As environmental, social, and governance continues to dominate many discussions of bond issuance and marketing the people on the front lines are constantly testing the limits of the label and contemplating how and if it dovetails with their needs.
The topic was explored in depth by a group of experts during a Tuesday panel at The Bond Buyer's Infrastructure Conference in Washington D.C. Panelists acknowledged that in some cases, it is not even clear what ESG means.
"I thought I knew what it was until I actually had to figure out what it is, how you pay for it, how you measure it, and then if you want to finance under the label," said Nancy Feldman, chief, division of fiscal management, Montgomery County, Maryland.
Feldman's county has been proactive in green leaning initiatives with greenhouse gas rules on the books since 2007 and a climate action plan in place. The county issues between $300 million and $400 million a year in competitive bonds, and has made climate disclosure via an internal process but has not issued any ESG-labeled bonds.
"We concluded it's not yet valuable for us to go through the process of labeling bonds and then seeing if it produced a better investor response or a lower interest cost," said Feldman.
The labeling process can be subjective and often produces unexpected results.
"Airport terminals are getting green labels put on them because they are looking at other opportunities in the "S" component by focusing on the minority/women business owners enterprising as part of the contracting," said Nicholas Donias, vice president of infrastructure project finance at North America SMBC. "It's often about finding the angle outside the core of the project itself."
In addition to airports, Donias' firm has seen the ESG label applied to data centers, housing and
Defining ESG can be dependent on the point of view. "Often when we are issuing ESG debt our definition doesn't matter, it's that of the investors," said Jamiyl Flemming, SVP at Siebert Williams Shank.
"Most ESG fund portfolios are comprised of bonds or bond issues that don't have an ESG label. Each investor has their own set of criteria that they believe determines what an ESB bond to be."
The possibility of using a third party to verify a bond's ESG status raises other questions.
"In the corporate space you see investors that require verification," said Flemming. "In the muni space investors don't really care that much. But it does offer some protection to issuers. It helps prevent against greenwashing especially for first time issuers. Whatever we see happening in the corporate space is foretelling what's going to happen with munis as well."
The methods of dispensing information to investors interested in ESG can be easily confused along with what is more effective in an issuance.
"Issuers need to scrub their projects for ESG principles," said Suzanne Mayes, co-chair, public & project finance practice, Cozen O'Connor.
"If you don't label, you're leaving the investors to scrub documents and figure out what is ESG-worthy and what is not. There can be some benefits to doing some of that work. Labeling is a marketing issue, but disclosure has nothing to do with issuing labeled bonds, it's one more topic that's become topical. Disclosure is different from labeling, and they're not tied."
The future of ESG and how it relates to the present raises questions about the general nature of public finance.
"Hopefully the goal of having this increased focus on ESG is the need to no longer have a focus on ESG," said Donias. "Most of the projects we finance are going to a public good or going to a social benefit. It helps bring attention to issues we need to focus on but hopefully in ten to fifteen years it becomes the norm."
Seeing the total normalization of ESG-flavored bond issuance raises question about what happens in the absence of any detectable public good.
"Is there some thought that everything would be ESG as the norm and doing something that didn't meet that goal gets penalized?" asked Feldman.
