 billion of bonds.   

While red states are busy throwing up roadblocks to "wokeness", New York City comptroller Brad Lander announced in April that two of the five pension systems he oversees have agreed to a goal of having net zero emissions in their investment portfolios by 2040.  Lander labeled anti-ESG maneuvers as a "cynical war of political distraction waged by red-state politicians at the behest of their fossil-fuel donors."  

The ESG debate rose above the state level as President Joe Biden issued his first veto of a resolution that repealed a new labor rule allowing retirement plan managers to consider ESG factors in their investment decisions.

ESG-flavored debt is a hot commodity internationally. According to Bloomberg, sales of ESG bonds around the world reached $111.4 billion in January, the busiest month since last January when sales were $111.8 billion. Anti-ESG sentiment does seem to be having an effect on corporate paper. Bloomberg reported a 50% drop in ESG bonds issued last quarter as compared to a year ago. 

Many leaders believe that most muni bonds are ESG by nature. Reid notes that there are exceptions including coal ash dumps and nuclear waste facilities. "We even see the occasional oil refinery being financed," she said.    

As ESG evolves from an insider financial designation to a political talking point, questions remain about how much the average investor knows or cares about the term. 

"Institutional investors and asset owners that we have spoken to expressed that they care about and examine multiple avenues of research to identify whether and how the ESG designation is supported by the issuer," said German. "This includes not only outside research, but their own examination of what the deal funds, and the policy and practice commitments the issuer has in place that give meaning to the designation as a jurisdiction."