Transcription:
Diane K. Quan (
Hi everyone. Good afternoon. My name is Diane Kuan. I'm a partner in the Los Angeles office of Hawkins Stella field in wood. And I will serve as the moderator for this panel in which we will discuss the legal and market trends relating to ESG factors and ESG designated debt. The panelists will take a couple of minutes just to introduce themselves beginning of Dan on my left.
Dan Wiles (
Hi I'm Dan Wildes. I'm Assisted Treasurer, Los Angeles county in charge of finance and investments. I'm a basically a 40 year public finance walk. And I've been on a few different sides of it. I was a lawyer for some time bond and underwriters council. Then I spent 29 years as a municipal advisor the last 17 of them with Fieldman rollup here in Southern California. And now I'm a humble public servant and incredibly happy to be so.
Marcus Martin (
Thanks Dan. good afternoon everyone. Marcus Martin I'm here from U.S. Bank. I'm the managing director of environmental social and governance advisory for corporate commercial banking. So we I cover all of the commercial products from bonds to loans to really everything else in between. it's been really an exciting experience over the last couple years running the business at us bank particularly exciting to be here today with all of our members from the municipal space and getting a better sense of where ESG really fits seems like it fits everywhere but we'll talk a little bit more today about where it really actually fits pleasure to be with you.
Helen Cregger (
Thanks Marcus. I'm Helen Cregger and I work out of Moody's San Francisco office. I also did my stint in investment banking with Piper Sandler out of Colorado and cover local government credits and headed up our ESG efforts to score water and sewer utilities, Happy to be here.
Kevin M. Civale (
Hi I'm Kevin Civale. I'm a shareholder at Stradling Yaka Carlson and Ralph I'm a general bond lawyer although I do have a particular expertise in disclosure matters.
Jamiyl Flemming (
All right. And I'm Jamiyl Flemming. I am a senior vice president at Siebert been in the industry for about 17 years. the firms had the pleasure of being involved in two of the three deal of the year awards from the bond buyer in the ESG category I'm based in New York. And last time I was out here was awarded the rising star award. So pleasure to be back.
Helen Cregger (
Nice
Diane K. Quan (
Congrat. Great. Thank you Jamiyl. So I thought we'd start with a short introduction namely to highlight the prevalence of E environmental S social and G governmental factors in credit and risk analysis as well as disclosure considerations as you probably know various organizations have prepared guidance on how to consider and address potential ESG factors among them are the securities and exchange commission which Kevin will address in greater detail later as well as the GFOA which is the government finance officers association which has developed best practices relating to each of E S and G including how to identify what is relevant for a particular issuer and how to determine which factors impact credit quality and other disclosure concerns. In certain instances you'll find that there is no real distinction between some of the factors for example between environmental and social. There's no consensus as to what factor falls into environmental or the social umbrella. Now with respect to assigning an ESG designation it should be noted that there is no legal standard for designation. Instead there are guidelines and standards proffered by various market groups namely the international capital market association and the climate bonds initiative which also has a certification system. Each of these are often linked to the United nations sustaiable development goals. So to start us off Kevin will help drill down on some of the legal analysis and tax analysis attendant to ESG factors and designated bonds.
Kevin M. Civale (
Great. Thanks Dan. So I'm gonna give basically a 30000 foot overview of the significant disclosure issues. So the basic rule as we all know municipal disclosure is you can't have any material misstatements or material omissions and the non ESG realm. It almost always comes down to money. You know it's pretty much universally comes down to money and every issuer has sort of their own threshold from materiality or pain. And whether the issuer says it's 1% of their revenues or 3% of their expenses usually you can boil things down if an issuer needs a new permit say okay what's it gonna cost you to put the facility in and what's it gonna cost to operate? and there's sort of you know again is it 1% or 3% of 5% that can be debate but we all know how to do that. Like everybody in the room knows how to do that. Figure out what's material in the non ESG context the problem is in the ESG context it very often more often than not has very little to do with the ability of the issuer to pay eventually over five or 10 or 20 years. And that's why it's starting to go into the ratings and things like that. But just when you're doing a book for a for an issuer usually the ESG is not driving the finances and the other there's other things too. There's also many shades of green and there's different things that different ESG investors are interested in. For instance you could have a wastewater facility let's say an issue where a sewer issue is doing a big wastewater upgrade. It's fantastic for water quality. It's gonna put a lot less pollutants into the waterways. It's great. It might do nothing for climate change. It might be negative on greenhouse gases for all we know but it's really good on the other side what do you say about that? We don't really you know we're all sort of struggling to find the rules and what's the right level of detail. Is the green section is it two paragraphs or is it five pages? It's just really hard to figure out exactly because I think there's a lot of and this why I think this panel is good. There's a lot of frankly ignorance on maybe some of the deal doers as to what the ESG buyers are looking for. So I'll be interested in hearing that and as a result of this it's hard for the issuers and the professionals to figure out what's what you know sort of what's the right thing to disclose. As Diane mentioned there are some metrics out there. Although the word I hear often used in the ESG is taxonomies. That's the buzzword they seem to use for the metrics the way you measure whether a particular project is environmentally beneficial and what aspect of that environmental benefit is implicated. You could use ICMA you could use the CBI some issuers more recently you're using leads. They're taking the position which seems to be a reasonable position that lead certification in and of itself demonstrates sufficient environmental benefits to call themselves green bond whether or not you get a third party verifier on top of it. so and there are some metrics there are objective standards out there that in theory and issuer could analyze with respect to a given project. See if it lines up see where it doesn't line up and say Hey this is what we did investors we've declared it to be a green bond. We think it generally matches pick a standard ICMA. We can't guarantee that it does and they can kind of work their way through it. It probably provides some protection to expertise it through a third party verifier. I'm not saying you need to do that but for many issuers they may not really have the expertise themselves to line things up with these third party standards. So it may make sense for them to bring somebody in to help them out with it. The thing about the ESG you're labeling it an issuers labeling it because they know that ESG investors consider it important for the making of an investment decision. So it is definitionally material to ESG investors. There hasn't been any at least not that I'm aware of. There haven't been any greenwash enforcement actions from the SEC in the muni space. As far as I know in greenwashing of course is an issuer saying something is more environmentally beneficial than it actually is. But in the corporate realm that was in may an enforcement action against an investment advisor that basically said in selling a mutual fund they said oh we vetted this all for everything in the portfolio we vetted for ESG purposes turns out they hadn't they had to pay a million and a half dollar fine. So it's the SEC is also developing standards and doing some rule making in connection with this space. And as we all know those regulations won't directly impact the muni market because of the way the the SEC laws are set up but it always has been the case that sort of developments on the corporate side do provide some guidance to us on the muni side. So my punchline is basically I personally believe in this stuff in a big way. So I like working on green bonds. I like issuers to issue green bonds. I'm a big believer in the need to do these sorts of things way quicker than we're doing 'em. So, I sometimes when I'm working on a deal and I'm advising an issuer when I'm saying Hey be careful you know be careful about doing this. You know it's not it's not a free ride in theory. This could come back to haunt you. So that's that's the punchline be careful. I'd suggest decide early in a transaction I've been involved in transactions you know it's a week before you post in the OS and somebody say Hey let's do a green bond. Like oh please you know it's a you do it decide early on decide early on if you were prepared to do it yourselves through your own staff. And if you're not prepared to do it yourselves hire the third party verifier. And I I'm curious to hear some of the buy side folks say just you know how important is that when making their investment decisions? Don't forget that the at the end of the day the insurance the OS you're offering document you should view as more of an insurance policy in a lot of ways than a sales tool. And I think it's particularly important in the context of ESG. Don't use puffy language about how fantastic these things are be factual say what it does say what it doesn't do those sorts of things. You can definitely you know it's it's a ever more vibrant market and I think that'll continue to be the case but just be careful when you do it.
Diane K. Quan (
Great. So to facilitate some of the conversation up here we thought we'd you know begin by asking Dan what an issuer's drivers are for considering ESG bonds.
Dan Wiles (
So we've issued a pair of different green bonds one in 2020 for Lackma for the gift and galleries the new building for the permanent collection. And that was that was a lead gold cert or you know that was a lead gold certification. And in 2021 we issued a group a bonds for a group of projects. Our recuperative care centers were lead gold. And and we have a behavioral health center and a fire station that were both lead silver. And then actually was one project in that basket that was not lead certified. We disclosed that pretty carefully but what we didn't do was sit down and look at third party standards and say gee this is what the climate bonds initiative says. And all that what we said was they're lead certified and frankly I really have no idea what lead certification actually gets to the gold and silver other than I'm pretty certain it's good. So that's what you know that's what that's what our decision tree was pretty much based on. Now the reason that we do it there really and this is gonna I'll state the obvious there are two reasons. One is because we're Los Angeles county and you can guess that our board of supervisors thinks this stuff's pretty cool to the you know environmental causes progressive causes that's important. And so there's a certain amount of signaling to signaling to our citizens signaling to the market that this is a priority for us. So that was very important. The other is to see if we can broaden the market by tapping into some buyers who might not have paid attention to Los Angeles county before you know our bonds tend to be pretty vanilla pretty pretty lease revenue bond simple bonds. And we might get a little bit of attention by by doing something it's green bonds. So we wanted to do that. And of course that relates to whether by broadening the market we can drive down the cost. And I think we'll talk about that. Other people talk about that. That's still I think an open issue.
Diane K. Quan (
Right? So you mentioned that that there wasn't a third party verifier that was engaged. what were some of your thoughts behind that you know were there discussions on it? what was the thinking?
Dan Wiles (
Well part of it is because we felt like there was a third party verifier in the sense that they were lead certified. And so the initial thinking was well if I go get a second party or third party validation I'm just asking somebody else to say yep it's lead certified. you know which is like that joke definition of a consultant somebody that takes your watch and tells you what time it is. And I don't want to denigrate the folks who do that work. I think they're areas in which they do hard work and provide good service. but we just thought in this particular case there just wasn't a lot of value that was going to come from it. Because for us the idea you go back to the idea of issuing the green bonds you know part of it is to signal to the market what our priorities are. The other part is to save some money. So to the extent that we get a third party verification or that we continue to have ongoing verification and we weren't certain by the way what they'd verify in the future project gets built were done. Lead certified project were done. and we have processes to make sure the project gets built. and so we just didn't really feel like there was a lot that was gonna happen that was positive from that. And certainly not enough to justify the cost cuz that's really what it came down to. Is there enough to justify the cost? And I think if we'd had a sense from our underwriting team that was that the market was going to give us a premium for having done that then we would've looked at it but but you know particularly in late 2020 and late 2021 it was still and probably still is an open question as to whether there's any real value from it. The one thing by using the lead certification we felt comfortable that we weren't gonna be greenwashing. We felt comfortable that it was a good faith statement that yes these are bonds that further an environmental purpose because they are for you know energy efficient projects.
Helen Cregger (
Okay, I feel like I have to jump in there a little bit because I agree with things that Dan have said certainly issuing bonds for a lead certified project in itself is a stamp that you're making an important step. And I was struck by the comments of the earlier panel in terms of how much this market is growing. We've gone from a hundred billion market in 2016 to now 1.4 trillion in 2021. We think it's gonna be at about that same level in 2022 about a quarter of those have independent evaluations and the market we expect to grow to as much as $7 trillion by 2025. So I think that we are making those initial steps right in terms of early identification of what constitutes a bond. But as the market grows investors I think are going to want an additional differentiation between different things. So they're going to want to know measurable and comparable comparisons across issuers and across sectors how meaningful the projects are to set criteria of the issuer in terms of how many of your buildings do you want to be lead suited? Do you have goals around that? And then lastly how what is the coherence with sustainability? So are these projects meaningful and moving you toward the trajectory that you want for your ESG goals overall?
Dan Wiles (
Yeah, And I should say on an overall basis you know we have a sustainability officer and a CEO. We have an annual sustainability report. That's really pretty detailed as to what the goals are and again given you know given the priorities of the board those sustainability goals are getting reflected in what we are actually doing.
Jamiyl Flemming (
If I can jump in here quickly on the topic of third party verifiers I agree wholeheartedly with Dan's approach to issuance and making that decision. And I think an important point that he just alluded to was having the requisite resources to make that decision and to track things accordingly to select projects and evaluate them accordingly. One item that I've actually learned relatively recently as it relates to lead certification, and I would agree that the vast majority of buildings that do receive that certification do indeed qualify as green is that the third party verifiers don't necessarily always agree with that approach. For example sustain analytics everything that's lead gold they agree is green lead silver. They take additional steps to qualify it. So they like to see that in addition to the lead silver certification that 30% of your savings is above and beyond the baseline. So again there are other factors at play there as well that the third party verifiers look at that investors look at because they have their own criteria as well just because you slap a green or a social label on your official statement does not mean that every investor will agree that bond qualifies
Marcus Martin (
I'll add very quickly. I'll split the middle. I totally agree with everyone. I the from where I sit in terms of all the issuers and investors the most important thing to keep in mind is that it's a game of progress right? So what was okay two years ago may not be okay in today's market. And we have seen a lot of what Dan was describing as self certification especially around pretty standard environmental eligible categories like lead certification. But to Helen's point to everyone's point I think the most important part is to keep in mind that what happened last quarter is not where the market is. And obviously into 23 when we have an SEC you know disclosure enforcement in play that's obviously gonna change some things too. So it is important to keep up with sort of where the investors is where the markets are. I'd say the short answer is the markets and the investors are forcing the markets to disclose more and be more transparent. Right? So to the extent that there is some distinction in the future between even silver plus and a gold minus right. I'm sure we'll get there at some point but the point right now is that it continues to evolve and without any legislative requirement or any you know regulatory roadmap the investors are driving most of the boat. And I would agree with Dan you know if they're comfortable if an issuer is comfortable and the investor community doesn't seem to have issue with it's about the additional costs and responsibilities you're putting on yourself.
Diane K. Quan (
Right? So it the panel seems to have spoken a lot about green bonds. I wonder if maybe Jamele and Marcus what are the most common categories of bonds you're seeing? Are you seeing other types of bonds that are coming to the market?
Jamiyl Flemming (
Sure. I think we've seen you know green issuance for a number of years now. I think over the past two to three years it's been a strong surge in social bond issuance. Also, we saw a lot of that from foundations in 2020 and now you have major cities issuing social bonds as well. The city of Atlanta city of Chicago will be in the market in the next month executing social bond financings. We spoke earlier about CBI certification. I think you see less CBI certified CBI certified bonds in the market. Their requirements are very very stringent are dependent upon the the maturity of the financing the greenhouse gas emission reductions. So it's a much easier right thing to achieve that green or social label than it is that CBI certification. But I'd say that yeah green and social issuance of the two dominant labels that we've seen in the market with social making are a strong surge as of late.
Diane K. Quan (
Right, and then so what are some of the metrics that show the value of issuing ESG bonds?
Marcus Martin (
I'll jump on that one. So as I was just saying I think that when when the investor is asking for more transparency it means getting down to the project level and finding ways to create metrics at the project. So one thing we're extremely proud of are the racial equity bonds that we've been fortunate to innovate and create put in the market. Those are usually with C D F I partners. But we're starting to get interest in more of the broader municipal space and these social bonds that we've issued. They typically are for affordable housing but they're restricted to developers of color. And so all of the investor documentation traditional bond documentation but you also get an additional addendum that has just anywhere from a half a dozen to a dozen metrics that are specific to the programs that you're financing. So obviously it doesn't get down to the individual tenant level which would be a violation but I think just when you get to a project level of that detail it eliminates or hopefully eliminates social washing. And obviously social sciences are much more local than environmental sciences.
Diane K. Quan (
Sorry, Jimele and then Kevin.
Jamiyl Flemming (
I can just jump in very quickly. I think as it relates to metrics in KPIs or key performance indicators that's really really relevant at when you speak to the fourth of those ICMA principles which is reporting. I think a great point that Marcus made is that this market does continue to evolve. And when you look at those four principles the fourth that's being reporting the only thing that you're effectively required to do even though those principles are voluntary is continue to report on the use of proceeds and the spend down until that those proceeds are you know spent but investors want more. Now they are looking for these metrics they are looking for this these KPIs. So, continue to be in tune with what investors want to see because even though you're following those principles to a T that market does continue to evolve.
Diane K. Quan (
Okay.
Kevin M. Civale (
Yeah. It's funny. I think this shows sort of the education that's needed cuz I'm a practitioner and I do lots of official statements for a lot of luckily a lot of big sophisticated issuers that are interested in doing green bonds. And I don't know a KPI from a hole in the wall and I and I think the issuers known either. So I think you're almost driven and there's nothing wrong. Of course it's perfectly fine to hire a third party but I've heard this a lot. Like the bankers come in early on a deal they say Hey listen you can we think they can do this as a green bond and the issuer says am I gonna save any money? And the banker says can't guarantee it but you'll get more eyes looking at your deal which is good. So, by long supply and demand you'll get a better price. Okay. Then we say what are we put in the book? What are we put in the official statement? We say okay they're building a new waste order treatment plant and it's gonna reduce the you know ammonia by this and the TMDL by that or it's a school and it's gonna use this kind of renewable materials. But we are really you don't have anybody often on the deal team doing the disclosure that has this level of understanding of what the investors wanna see.
Jamiyl Flemming (
And just to that point a lot of those KPIs that you just mentioned are in the green space they don't always exist as readily in the social bond cause we're still understanding and developing what those KPIs are in the social space. Cuz also a lot of those benefits aren't as tangible right? It's harder to measure some of these social benefits that kind of address social inequality. So we're we're still learning what those things are.
Marcus Martin (
And just for a comment to the to the crowd there are three U O P use of proceeds KPI, SPT. So a use of proceeds is allocating proceeds directly to a project that's labeled or eligible for status green. You know social the KPI side is actually the newest part of ESG which is I don't mean to throw us off on a tangent but you actually can raise under general corporate purpose but your entity has KPIs key performance indicators. When we wrap them into a loan or a bond it's called a SPT sustainability performance target but this is a very different beast. It doesn't require eligibility of the exact proceeds. It requires a higher level KPI structure actually with that usually comes an adjustable table that will adjust your your bond price up or down. So ultimately the investor in a bond deal benefits if the issuer fails at their sustainability performance target we haven't seen that yet. Thankfully but it is distinct when you think of use of proceeds we've been talking green and social but really on the on the KPI or S P T side they call it we call those sustainability linked. So sustainability linked bond or sustainability linked loan
Kevin M. Civale (
Is the buy side running those calcs or are you or is the buy side looking for the issuer?
Marcus Martin (
So it's do that. It's at least in our business in our corporate commercial banking business we probably see five to 10 times the amount of loans come through on the bank side than you do on the bond markets. So it's still working through you know on the bond side but I would say on the bank side for bank debt it's pretty much the bank group. That's helping the borrower determine which KPIs but it's typically a series of parking lot of opportunities that they already have right. You're already doing something in affordable housing. You're already doing something around you know clean water or what have you. Right. And you'll pull those in you'll wrap a program around it and you'll issue. You don't create a new objective with this process
Helen Cregger (
Right. It goes to the authenticity of the project right? Absolutely. In terms of you know and to your point bringing the folks in at the disclosure moment and saying let's call these green bonds is too late. You know it goes to really the first moment of how is the project selected and how are you pulling it apart from other projects and what key performance indicators are you measuring against your existing programs and your existing objectives and goals for sustainability.
Diane K. Quan (
So along those lines Helen I wonder if you could speak a little on how ESG factors affect credit and risk analysis?
Helen Cregger (
Yes, well we're assigning ESG scores to all of our issuers and it's not something new for us in terms of looking at credit and thinking about environmental and social and governance risk but we are very intentionally and this follows many steps of making the rating process more transparent in terms of publication of our scorecards but making it very transparent and measurable so that we can make comparisons among issuers and across sectors and watch movements over time. So if housing affordability is a social concern as we've heard over and over again here how are your programs addressing that? What is the coherence of your ESG and of your social bonds against that challenge?
Diane K. Quan (
Okay great. So we've been talking this far about public issuances. I I wonder if there are any trends in private placements with respect to ESG bonds or or maybe what folks are seeing.
Marcus Martin (
Yeah. I mean I would say it's a fast follower you know I think obviously from a disclosure perspective on the private side depending on who you're talking about you might not have the same requirements but I think in terms of the ESG label and from an investor perspective I would say the investor is more hungry for transparency obviously on the private side than on the public side. So you could kind of see the lanes merging.
Jamiyl Flemming (
Just On the topic of transparency. a lot of we focused on thus far have been issues that have that ESG label on it. And what I've been kind of encouraging clients as of late in the public space at least is to start incorporating ESG language into your disclosure documents even when you're not issuing an ESG bond so much in the same way we started incorporating climate change risk and cyber security risk into our documents. I would encourage you to do things that relate to ESG much in the same way. We're seeing that a lot in the airport space for example a lot of ESG related disclosure from airports city of Chicago for example they're financing from last fall was not ESG labeled but to your point about not knowing if it should be two paragraphs or five pages they had maybe five pages of ESG disclosure. In that document not encourage you to go that far necessarily. But I would encourage you to incorporate some language whether it be on the environmental or social front cuz much of what issuers do is in that vein anyway and you're already doing the work. So why not make it easier for investors to know that work that you're already doing? Yeah
Kevin M. Civale (
Well people disclose their debt policies. They disclose their investment policies. It's logical disclose the sustainability policy.
Jamiyl Flemming (
Absolutely
Dan Wiles (
Well and I think that there's this there's this question that seems to be hot right now about ESG and I see it on the on the flip side for deferred compensation funds and things like that. I see consideration of ESG funds and there is a you might call them the sort of the denier group that says well this stuff's irrelevant. And it's just it's just people forcing values down you know corporate throats and and I think many of us see it a little differently. We look at credit a little more holistically and say gosh if there is a significant chance that 15 years from now you're going to have you know you may have some cataclysmic flood that probably bears on your the credit value of your 30 year bond and so I think that there's some there's a real nexus there but but we probably need to think carefully about the nexus about which ESG factors are really hitting credit and which ESG factors which we still may want to disclose but but they are communicating values.
Jamiyl Flemming (
I think to that point I think Fitch had a report back in may where they announced that probably 7% of their rated deals are impacted by ESG. So you know don't be too too fearful to disclose some of that information for fear that it will impact your credit worthiness. Cuz as of now if I speak you know on your behalf I don't think it's having a strong material impact just yet in our space
Helen Cregger (
Right? Those considerations are already incorporated into our rating. But it's an evolving paradigm right? Issuers used to focus a lot on budget management and five or 10 year CIP's. And now we're looking at a much longer arc that transcends any particular maturity of a series into what does a sustainable community look like in terms of environmental risk and in terms of a sustainable social contract with each other.
Jamiyl Flemming (
And I think just to touch on the point that Dan made about some of the political headwinds that ESGs facing in the market right now you have a lumber of social justice initiatives in our space right now for example just capital a nonprofit working with a few investment banks. Siber being one of them in addition to about five major investors developed a racial equality and inclusion framework for investors to voluntarily respond to as well the national league of cities and public finance initiative also started with a $4 million donation from the Robert Wood Johnson foundation social justice initiative as well. So I think a lot of that advocacy is gonna help kind of steer where ESG goes in our space as well.
Diane K. Quan (
Right. So one of the prominent entities sort of in this space is is the SEC. I wonder how this panel feels the SECs, ESG related initiatives are going or have impacted the market the legal side.
Kevin M. Civale (
It's gonna be interesting. Great. So on the on the on the corporate side not a I'm not a corporate lawyer but I know enough to know that it's very prescriptive on the corporate side what has to be disclosed and sort of many times the order it has to be disclosed and things like that. It and of course it's not that way at all. And that I can't say I know them I'm that familiar with them but I have looked at the sort of the rule making so far and it's prescriptive it's numerical it's you know you're gonna hide there's gonna be somebody on the working group preparing the corporate prospectus that you know is gonna have to have a PhD and being able to put the information together. I don't mean that facetiously. I mean I think that's just the way that I don't know is that gonna happen in the muni market? I don't know. Certainly as a regulatory matter they that they can't they don't have the authority to do that as we sit here today you know maybe it'll make its way into 15C to 12 you know 10 years from now. That's how they get everything in. But I don't know. It's it's very hard to guess very hard to guess.
Dan Wiles (
I guess I'd say too that you know if if we go back to what Kevin had said earlier that the point of an offering document is not really a sales document it's a CYA document, and at least back from my old being a lawyer days the moment you look at that language in detail is after everything went to hell and you say did you tell the investors that it might go bad this way? And so fast forward 15 years now you don't believe gosh you don't really believe this climate change stuff is really happening. And gosh I don't really you know well how certain are you? Because if you're wrong if you're wrong and it's and there's nothing in there and it goes bad that way you might really regret that and your defense that I didn't really believe that was a possibility is not going to look very good
Marcus Martin (
I don't think we're gonna get a roadmap like you would think they got in Europe with the European with the EU taxonomy with with the S E C requirements. But I guess broadly everyone's expecting there'll be a roadmap. I don't think that's what we're gonna get. It's really more like we see in terms of how they're already looking at the investor. You have to define what is material you have to manage it and you have to continue to report it. I think a lot of debate is on scope three because the visibility into the data is almost it's almost zero frankly. It's very difficult. so I think that the S E C rule is going to obviously provide some guidance but it's not going to be the you know the fate economy plan in terms of how you're supposed to structure. Like we thought we would see in Europe with the taxonomy that hasn't worked out that way either. So still gonna be a little bit of a wild wild west.
Jamiyl Flemming (
Yeah. I think the SEC's proposals from may will be interesting and those I think will impact more the investors than they will. The issuers. I think the first one that relates to the naming rule will be important which requires those funds to at least hold assets that are at least 80% invested in ESG related you know investments and again that's actually gonna impact more than just the ESG funds but I believe they are targeting the ESG funds with that proposal. And then secondly relates to disclosure. And once again has to do with investors disclosing kind of what your ESG strategy is. Cuz right now it's somewhat of a black box at times you know not knowing what goes into making those investment decisions and I think once the issuer has a better idea as to what the investor is thinking it'll inform us in terms of how we disclose certain things as well.
Marcus Martin (
It's a ping pong though right? Because the issuer also needs to disclose what their strategy is. And that's the reason why you typically would get a second party opinion. And it's part of the reason why investors are starting to ask for entity level KPIs rather than a individual bond. Tranch right. I mean you might have a a let's just say your maturity stack is you know goes on forever and you issue one half a billion dollar green bond. It doesn't necessarily mean you're greening up your house. Right? So a lot of investors are starting to look at this at the entity level rather than on a single maturity or a single issuance level because that doesn't necessarily show you an increased probability of default if you're you know sea level and you've so on and so forth. Right? So I mean same in the corporate side you're seeing a drive to understand how that individual bond offering might actually affect the overall company when they're labeling just that bond. But there's obviously a bigger story to tell or more information to find out.
Jamiyl Flemming (
I completely agree with that. And I do think a number of issuers once again are already doing this work. So I think a lot of folks at times get deterred from issuing ESG bonds cuz it feels very overwhelming whether it be the disclosure or the reporting or whatnot but chances are you're already tracking your use of proceeds right? You're already tracking some of the outcomes and whatnot. So I think it's a matter of coordination at times of the various departments. If you already have that sustainability well make sure that investors know what that office is doing because it is important for investors to know and I have to always track it down on their own. Because also to that last point that you made I think as much as it's important to disclose what's happening with that individual issuance and those projects investors care about your larger story where have you been where are you going? What are your goals? And that's gonna inform their decision to invest as well.
Helen Cregger (
We talk a lot about the durability and reach of a project right? Not just double paying windows in one building but what is your overarching energy use strategy about and how does that fit into that puzzle?
Diane K. Quan (
So before we open it up for questions I thought I might just ask the panelists up here how they see the increase in issuances of ESG bonds as affecting the muni market maybe in addition to or separate from the points that have been raised today
Marcus Martin (
I would just say that the same be cautious statement everything in the municipal space looks like it could be labeled right? And so as we continue to move in a progressive direction investors are gonna demand more. So I would I would just say be cautious in terms of maybe a broker selling you yesterday's trade it's. I think that you're gonna really need to distinguish in the municipal market what is really green and what is really social and then provide the impact data below the surface not just the label based on ICMA or UNSDG's.
Jamiyl Flemming (
And Helen earlier noted the increase in ESG issuance in our space. But one of the prior panelists mentioned the increase in fund flows in assets into our space as well. And we've continued to see record flows year after year I think in 2021 $70 billion of flows $350 billion of net assets in our space. So continue to tap that market right get that disclosure out there. And as Gary alluded to previously we've only seen a handful of deals that have realized that pricing benefit but increasing your demand for financing can ideally you know drive down price in that Primary market. And frankly we have seen a bit more pricing differential in the secondary market. So that's one thing to think about too that little nuance there.
Helen Cregger (
Yeah. That's the bright hope right? That investors will drive down the cost of capital for these projects that are so important to meet these goals and the better that you can express that and tie it into an overall strategy. And I'm hopeful in a way and that a lot of the federal dollars as they came in you municipalities were really leveraging nonprofits to get the funds out quickly and I've seen cities issue RFP's to nonprofits to bring them ideas about social impact bonds and social initiatives.
Jamiyl Flemming (
You just reminded me remind me one more key important point too in that it was also mentioned previously that a lot of issuers let's just take affordable housing. For example you've been doing that for 20, 30, 40 years right now slap a label on it. Investors don't necessarily wanna see that anymore. They wanna see additionality they wanna see incrementality what extra are you doing to benefit the environment to combat social inequality? So that's really really important in the market right now as well going above and beyond kind of status quo business as usual.
Diane K. Quan (
Is it measurable? And is it meaningful?
Jamiyl Flemming (
Absolutely.
Diane K. Quan (
Okay. So, with that I I thought we might open up if to see if there are any questions okay. Right in the light there. I think she's coming to you with a mic
Audience Member 1 (
Thank you so much for the panel. It's very very good lots of information. my question is really for the bankers do you think we would get to the point where instead of looking for savings related to ESG bonds it's the opposite. If your bonds are not ESG and it's not sustainable you'll pay a premium.
Marcus Martin (
I'll answer. Yeah. I think that's a I yeah. So a lot of what we tend to to think from from where we sit is that you know this is eventually turning into mainstream right? So at some point it really is gonna be about within a certain comp group who is the most sustainable. And then everyone else has to pay a you know cost premium cost of capital to that. So in today's market with you know a few leaders in different areas and you're not sure who's really outperforming it's hard to determine in tomorrow's market. If it ends up the way we think it will end up continue to just proliferate. Eventually you're gonna be able to look and see a series of comps and say okay based on these comps you know comp a is the most sustainable from a social perspective comp B from an environmental so on and so forth. And then you will likely start to see pricing a you know allocated accordingly. That's our view. I'm sure others have a different perspective.
Jamiyl Flemming (
I think a key for me is a point that Helen just made which is not necessarily looking at specific series in green versus non green but looking at issuers that have some sort of overall strategy versus those that don't I think having that strategy is the most important thing right now.
Diane K. Quan (
There's a question right there this gentleman.
Audience Member 2 (
Sure. All the discussion I had Wass. So lemme ask you what's like for example
Jamiyl Flemming (
Yeah absolutely.
Audience Member 2 (
Seems to me that's equally important to
Marcus Martin (
Investor. Yeah, you beat you beat me to it. Cuz I was gonna mention that the G that we focus on is more data privacy. So our role a lot of my role is on the corporate side as well. So I we spend a lot of time thinking about data science and the spend that you know you're you're putting out there for data privacy obviously a hack isn't is a social issue for the person but it's a governance issue for the entity. Right, So we definitely think that the governance is leaning more towards the data science including blockchain which at U.S bank we actually have blockchain under our ESG remit because we see it as as the large G but others may have different opinion.
Audience Member 2 (
Do cyber that should be part about
Marcus Martin (
I couldn't hear.
Jamiyl Flemming (
I didn't hear it. Sorry.
Marcus Martin (
Where
Audience Member 2 (
Does cyber for
Marcus Martin (
Yeah that's what I was just saying is the cyber So, for if you think of like protecting you know customer data individual data right. Tenants data what have you so we look at the G from you said cybersecurity same idea right? Just broadly from a data privacy and governance when it comes to you know data sciences.
Audience Member 2 (
Yeah. They factor process.
Marcus Martin (
Well we've had issuers in the corporate side that have used it but they haven't necessarily flagged it on the offering but it's in their framework. So they'll highlight the idea of future spend around you know cybersecurity to your point. And they'll highlight that as a G but it may not necessarily be a part of the existing offering. Usually the framework kind of has everything that you could possibly do ES or G and then you'll issue from that framework. So we haven't seen a lot of the governance issuance if you will. Typically governance is on the reporting it's on the internal management of you know all you know allocation of proceeds towards eligible categories that type of thing.
Jamiyl Flemming (
And just to piggyback on that that was the point that I had referenced earlier is I think in our market you have seen more climate changes. I mentioned earlier disclosure but also cyber security which has been in issuing offering documents for quite some time now. So I don't think you're gonna see issuance for the G per se. Yeah. Yeah. But I do think it'll be more and more important in the disclosure space. Especially as we move from this more in-person world of working to the more you know virtual space and people are online more whether it be in zoom meetings or teams meetings or what have you. And they do communicate more electronically I think disclosing your necessary risks and precautions as it relates to cyber will be increasingly important.
Diane K. Quan (
Any other questions? Okay. I don't think I see any so thank you so much for your attention today and we'll we'll see you later see
Marcus Martin (
You for drinks.
Diane K. Quan (
Thank you.