- What stands in the way of moving forward on ESG-related matters?
- Labeling vs disclosure
- What, if any, pricing benefits can be expected for ESG designations?
- Addressing the pushback on ESG from certain states
- The investors' side: What do they want to see?
David Erdman (00:08):
Well thank you everybody. Welcome to the ESG panel. Some excitement for three o'clock on a conference filled day. It's great to be back here in Green Bay South. Yeah, you guys are awake? Yes, so I'm just going to have my panelists introduce themselves and then we'll kind of go over what we're going to accomplish today. Go ahead Jenny.
Jennie Huang Bennett (00:30):
Sure. My name is Jenny Bennett. I am the former CFO of the city of Chicago. I'm currently a board member of the MSRB and just as a disclaimer, my comments today are as the former CFO of the city of Chicago, not on behalf of the MSRB. Before that, I was the CFO for Chicago Public Schools and before that I was an investment banker for about 12 years.
Matthew Lentz (00:50):
Matthew Lentz, I'm the Chief financial Officer for Upper Merlin School District where a suburban school district located right outside of Philadelphia, Pennsylvania.
David Blair (00:59):
I'm David Blair. I'm a portfolio manager at Nuveen Investments, located here in Chicago. I'm actually based out in California in our Newport Beach office. Been at Nuveen second stint here for six years. I managed mostly SMA separately managed account portfolios, some of our ETFs as well, including our ESG strategies.
David Erdman (01:21):
And I'm Dave Erdman. I'm a managing director of Baker Tilly Municipal Advisors. I've been there for about a year after a long career as issuer for the state of Wisconsin. Today's panel, we're going to start out with Jenny going over the transaction. She did back earlier this year, the last transaction that most of us point to for disclosure examples, pricing examples and so forth. So Jane's going to give an overview of that transaction. Then we're going to have some questions and answers that kind of address the different parts of ESG we want to accomplish today. Granted, many of the sessions so far have addressed ESG in some aspects, but we're going to try to address all aspects of ESG and try to keep the different avenues of ESG clear as we have those discussions. So Jenny, good luck.
Jennie Huang Bennett (01:59):
Great, thank you so much. So when you sold municipal bonds for a number of years, I think there's only so many 30 year level debt or bonds you can sell before you start to try to exercise your municipal financial expertise and start to flex that expertise and test the markets. This transaction for me was a very rewarding and interesting transaction. Just by way of context, the city of Chicago has a 26 billion debt portfolio. We issue somewhere between one to $2 billion of debt a year, which annually puts us in the top 10 or 15 issuers in the market. And through all of that, this $165 million social bond was a highly complex transaction and took us a lot of time to get there. And I'd like to spend my time today speaking to some of the aspects that differentiated from some of the other bonds in the market.
(02:50)
First off, the slide here shows some of the details around the Chicago recovery plan. The use of proceeds for this bond issue and in particular for the Chicago Recovery Plan was not a part of a normal city of Chicago capital plan. We often get pitched that almost every one of our bonds that we sell as the city of Chicago should be a social bond. And technically speaking, every bond does serve a public purpose, but that the Chicago Recovery Plan is the largest progressive investment plan in the city's history. Within it, there are several investments that are the largest investments in the city's history, and very importantly, some are the largest in the nation by way of progressive social and environmental investments Within the Chicago Recovery Plan. There are a number of projects that we curated to fit within the initial inaugural social impact bond, which is highlighted in this slide.
(03:45)
And I know this text may be a bit small for folks to read, but the slides are available after the panel. If you want to dig in a little deeper, I'll highlight a couple of the projects here. But before I do, I wanted to lay out the framework for how we chose these specific projects and curated them within the social bond to help address what investors were looking for. First off, they had to have easily measured outcomes. They had to be far enough in the planning process, including procurement and contracts to have spend that would happen within a fairly short timeframe. And then very importantly, the investment durations of the projects had to match the duration of our bonds in order for us to be able to meet tax requirements, but also to meet what investors were looking for. In particular retail, which I'll speak to in a moment by way of some of the projects I wanted to dig in a little more deeply into one or two of them.
(04:40)
One is the vacant lots investment within the Chicago Recovery Plan, there was an $87 million allocation towards vacant lots within the initial inaugural social bond issue. There was a $12 million investment and very importantly, all of the various projects within the Chicago Recovery Plan was based in research. There's a Columbia University study on a very large Philadelphia vacant lot remediation program, which demonstrated that investments in vacant lots can have a 29% reduction in gun violence, a 22% reduction in burglaries, a 37% reduction in the perception of crime. And very importantly because we know the activation of communities is very important to public safety, a 75% increase in the use by residents of their communities and time spent in the community so that if Chicago were to see even half of those benefits by way of public safety, it would be an enormous transformation for the many vacant lots that we have in the city of Chicago.
(05:35)
In addition to that, we also know that the improvement of vacant lots improves property tax values, improves the use of the community and helps support various tax revenue bases of the city. Some of the other investments within the social bond included environmental investments within the Chicago Recovery Plan. There's $188 million largest in the city's history environmental investment program. Within the social bond, we included a $23 million full scale electrification of the city's light duty fleet, which includes 728 vehicles as well as the charging stations that go with them. And a $17 million investment in INE equitable tree planting program. We had 157 million investment within the Chicago Recovery Plan, which leveraged up to about a billion dollars in an affordable housing round when you consider all of the lending that goes with that. And within the social bond, there was an $81 million investment in the continuum of affordable housing, which includes various different types of affordable housing to provide the specific wraparound services and other mixed use housing settings that are supportive of different demographics within that need.
(06:44)
There is also a $16 million investment in economic development grants, which helped to support economic development along specific corridors of the Invest Southwest program. And very importantly, they were clustered in order to create transformation and impact so that there would be a completing of the smile as they call it in economic development world, but that there would be some sort of return on the investment so that there was a collective impact. Very importantly, at the very outset of the crafting and structuring of this bond issue, we conducted a survey of some of the largest ESG portfolio holders in the industry to find out from them what is it that they wanted to see in an ESG bond. And the number one response back was they wanted to see impact reporting as a result of that, and also in conjunction with the strategic development of the Chicago recovery plan, the city conducted an economic impact study by a external consulting firm, which outlined approximately $29 million of additional revenues that could be expected from the Chicago Recovery plan, about 7,000 new jobs that could be created and 26 million of a one-time revenue boost that came from the initial investment program. In addition to that, the city also committed to on an annual basis with its Emma reporting, provide outcomes reporting on each of the various projects.
(08:09)
And that's outlined in the official statement. The city also conducted a hyper-local marketing process, and again, lots of words here, but ultimately the hyper-local marketing process included radio, social media. We had a 1000 denomination for our investors to help retail with coming in on the transaction. We had a very large selling group, which included a partnership with Fidelity, and we also set up a one 800 number and gave Chicago retail priority including a one day retail order period. At the end of it, we received over 165 million in retail orders for 160 million in social bonds and ultimately secured a pricing differential of three to five basis points on the transaction between our social bond and non-social bonds, similar maturity, similar coupons, all similar marketing, and ultimately just based on market demand and subscription. And so with that, that's a brief overview of the social impact bond and I'll turn it back over to Dave.
David Erdman (09:12):
Thanks, Jenny. The rest of the panel, we're just going to have some dialogue. We'll save some time for questions and answers at the end. But with ESG, just a general discussion compared to two years ago, I think we're in a lot better position on a municipal market standpoint on ESG. Two years ago, there was still a lot of conflating in the different topics. You'd asked to talk about risk disclosure within 10 words. Someone had ask, what's the pricing benefit? I think the municipal market's done a great job, better job now of keeping things in their own lane to talk about the different things related to ESG, many of which we're going to talk about today. ESG is not going away. I had a little joke I was going to say about Aaron Rogers here, but I'll save that.
(09:47)
But ESG'S not going away. And ESG is what governments do, and I think you can look back as to government financings for many, many years and probably connected to ESG S and P published a report in February talking about municipal sustainable bond issuance and they mentioned momentum to continue. I think it's interesting when we talk about ESG or sustainable bonds, what's included in that. We'll have some discussion later about disclosure, but self-designated second party opinions, third party opinions verification, just good disclosure. I mean, if you're issuing general obligations for higher education, if you have good disclosure, is that part of the sustainable bond issuance that S and P is talking about? There is some data right now that says green bonds or sustainable bonds are down compared to prior years. Well, obviously municipal market's down, so it just goes hand in hand.
(10:37)
Paul chat us this morning talked about how the state of Illinois has taken a cautious approach to green bonds and I think Paul and some other issuers are in that same boat as they look forward to opportunities. We've had a lot of discussion about ESG so far during this conference. Yesterday, Gary Hall talked about retirement, the grace Swamy about skilled workers and infrastructure and how many people are going to retire by 2030. That's part of the ESG blank ESG plan governance right there. We had someone from the bond insurers talking about resiliency and how they look at for resiliency in their credit reviews, not only what their current efforts are, but how they're going to disclose that going forward, not in the primary market, but what promises they're going to make to continue that disclosure going forward all as part of their review of credit reviews for bond insurance.
(11:22)
But the questions we're going to discuss today kind of break down into four different categories. One, we're going to talk about risk disclosure and within risk disclosure, you could just talk about good disclosure I mentioned about issuing general obligation bonds for higher education. If there's good disclosure just promoting what you're doing, the good things you're doing, not just the risk may all go part of the ESG disclosure. Then we're going to talk about the designated bond process and disclosures that go with that. We're going to talk about the headwinds that are out there. We're going to be a little bit more neutral than the Hall of fame panel last night. I'm just going to say there's some headwinds out there. We're not going to discuss the headwinds, but headwinds have caused main people to rethink how they're looking at ESG. I know at my firm we no longer promote it as ESG.
(12:01)
We talk about resiliency and sustainability, trying to stay away from those buzzwords that may automatically get a negative impact as people talk about the topic. And then our final question, which again is probably the question that's on the forefront of people's minds is why, what's the benefit? And David will provide some insights there. Obviously as an issuer, you're really interested in doing green bonds when it comes time to what the benefit is. Obviously the person with the checkbook has a big say as to what the benefit is. I think people are aware that Brookings had a conference in July in which a paper was produced that talked about maybe good green bonds, good disclosure, and again, all subject, it'd be in a two to three basis point benefit for green bonds. I personally think that when it comes time as to the pricing benefit of green bonds, I often respond, it's probably the same as selling bonds at a competitive sale at nine 30 or nine 45.
(12:50)
You just don't know markets are going to change. But in the bottom line I think is if you have designated bonds or you're doing good disclosure and get more interest in your bonds, you're going to get more interest in your bonds. People are going to be wanting to buy your bonds and just that demand for your bonds should give you a better price if you follow the economics theories that are out there. So with that, I'll stop talking and let my panelists do some talking. David, first question's for you. As we discussed, ESG is a big topic as an investor, what are you looking for in disclosures for any credit, whether it be a designated bond or even just a general obligation from a mid-sized community in which there are financing educational purposes?
David Blair (13:29):
Yeah, good afternoon. I think there's really two aspects to this. There's the enterprise level disclosure and then there's this disclosure that's related to the specific bond issuance. So from an enterprise standpoint, when you talk about ESG, obviously I think part of the reason that we're getting rid of that term is that it's kind of a loaded term. There's a lot in there. So on the E part, there's the traditional risk disclosure that when you think about climate risk, right? And we're seeing that disclosure approved considerably, but there's a long way to go. There's some issuers, particularly some of the bigger issuers that face higher risks with climate change, particularly on the coasts wildfires as well. You're seeing some of these bigger issuers get pretty sophisticated with their disclosure. And I think there are examples that we can look to or smaller issuers can look to in terms of talking about what the risks are in terms of how you measure them, what you're planning to do about them, what resources have you developed internally in terms of teams, people that follow this, that measure this, what investments have you done outside with consultants?
(14:45)
I realize that some smaller issuers might have limited resources for this, but I think speaking to that is important because that's one thing that issuers or investors want to hear from issuers is at an enterprise level, how are you approaching areas around environmental risk and what's the plan? Even if there's not a lot of investment done initially right now just articulating that this is your view, we're taking it seriously. This is where we want to get to and this is the plan to get there. That's a big change, a big improvement from saying nothing. And some issuers still say nothing. So then when you can move on, then you can move on to the social aspect. And I think then it gets into things like some of the things Jenny talked about, things that support jobs that reduce crime, that really support the sustainability of the community.
(15:47)
These are incredibly important things. We're seeing a lot of change over the last few years post covid in terms of particularly in urban areas in terms of risk to crime, crime going higher in some cases, and what are you doing to manage that and to improve job opportunities, reduce income inequality, improve equality around education, things like that. Because that's not even really an ESG thing, although it is, but it was there before ESG existed. Obviously those are things that support the vibrancy of communities and your ability to draw in new business to support jobs and the population growth. And then governance is also important. I think Matt will probably touch on that a little bit. I won't spend too much time on that. That's been a little harder to measure from an ESG standpoint consistently across issuers because the disclosure is pretty varied there and I think there's a lot of improvement that can be done around governmental governance type of disclosure.
(16:54)
So there's the enterprise level and then there's the disclosure around the particular bonds, particularly if you're designating bonds or you're issuing labeled bonds. Things like identifying the projects specifically that are tied to these bonds, the rationale for issuing these bonds as green or social and if possible, hopefully being able to quantify some of the improvement that you expect either whether it's from water enterprise issuance or clean power or what have you. From these bonds, we see a lot of issuance that it really just notes that the bonds are issued, therefore these general projects. And that's pretty much it, quantifying it and then also committing to at least follow up when the proceeds are used as articulated as intended. Some issuers are doing that, but often there's no requirement. So we're not always seeing that done, but it is something that investors preferred to see. So I'll stop there and we can discuss in more detail, but I don't want give him the time.
David Erdman (18:11):
Okay, thank you. Matthew, you mentioned the governance and from A ESG perspective, governance is often overlooked, although Omar, Doug, scientist mine talked about pensions and unfunded pension liabilities. I see that being a big part of G, but you recently experienced a rating upgrade due to some matters related to governance. Can you share your story and how you've shared that story with investors?
Matthew Lentz (18:33):
Sure. Yeah. And again, as a small issuer in the marketplace, it really was honing in on our governance risk associated with policies, what we were committing to as far as a long-term with revenues to support our issuance. Also, the fact of transparency factoring into that ranking and then really setting up mechanisms within our entity to support pension liabilities, OPEC liabilities and trusts, future debt increases or changes there, really segmenting that out, which I don't know that a lot of small issuers necessarily have that capability to develop a more complex system than what people are comfortable with funds and other trusts. But that was one of the key factors for us with demonstrating that commitment of our governing body, that we put those steps forward, not just having policies limiting our certain balances or targets, but actually putting into action within our structure over a number of years paired with our commitment to levying the appropriate revenues to support those initiatives.
David Erdman (19:43):
Okay, thanks Jay. Next questions for you. And we discussed how ESG'S growing and evolving and thanks for your leadership on ESG and disclosure at the city of Chicago. As a former issuer, I may have sheeted and looked at some of your official statements to see what I should include in my official statements. We're both not doing it anymore, so the truth can come out, but can you comment on the data and information that's needed for disclosure that you did for the city of Chicago and also talk about the approach that you and your financing team took to determine what information to include.
Jennie Huang Bennett (20:18):
So Dave, I may have also cheated and looked at your financial statements as well, so their respect is mutual. I think that when it comes to disclosure, first off with ESG, it's about disclosing contingent liabilities that already exist. When we first started our ESG disclosure a couple of years ago, we took a look at the GFOA best practices, which I know Dave, you're instrumental in developing. And one of the takeaways was that in the first round of disclosure was that we needed to disclose Nexus to credit issues and that there were significant nexus to credit issues under the ESG umbrella that we had not contemplated in that lens before. And that ultimately led to better disclosure. And so I'll give you just a few examples. The city of Chicago is under consent decree for some of its policies, procedures, training and compliance around public safety and is a significant governance issue.
(21:14)
And as a result of that, there are approximately 140 million of settlements and judgments that are paid on an annual basis to cover for some of those governance issues. And so the city of Chicago's ESG disclosure now includes that another one includes the eight to 10 billion lead service line replacement. There was some discussion about that in the panel earlier today. We have 400,000 lead service lines that need replacing and that the city, again now under its ESG discloses that and also has put together a strategic financial plan for paying for that lead service line replacement program. So I mentioned that to say that regardless, issuers have a requirement to disclose material contingent liabilities and whether or not it falls under an ESG umbrella in a specific paragraph or in the entirety of the official statement, I think it gives us a lens to be able to take a look at those contingent liabilities, disclose them, and then ultimately think of strategic and innovative financial plans to pay for them.
(22:16)
I also believe that like fine wine, that disclosure gets better over time. And in subsequent iterations of our ESG disclosure, we started to take a look at what we were hearing from investors around disclosing broader statistics that might not be as close as it relates to nexus to credit, but we're relevant to them. So for example, the number of people in the city of Chicago who didn't have access to internet affordable housing statistics, certain crime statistics and other social factors that were of interest to investors that we heard in our one-on-one discussions with them. And so that's a bit of context around the evolution of our ESG financing, but most importantly, the way I've approached it is that very similar to your regular disclosure as an issuer, if it's material, it should be disclosed and it's something that we feel like we've done some work to help to improve over time.
David Erdman (23:12):
Okay. And for the materials that you included for normal official statements, people who've been writing 'em for a long time have access to information in the city, nowhere in the state to get that information. Obviously when you start disclosing different risks related to ESG, it's a different group of information, information that a finance officer may not know exactly where to get that any secrets that you had as to where you reached out to get that information or any contractual services that you may have had to help get that information that's needed.
Jennie Huang Bennett (23:40):
So we happen to be in the midst of developing the Chicago recovery plan in response to the pandemic. And as a result of that, we're already in the midst of accumulating some of that information to provide for the policy framework to support that Chicago recovery plan. I will say it took a fair bit of work, and I want to acknowledge the city of Chicago folks here. I see Jack Broman and a bunch of the finance team folks. It was a lot of work and I think to the discussion around all different sizes of issuers and the pricing differential discussion we're going to have that it's important, but it was a lot of work to do and that ultimately there was a lot of internal work. We did also have a kestrel evaluation of the social impact of the projects as well, which I think helps provide a framework around the projects and the use of proceeds. But that ultimately it was about improving our disclosure for investors, which I think is ultimately appreciated just given the one-on-one discussions that we've had and that ultimately that does serve as a better way for them to get transparency into the operations of the city.
David Erdman (24:46):
Okay, thank you. David. From an investor standpoint, often people rating agencies will include economic data, but it seems like investors have their own sources from an ESG disclosure perspective, is there any information that you use that's away from an official statement of an issuer? Any resources that you rely on?
David Blair (25:05):
Yeah, for our ESG strategies, in addition to what the issuer provides, we've got public data sources from the federal level, whether you're talking about EPA type data for air quality, also gen scores for wealth inequality and just different measures to try to assess access to public transportation and affordable housing. So it's great when the issuer provides it, but I can't really speak for all issuers. We're a pretty big issuer. We've got a very large team and we've developed our own proprietary modeling for all this, which took place over a number of years working really a collaboration between our responsible investing team and our credit team and identifying these sources and aligning with the proper sector. So it's a sector by sector really comparing on these data points issuers within the same sector.
David Erdman (26:12):
And Matthew, we've heard from Jenny being a large issuer and an investor, I mean from your shoes being a middle size, smaller issuer, thoughts as to how you would approach trying to increase your disclosure or how you have increased your disclosure and getting the data and getting the information for that purpose?
Matthew Lentz (26:29):
Yeah, absolutely. So we definitely have, I think to Jenny's point of a fine wine, we've gotten better with our disclosure in particular, we migrated to an all alternate fuel bus fleet that of course we disclose. I think the piece about the disclosure that it didn't necessarily equate to a change in that component of the rating, it really fell back more to regional county issues with there, but we definitely disclose it because we think it's of value to have out there the strides that we are making within the realm of possibilities regardless of whether it's translating into an improved rating or not.
David Erdman (27:10):
Okay, thanks David. The question that we threw out there earlier, and it's kind of the last question we'll have before we wrap it up for some final thoughts and question and answer is just pricing benefit. Obviously you're the investor, we're all here to hear your thoughts on this obviously, but as issuers look at options to maybe increase their disclosure or do a designated bond and if they do a designated bond, whether they self designate or provide the follow-up information you mentioned, how do you look at that from a pricing perspective?
David Blair (27:41):
Yeah, the pricing benefit has not been there consistently. It has been there at times. I've noticed it once or twice in comparing like in Jenny's case where you've got a big issuer that has different series, say a green bond and then an unlabeled bond. But often I've not seen any difference. I would say this is just sort of eyeing it. It's not like an academic study, but in most cases I haven't really seen a benefit. It's pretty marginal, but it's been identified in a few academic studies, but then in others it hasn't. So I'd just say it's inconsistent, but a couple caveats there. One is that doesn't mean that there won't be one that develops. And I think what could cause that to develop is the continued growth and demand, which has been very gradual and steady in the municipal market. This is retail driven demand mostly.
(28:33)
That's different than a lot of other asset classes on the taxable side where you've got pension plans and big institutions with mandates to put billions into or even trillions into these types of strategies. So I think it's more gradual, but you're seeing a shift with the millennials gaining wealth. This is more important to them. I think it's important to be developing the practices to issue in a much more effective way for the investor, because at some point you may notice that investors are getting it from some issuers and not others, and then there is a pricing difference between issuers based on for green or social bonds. So the other caveat to that is that a lot of issuers aren't really issuing this for pricing benefits. They're issuing it as a signal that they're fulfilling the plan that they've laid out their long-term plan to address, for example, environmental risks. So some large issuers have articulated a multi-decade plan making their infrastructure more resilient, and by issuing green building bonds for example, this is indicating to their constituents that they're actually following through for these purposes. So there's a value to them in doing that which might not be quantified through pricing.
Jennie Huang Bennett (30:02):
So just to add to David's comments, I think that ultimately pricing benefit pricing is where demand meets supply or supply meets demand. And in terms of ESG, ultimately it's a values trade for those ESG investors or those who have indicated ESG intent that these are values that they'd like to be able to say, come out of the investment in the bonds that have been issued. I think that what we learned during the process of the Chicago financing is that investors are looking for a particular type of information that allows them to be able to go to those holders to be able to say that they've met those values and that the impact reporting is a critical part of that. And so that if as issuers, we don't differentiate the bond, if every single bond we issue is a social bond and you just call it a social bond, then it's not creating value for that investor and ultimately not shifting the place where that supply meets the demand.
(31:02)
And so in a lot of ways, to your point, the market's still developing. And I think in our discussions with investors, one of the other things that we gathered is that investors all have different ways of evaluating their values related to ESG and that there's market consensus that may come to fruition as that market develops or may not, depending on how we all move through this market together and how issuers structure it, how the participants in this room advise their issuers to structure it and ultimately how investors perceive that. And so that at this point, we haven't really seen that in most bond issues, but to the extent that we do start to see a differentiation in the way that those bonds are structured, that ultimately there could be some differential for what is a very large segment of the market that has asked for this.
(31:47)
The other aspect I would also add to the pricing discussion is that even if it's not pricing immediately, as I mentioned with the contingent liabilities, there's a very long-term benefit that issuers get from addressing their contingent liabilities head on. And we saw this with the pension crisis and something that became a burgeoning problem. Ultimately, we did address it with disclosure in various places and much more sophisticated disclosure. But as we start to attack those contingent liabilities head on that ultimately to the point that you made, David, that issuers become more resilient in their infrastructure and can address climate change and social issues, et cetera. The Norwegian Sovereign Wealth Fund has a really interesting approach to this in their ESG investing where they see certain types of brown investments as not being sustainable in the long term. It's a very long perspective as it relates to return on investment there, but that ultimately they started to take that approach in some of how they allocate funds. And I think it'll be just a matter of time before it is that we see that come to fruition.
David Erdman (32:51):
Question was asked to me at lunch, thanks Lynn. We look at pricing benefit. Are we closer? Are we getting closer to a point where there'll be a pricing penalty if you don't do certain things ESG related?
David Blair (33:08):
That's hard to say. That's not the sense I get at the moment. It's an evolving process. I'd say that as investors, and this is a little bit beyond ESG, but when we look at an issue or a bond issue, there's really a mosaic that we're looking at, and it's a collection of a variety of different risks. Jenny was sort of hitting on the fact that you've got contingent liabilities around pensions, ope, and now you've got climate. And so I think it's important for issuers to consider that they're being viewed from this multifaceted standpoint. And so that's why disclosure is a reflection of management quality and good budgeting is a reflection of management quality, identifying your longer term risks and setting out a plan even though you may not have an answer for it today, but setting out a plan, recognizing that you need to get there is a reflection of good management. And so ultimately you may have a levered investor that has certain weaknesses in his balance sheet, maybe certain other weaknesses, but if they've got strong management where there's some confidence in them that helps mitigate that and that will affect pricing.
David Erdman (34:25):
Okay. Thank you. That's it for our prepared questions. I'm missing out the panelists each take a couple seconds and give some final thoughts they may have on ESG and then we'll open it up for questions from the audience. Jenny, go ahead.
Jennie Huang Bennett (34:37):
I think the last thought I would leave folks with is that it did take a lot of work to do this financing, and I know a number of the folks in this room were part of the working group that provided a lot of the help to support us in getting there, but that it takes a lot of work to create what is effectively a new type of financing in the market. I think it's very exciting and very much a part of figuring out where the market is, how our market grows and develops, but that we also have, and also that work is important because we have to make sure we get it right because ultimately if the bonds aren't differentiated, we've seen previous iterations of green bonds and waves of interest that come and go, and this could be one of those. And ultimately that development lies within our hands.
Matthew Lentz (35:23):
I think I echoed Jenny with a lot of work and the fact that considerations for smaller entities and making them aware of the resources that in our case, utilizing external parties because we don't have that internal infrastructure is really important and supportive to the.
David Blair (35:47):
Yeah, I think a few thoughts I'd like to leave is that, again, this is a gradually growing market for Munis, but it's going in the right direction. When you look at 2022, I think there was a lot of media reporting around ESG growing very quickly up until 2022. And then a couple of things happened, which gave it some bad press and even it was sort of like any ESG strategy was affected by this. One was energy prices going up after Russia invaded Ukraine. And this is not so much in the Muni area, but some of the ESG strategies more on the equity side were underweight some fossil fuel heavy energy providers and the underperformed. And there was a very, I think, myopic view of that. They got a lot of criticism. Another aspect of it was there were suddenly media reports about flows slowing down in ESG, but actually they outperformed non ESG strategies who had massive outflows and ESG strategies actually had very minimal of any outflows last year, the small part of the market still.
(36:56)
But it's an important point I think. So there was one other point I wanted to make related to that and I forgot, but I think the main point, oh, the other point was the third. It was just like getting hit from all sides last year. The political rhetoric stepped up. And if you understand ESG or sustainability, particularly within Munis, a lot of the criticism is sort of silly because the criticism is around exclusion going after companies for excluding certain types of markets or businesses. And for munis, it is naturally aligned with sustainability. These are issuers that are supporting public needs, public infrastructure. They're naturally sort of ESG. And I think what investors are trying to do are trying to find some of those projects that, and issuers that are sort of leaders in creating public benefit and reducing inequality around education and incomes and providing better access to affordable healthcare, things like that. Who doesn't want that? That's sort of the job to some extent of public issuers and they're funding these projects toward that.
David Erdman (38:21):
And my final thoughts would probably just be disclosure, disclosure, disclosure question was asked this morning about why it takes a while to change things in the municipal market. I think over the last 30 years I've seen an increase in improvement in of material information. And I think as long as we continue to address ESG and look at our disclosure, improve our disclosures, it'll go a long way to address a lot of the questions that are out there as to whether it's risk, the good things that our municipality is doing, and also any sort of pricing benefit that might come would all be the result of disclosure, disclosure, disclosure. So with that, I think we have some time limited time for some questions from the audience. So as I said this morning, we can't see you, but if you'd raise your hand, someone with the mic, we'll come around and take your question.
Audience Member 1 (39:19):
So thank you for your comments. I want to kind of dovetail what David and Jenny both kind of said and put it together because my question really is using what you just talked about, David is saying that Munis by their nature are ESG and Jenny, you brought up the fact that there were a number of issuers that have labeled their bonds as such and just gone on their merry way and they haven't seen the pricing benefit. So I'm going to make David happy and use the word disclosure just one more time. How much of this might actually be related not to necessarily the label on the bond, but instead the disclosure in the documents that's actually getting, if there is a pricing event of it that that's getting it, not whatever label you're throwing on your deal.
Jennie Huang Bennett (40:08):
So I could start with that. So the city put together ESG disclosure before it sold its inaugural social bond issuance, and we didn't see a differentiation in our pricing per se as a result of our additional disclosure. I would say regardless, good disclosure is good as it relates to communicating with investors transparency and ultimately giving them a confidence that we have good management at the city of Chicago. What we did see though, and heard very distinctly from all the investors we talked to even before we sold the bonds, is that the impact reporting was very important and that most issuances don't come with that impact reporting. And that also is a fair bit of the work that came with the social bond where on an annual basis we would be reporting on impacts, whether it's carbon emissions or more disposable income or number of folks in affordable housing, et cetera, but that we would be disclosing on those impacts on an annual basis. And that had a lot of, I think that value proposition that investors were looking for by way of the social bond and ultimately the pricing differential.
David Blair (41:15):
And I'll just add that we, and I think a lot of our competitors really don't rely on the label, the label. It can't hurt you and it may help you particularly, there are some investors who probably do rely on it a little bit more like individual advisors who are buying for their clients. But in terms of asset management firms that have teams that evaluated on their own, they go straight. You can kind of tell from the project that's being financed, whether that's eligible, and then you want to look at the disclosure and understand better how the funds are being used and ideally what improvement it's providing for those different types of projects, whether it's toward cleaner water quality or cleaner power and so on. So disclosure is important.
(42:13)
I think right now, in terms of pricing benefit, part of what's going on is that this is more my opinion, but I just think that looking at the assets that have come into the market, it's notable, right? There's something there. There's demand and it's growing, but it still is a pretty small part of the market. And so when you look at labeled bonds, there's a lot of just traditional buyers that are buying that. They don't really care so much about the label. They think that, oh, this might just be an added bonus if it ends up being a premium later on where people demand it more because the assets come into these ESG strategies at a higher rate. But I think right now you just have a lot of issuance out there of labeled bonds relative to the assets that are in dedicated types of ESG strategies. And I think that's a part of the reason why there's no notable pricing benefit yet.
David Erdman (43:06):
Next question. I can see that right there in the middle of the room.
David Geringer (43:16):
Thank you very much. David Geringer with Investor Tools. Thanks for all your time this morning. As interest in ESG has not waned, as you've said, but has continued to grow, so is the political baggage attached to the label ESG? So I'm curious, in conversations with your clients and your constituents, what have you found to be helpful language in describing ESG that kind of continues to underline the benefit without the added baggage of the political connotations of the themes?
Jennie Huang Bennett (43:50):
I could speak to that. So regardless of, and I said this earlier, whether or not you believe in ESG, there are the benefits of addressing contingent liabilities head on. And I think that's a really important part of it, that we should be disclosing what's material regardless because of our regulatory requirement to do so. The other thing that I also wanted to touch on is the hyper-local marketing process that we conducted along with the social bonds and that of all the bond issues that we issued at the city of Chicago during my time there, I didn't receive as much good feedback and press around it as I did for this social bond issue. And I think in part it's because a social investment program or social bond is about investing in your investing in your community. And for Chicagoans who had retail priority to come in and say, I'm investing in a project that's going to improve my community, there's a lot of really positive feedback around that.
(44:42)
And we saw that in the retail orders as well as the comparisons to our normal retail participation, which is very low in the state of Illinois. There's no state tax exemption and we don't normally see a lot of retail participation. So that was, and David made this point that there is a lot of benefit for our stakeholders for cities to be able to say that they're investing in their own communities. You can be a part of that, get buy-in with your local residents. And that was a positive outcome, a more positive dialogue that we had as a part of that transaction.
David Erdman (45:15):
And from my perspective, I mean, there's a lot of state laws out there that saying anti ESG, but within those states there's a lot of communities where people are living and have to understand and make decisions where they're still promoting sustainability, resiliency. Indiana is an example. I don't know. They have a law in place that says no ESG or s g destinations, but our firm has clients that we're working with within Indiana to address some resiliency and sustainability matters. The Inflation Reduction Act just passed, gives a lot of communities the opportunity to address energy use and receive some federal tax credits before that. So yeah, it is a headwind, but I think the realities outweigh the headwinds. So I've been told a couple of times that we're out of time somewhere there's a clock over there probably saying time's up. So thanks to my panelists for all your time and preparation for this panel. I also have a note to read that there is a break now, but you're supposed to stay in this room because it's going to be a really short break. So thanks everybody.