A majority of municipal market participants believe there should be a universal language for environmental, social and governance factors in the industry, but consensus on how to create one and who should lead the charge is far from uniform.
Seventy-seven percent of respondents to an Arizent/Bond Buyer Research survey said they believe there should be universal ESG standards and just over half, or 56%, of respondents said ESG is “critical” or “very important” to the municipal industry at large.
The report, sponsored by Assured Guaranty, was conducted online during August and early September among 187 participants and observers. Most respondents said ESG and municipal bonds are inextricably linked.
“The more our industry can embrace and codify this relationship, the better for buy-side, sell-side, issuers, investors, and society overall,” a retail asset manager said.
The breakdown of respondents on the question of universal language shows 80% of insurers, ratings agencies, and regulators say yes, 80% of wealth managers and broker-dealers and 79% of legal, academic/research and technology firms agree. The figure drops to 58% of issuers who believe there should be a universal language.
“If we are to be fluent on any topic in our industry we need a universal language that issuers, investors, financial advisors, underwriters and regulators speak," an asset manager said. "It is very obvious and it will help make ESG another viable component in our market. With $30 trillion globally dedicated to ESG investing currently, we need one language.”
Breaking down the E, S and G shows the greatest importance is placed on the environmental factor at 73%, followed by governance at 60% and social at 50%.
And while most participants say ESG is important for the industry, one of the biggest hurdles for accepting ESG designations from an issuer's perspective is pricing benefits, or lack thereof.
In the next five years, 7% of respondents said it will significantly lower costs for issuers, 40% of respondents said it will somewhat, 42% said it will not and 11% said they did not know. Among those saying no, 46% were issuers, 45% were wealth managers, 30% were rating agencies or bond insurers and 36% were in the "other" category.
“If we are not seeing a price differential, or any other sort of economic advantage, we’re probably not looking, at least currently, at doing ESG,” said Jay Goldstone, chief operating officer of San Diego, California. Goldstone spoke on a panel on the report's findings at The Bond Buyer's California Public Finance Conference Tuesday. "We look at ESG as one more tool in the tool chest. It’s got to have some economic benefit to us."
Many participants noted investors will need to push the needle on ESG and munis.
“Is this a market-driven paradigm that will change because of the importance of ESG and when will that happen? Everyone sees the value, from the issuers to investors," said Randy Gerardes, managing director at Assured Guaranty, speaking on the panel. "Eventually you’re going to see that reflected in price.”
Karen Daly, senior managing director at Kroll Bond Rating Agency, said in conversations with investors, the firm sees a large appetite for more information about ESG.
“From our point of view, ESG is an integral part of the research we publish," Daly said at the panel. "The momentum is very strong in ESG."
And two-thirds of respondents said it is very important or critical for issuers to disclose ESG risks and opportunities.
“It’s very important to be transparent,” Goldstone said. "The question is, how much information is enough? That’s a caution because you don’t want to think you’re disclosing everything and only find out later that it wasn’t. Now there is potential securities fraud."
To the question of whether federal regulators, such as the Securities and Exchange Commission and the Municipal Securities Rulemaking Board, should provide guidance to investors, 45% say yes, 36% no, and 19% said unsure or no opinion.
That answer changes slightly when asked whether regulators should provide issuers with guidance: 54% said yes, 32% said no and 14% were unsure or had no opinion.
Breaking down the results by constituency: 67% of analysts said yes, 50% of asset managers or advisors, 48% of issuers, and 40% of investment bankers.
“Most local governments do not have sufficient capacity to develop their own frameworks for how to report on and disclose ESG metrics," an issuer said. "Finance officers likely don't have expertise or support in ESG components and will need to rely on guidance.”
Two-thirds of respondents, 66%, see ESG as an accelerant for municipal industry growth and 56% see it as a catalyst for foreign investor interest in the space.
During the first nine months of this year there was $777 billion of ESG debt sold globally, up 57% from a year prior, noted Tom Chan, senior credit analyst at Refinitiv, speaking on the panel. “That really reflects the mindset that investors have."
In global taxable markets, there is a "greenium," Chan said, adding, whether it translates into the muni market remains to be seen. “I would suggest to issuers, disclosure as well as transparency should improve over time. That's a way to communicate with your stakeholders,” he said.
While a majority sees more growth opportunities in foreign markets, they also say there needs to be a clearer picture of municipal ESG opportunities to aid that growth. Participants recognize that international standards might not be easily applied to fit the vast municipal market and the industry should create its own metrics to fit the needs of issuers and the expectations of investors.
“International investors have more experience with green bonds than U.S.-based investors. We need to accommodate these preferences and adopt similar if not substantially equivalent standards to bring these investors into U.S.-based bond financings and to provide U.S.-based investors with a basic set of standards,” an asset manager said.
Of the 23% responding who say there should not be a universal language, the usual argument is that the muni market itself is just too complex for uniformity.
“Muni issuers and credits are too diverse to set uniform standards that would be relevant and meaningful. So impracticable as to be virtually impossible to think that uniformity can be achieved for the multitude of issuers and credits in the muni space that would be meaningful to credit analysis and/or ratings," an issuer said. "A principles-based approach with general guidance that can be adapted to each issuer and credit’s unique circumstances is a far superior approach to providing meaningful information about ESG to the marketplace.”
