Muni issuers and borrowers should be considering climate risks and disclosing them in offering documents, a process that requires an important legal analysis.
That was a major takeaway from a Wednesday discussion at the National Association of Bond Lawyers' The Institute conference. Climate risk disclosures have been singled out by Securities and Exchange Commission Chairman Gary Gensler from the very start of his administration as one of his top priorities and has asked his staff to develop a mandatory disclosure rule for public companies by the end of 2021.
A disclosure rule for public companies is coming before the end of 2021 but the Commission can’t institute mandatory disclosure rules for munis, leaving individual issuers and borrowers left to navigate the risks themselves.
“It comes down to materiality, analysis and your facts and circumstances,” Kim Magrini, a partner at Ballard Spahr said.
“It's a balance between reviewing
information that's available, asking for that information and then a discussion with the deal team and with the issuer or obligated person about how that affects their financial and operational health and risks.”
“You want to make sure that the information you are including in your offering document and the risks you are addressing in your offering document are relevant to your particular location or your particular circumstances,” Magrini said.
Magrini also stressed the importance of knowing your information is accurate and knowing exactly where it came from, not just accepting a secondary or tertiary source’s information on offering documents blindly.
“It's complicated because it depends on the type of risk you're worried about,” Lisa Washburn, managing director for Municipal Market Analytics said. “In terms of integrating ESG into credit analysis, integrating the climate risk probably has the most potential impact at the present time on a borrower's ability to repay its debts.”
Matters such as investment time horizon, portfolio construction and as well as your own personal assumptions about climate risk all play a role in deciding how to incorporate them into your view on credit analysis, Washburn said.
Several muni groups, including NABL, submitted formal comments to the SEC on its efforts to produce a disclosure rule for public companies.
The NABL letter noted that “for disclosure to be required under the anti-fraud laws it must be deemed material to the reasonable investor,” Rebecca Olsen, director of the Office of Municipal Securities at the SEC said. “If a particular class of investors deems information to be material it does not mean such information is per se material under the anti-fraud laws.”
NABL also went on to comment that materiality is carefully defined and understood in the municipal securities markets and already sufficient to encompass those specific instances where climate related issues are material to particular investment decisions, and that they would support clear and flexible guidance.
“Is the current anti-fraud framework for municipal securities sufficient to cover investor desires?” Magrini said. “The framework itself doesn't change. It's still an analysis of what is material and a facts and circumstances determination,” she added. “What is material may be changing and has changed.”
The Government Finance Officers Association and the Large Public Power Council recommended establishing uniform metrics for evaluating climate risk disclosure, which in the municipal market and its large diversity of issuers, is “just not feasible and each issuer of municipal securities should reasonably vet its known impacts of climate change and ensure those impacts are appropriately disclosed to investors when they are material to investment in the municipal securities site,” Olsen said.
The GFOA further recommended that issuers consider disclosing material information regarding the environmental risks they face and their plans to address them. In an audience poll as part of the panel, participants were asked, following this recommendation, how often this is happening and 43% of respondents replied sometimes, depending on the size and sophistication of the issuer, 22% said increasingly, 20% said frequently, assuming geographical relevance and 15% said never.
The Municipal Securities Rulemaking Board, in connection with the SEC is also taking ESG and climate risk seriously, as their recently released strategic plan for the next four years included a bullet point addressing ESG and plans to coordinate regulatory and industry efforts to promote dialogue and use MSRB data to inform the market’s understanding of ESG factors and emerging issues.
The MSRB has also publicly stated that it intends to issue a request for more information before the end of the year.
In May 2020, then-SEC Chairman Jay CLayton and Olsen issued a public statement on the importance of muni market participants disclosing the effects of COVID-19, which muni market participants generally were pleased with as it was flexible and non-prescriptive.
In a second poll, audience members were asked to whether they were more or less likely to recommend voluntary EMMA disclosures following Chairman Clayton’s and Olsen’s May 4, 2020 statement on increased COVID-19 related disclosures, to which 62% said about the same, 28% said more and 10% said less.
We shouldn’t expect the same sort of statement for climate disclosures, Olsen said, as there is nothing currently on the agenda and any future statements of this sort would have to be initiated by Chairman Gensler.
