Municipal issuers nervous about meeting proper market disclosure on ESG factors should just apply traditional disclosure rules and “you’ll be in a good place,” said Dave Sanchez, director of the Securities and Exchange Commission’s Office of Municipal Securities.
But disclosure around bonds that are marketed specifically as green may prove thornier, said Sanchez, who made the comments Monday on a panel about “hot topics in the muni market” at the Government Finance Officers Association’s conference in Austin, Texas. It marked his most visible public appearance since
Sanchez said he has spent the last few months holding dozens of meetings with municipal market participants.
“What we’re hearing loud and clear is that folks want to see more guidance from the SEC about disclosure, especially voluntary disclosure,” he said. The SEC has no explicit authority to mandate the content of disclosure by municipal issuers, but in May 2020
“I think there’s an appetite for folks to see that extended to other areas,” Sanchez said. “I understand having the commission make clear statements like that is helpful.”
The SEC has ramped up ESG disclosure concerns since last year and in May proposed
Though the rules don’t apply to munis, most market participants expect to see at least an indirect impact, and Sanchez’s comments addressed concern around the stepped-up scrutiny.
“When we’re talking about climate risk and general disclosure, this is an area where there’s a lot of noise and discomfort,” he said. “The point right now is using the same principles you should use for other disclosure; you’re just looking at these like do they have a credit impact, a financial impact on revenues used to pay back the bonds,” Sanchez said. “The rules have not changed, you’re just applying it to a different topic."
But disclosure around bonds that are specifically marketed as green, by either an issuer or a third party, may prove more complicated, he said. “What are we promising and are we actually delivering what we’re promising? You’re marketing to investors in a specific way; you have to be careful.”
Responding to an audience question about whether an ESG-related factor has ever sparked a muni default – a question that Sanchez joked was “passive aggressive” – he said the commission is well aware of the market’s low default rate. “It’s a very good point and something that we’re very conscious of – to not overreact to an issue,” he said, adding that default is not the only risk that investors care about. “What happens to ESG on the corporate side is very different from the muni side, and we’re cognizant of that.”
Also on the disclosure front, Sanchez warned that in light of post-pandemic changes in behavior, issuers may need to revisit projections that accompanied original borrowings.
The rule is that projections, such as ridership or traffic assumptions, should be reasonable at the time they are made, “but so many sectors have been affected by COVID, when you’re going back to review the projections for primary market disclosure…it’s really important to take a hard look at those assumptions and make sure they’re still accurate.”
The OMS director reports directly to the SEC chair, and Sanchez said a big part of his focus is monitoring the commission’s rules from a muni perspective in part to guard against unintended consequences.
He also told the mostly issuer crowd that he would be watching for “structures that might be problematic and making sure municipal advisors and broker-dealers are providing you with the information you’re entitled to.”
Issuers should protect against risky structures like pension obligation bonds, he said. “Be careful with deals that seem too good to be true,” he said.
This is especially true in a time of low supply, he said.
“Anytime you see issuance start to go down and [see] pressure that your service providers might feel to generate deal flow, you have to be careful and make sure the deals being proposed actually work for you,” he said. “This is not unique to the muni market: folks will start proposing different types of deals just to see deal flow continue.”
Sanchez said he returns to the commission at an “interesting moment” for munis, as congressional and regulatory attention is largely focused on crypto and cybersecurity.
“When I was at the commission before, it was all about municipal securities, so it’s nice not to be in that spotlight right now, but it’s important not to let your guard down,” he said, joking that “all bad ideas come back around every 10 or 15 years.”
