With weather events on the rise, focus on ESG sharpens

Bonds

Recent severe weather events — hurricanes, wildfires, and droughts — coupled with the effects of COVID-19 underscore the growing urgency for the public finance industry to adapt to changing conditions and update and build infrastructure to withstand their effects.

While congressional Democrats are working toward a $3.5 trillion budget reconciliation package that will be heavy on environmental priorities, including tax incentives and clean energy programs and funding for green infrastructure aimed at drastically reducing carbon emissions, pushback remains.

Damaged homes in floodwater after Hurricane Ida in Pointe-Aux-Chenes, Louisiana. Severe weather and climate events underscore the increasing weight of environmental, social and governance factors for the municipal bond market.

Bloomberg News

But what is clear in the public finance space is that environmental, social and governance factors are becoming more important to investors and issuers in the municipal industry, whether Washington acts or not. Because state and local governments build three-fourths of the nation’s infrastructure, the municipal industry is prime for ESG growth.

According to Refinitiv MMD data, total ESG issuance for 2021 through mid-August — including only deals over $100 million — is $11.5 billion and of that, $5.51 billion are social bonds.

Recent reports highlighting the risks, such as carbon transition costs, and opportunities from considering ESG are plentiful.

“The advance of access and sourcing of socioeconomic data at the city, county, school district and state level has recently provided an insight to the risks that these municipalities face and the repercussions from these risks upon the financial state of the entity,” said John McLean, executive director at ISS ESG. “Unlike corporations where disclosures or questions/submissions are the primary source for datasets that encompass ESG risk measurements, municipals are a very different animal.”

The Bond Buyer hopes to glean insights into the public finance industry’s views on ESG and invites market participants to add to further the discussion in a market-wide survey on ESG in the municipal industry.

You can fill out the survey here.

The Bond Buyer wants to provide the market with insights into how issuers will tap into ESG opportunities to satisfy investor demands and constituency concerns about climate change, social justice and governance issues.

We will discuss the results of the survey at The Bond Buyer’s California Public Finance Conference in October. We will also release a special report of the research findings on bondbuyer.com following the event.

“As with other fixed-income sub-asset classes, ESG factors have traditionally been incorporated in muni bond valuations to an extent,” a report from the Principles for Responsible Investing said. “New developments have heightened awareness of the need for an explicit ESG risk assessment.”

These include rising commercial pressure on asset managers to demonstrate ESG incorporation in bond assessment to asset owners, growing demand from non-US investors, shifting priorities at the federal level and changing expectations from financial regulators around the globe.

For market participants who care about or are even simply intrigued by ESG factors and for the issuers selling securities to include them into their financing plans, we want to hear from you.

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