MSRB: ESG responses highlight need for clarity

Responses to the Municipal Securities Rulemaking Board’s request for information on environmental social and governance considerations in the muni market highlight the need for more precision when discussing ESG, the regulator’s chief executive said Tuesday.

MSRB CEO Mark Kim made that conclusion in a new MSRB report summarizing the responses it received to its RFI. The report organizes the responses within three broad themes: ESG practices in the municipal securities market, challenges associated with ESG integration in the municipal securities market and suggestions for the MSRB to improve market transparency of ESG through the EMMA website. Of the 52 responses, 12 were investors and investor associations, 16 were issuers and issuer associations, 7 were dealers and dealer associations, 5 were municipal advisors and municipal advisor associations and 18 were other market participants.

“One of the most important insights that I think was shared by a number of public commenters was the need to be more precise in defining what aspect of ESG we’re speaking about,” said Mark Kim, chief executive officer of the MSRB. “A number of public commenters made distinctions between, for instance, credit risk related ESG disclosures, versus non-credit related ESG information that might pertain to the bonds or to the issuer of the bonds,” he added. “I think that’s just a really important distinction in the dialogue that’s been happening.”

The responses to this RFI gained notoriety in the months since its release in Dec. 2021, partly due to the high number of responses and partly due to the fervor behind some of the responses. The Disclosure Industry Workgroup, which includes groups like Bond Dealers of America, the National Association of Municipal Advisors, , the Securities Industry and Financial Markets Association, and the National Association of State Treasurers, among many others, released a letter focused on the bright line that exists between ESG risk-based disclosures and those that exist for designated bonds, among other concerns, and Utah State Treasurer Marlo Oaks brought together a coalition of officials from 23 states to say that what the MSRB is doing is dangerous and should be abandoned.

But as Dave Erdman, then-capital finance director for the State of Wisconsin and now managing director at Baker Tilly said during the Government Finance Officers Association’s 2022 Annual Conference, the RFI got groups talking, and better communication leads to a better understanding of many of these nascent concepts.

Mark Kim, chief executive officer of the MSRB cheered on the way the municipal market has made the distinction between credit risk related disclosures and non-credit related information that could pertain to the bonds.

Within the three themes outlined in the summary, the document provides a number of takeaways that commenters expressed in their responses such as the fact that ESG practices are still evolving, market based solutions are emerging and that regulatory action is premature. 

“SIFMA appreciates the MSRB’s summary report on the responses on their ESG request for information, and the acknowledgment that ESG practices are still evolving,” said Leslie Norwood, managing director and associate general counsel, and head of municipal securities at SIFMA.  “The report supports the conclusion that immediate regulatory action is premature at this time.”

That the MSRB would be exceeding its mandate in trying to institute any sort of regulatory framework on ESG has been expressed in almost every letter and continues to be on the minds of market participants.

“I am looking forward to reading the summary. I note that disclosure regulation in general, including disclosure related to ESG labeling, is outside the MSRB’s jurisdiction,” said Michael Decker, senior vice president for research and public policy at the Bond Dealers of America.

Within the theme of challenges associated with ESG integration, the report noted the fact there is a lack of ESG standards and uniform practices and that ESG poses regulatory compliance challenges. Commenters generally agreed that there was a shortage of ESG standards or uniform practices, but were divided on whether increased standardization or uniformity would benefit the muni market.

“Uniform ESG disclosure standards or metrics will not improve investor protections or increase available, meaningful information for investors,” GFOA’s Emily Brock wrote in her letter. “Issuers are addressing ESG factors in rating agency discussions that, if material, will be part of disclosure language.”

But some general standards that issuers can adapt to their unique situation could help move the needle. “The establishment of uniform standards that would be relevant and meaningful would be a difficult goal to achieve,” said Marjorie Henning, deputy comptroller for public finance for the City of New York. “Perhaps a minimum threshold of disclosure with general guidance that might be adaptable to each issuer might work better in the environmental area.”

Market participants have long expressed dissatisfaction with what they deem as “costly” updates to EMMA and EMMA Labs that don’t necessarily improve the market as a whole.

The DIG letter highlighted the importance for the MSRB to improve its EMMA system as a whole and fears that the board is “actively working to expand EMMA in functionalities that will not be used to directly improve the information flow between issuers and investors,” the DIG letter said.

But many market participants still feel that access to ESG data is limited. “No, we do not have access to all the ESG information we need and it is a very manual process to gather relevant ESG-related information for municipal bonds,” wrote Daniel Solender, partner and director of tax free fixed income at Lord Abbett & Co.

The MSRB said it will continue to monitor developments within the market, and continue to engage with market participants as it waits for the report to garner responses.

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