CDIAC attempts to close information gap between green bond issuers, investors

As the green bond market continues to evolve, investors have become more discriminating about what they will purchase.

The California Debt and Investment Advisory Commission, the educational branch of the state treasurer’s office, has been working to help issuers determine what kind of green bond disclosure will capture market attention.

“At CDIAC, we recognize issuing green-labeled debt might not be the best decision for everyone,” said CDIAC Executive Director Robert Berry, during a webinar Tuesday. “But if you are considering it, we want you to be able to take advantage of this opportunity.”

Investors want issuers to “stop talking about green bonds, and start talking about green projects,” said Raul Amezcua, a Ramirez & Co. senior managing director referencing a paper written by PIMCO’s Emily Robare.

Ramirez & Co. Inc.

Berry, who delivered the opening address for the panel — that included two investors, an issuer and bond counsel — said the intent was not to provide a recipe for issuing green bonds, but to help issuers position the bonds in the market.

Moderator Raul Amezcua, a senior managing director with Ramirez & Co., emphasized the discussion — like a paper issued in May by a committee he served on — would focus on the “E” of environmental, social and governance bonds, meaning those colloquially called green bonds.

The Green Bond Market Development Committee formed by the California treasurer’s office developed investor-driven guidelines for disclosure on green bond issuance.

There are a number of different kinds of investors with different investment strategies for buying green bonds, said Ruth Ducret, a senior analyst in municipal research for Breckinridge Capital Advisors.

At Breckinridge, “we incorporate environmental, social, and governance risks into all of our analysis. We view it as a way to minimize risk over the long-term horizon,” Ducret said.

Boston-based Breckinridge not only looks at audited financials, but also non-financial information, like climate change and social factors that are not so quantitatively driven, but could affect risk over the longer time, Ducret said.

“We take this approach and apply it to all of the investment types we cover — even CMBS, MBS and asset-backed securities,” Ducret said. “In terms of munis, we are focused on analyzing non-financial data and how it can drive investment decisions over the long term. For each sector, we have developed our own priority frameworks based on quantitative and qualitative metrics that can be scalable and sustainable.”

Breckinridge has a heavy muni emphasis in its portfolio, with $36 billion of its $44 billion assets under management in municipal tax-exempt bonds, Ducret said. For Pacific Investment Management Company, $70 billion of its $1.8 trillion assets under management are in municipal debt; and one-third of its assets overall are invested in assets that have a sustainable strategy, said Emily Robare, a PIMCO vice president and municipal ESG lead.

Breckinridge scores the assets they invest in from 1 (poor performer) to 4 (best in class), based on ESG-driven metrics.

For instance, if they assigned an AA-minus to an issuer, but it has a disproportionate risk of flooding, that might drop it to an A-plus, Ducret said.

“That is what our investors use to make trading decisions and for pricing discovery,” she said.

Both Ducret and Robare would like to see more specific information about what projects the bond proceeds will be spent on.

“If the use of proceeds paragraph in the offering statement doesn’t have a lot of detail, then we don’t have a good sense of what they are using the bonds for,” Robare said.

Amezcua further emphasized Robare’s point, quoting a paper she wrote, in which she said, “stop talking about green bonds and start talking about green projects.”

“We want to look under the hood and see what you are actually doing,” Robare said. “If you aren’t giving us any data, it’s hard for us to categorize” bonds, so they can fill investor requests for ESG paper.

PIMCO also wants to know the expected outcomes, metrics used to gauge success and how they fit into the issuer’s overall sustainability strategy, Robare said.

The lack of standards from regulators and ratings agencies leaves muni credit analysts “on their own,” said Emily Robare, a vice president and credit research analyst on the PIMCO municipals credit research team.

The Bond Buyer

“We want to know what you are doing overall as an issuer, as well as the impact from these particular bonds,” Robare said.

PIMCO also considers how well the issuer is meeting the 17 or 18 sustainability goals, the United Nations has set to be met by 2030, she said.

Though a second- or third-party verification isn’t necessary for PIMCO to purchase bonds, Robare said, “it can be really helpful, particularly if there are investors from Europe and other parts of the world interested in buying the bonds.”

The regulatory environment in other parts of the world is more stringent about what they consider green, she said.

But Robare acknowledged that smaller issuers might not have the resources to provide more robust disclosure on their first green bond sale and she doesn’t want ongoing disclosure requirements to keep them out of this market niche.

“So, maybe you start small, and if you do a second green bond issuance, you add more disclosure,” Robare said. “Maybe the first year, you don’t have as many green bond-focused investors, but then you get input, and act on it, and it grows from there.”

Though the muni market tracks the Securities and Exchange Commission’s actions as it works to develop green bond market regulations, that rulemaking doesn’t apply to munis, said Kevin Civale, a shareholder with Stradling Yocca Carlson & Rauth, P.C.

That doesn’t mean muni issuers shouldn’t take note of what the SEC is crafting.

“With the focus on green bonds, SEC has heightened its focus on ESG,” Civale said. “There have been some enforcement actions on the corporate side where they have missed meeting ESG disclosure requirements. It’s known as green washing. But there have not been any enforcement actions on the muni side.”

“The final rules on the corporate side will be fairly specific in terms of what needs to be said, and which metrics need to be utilized,” Civale said. “It won’t apply to muni issuers, but the muni lawyers do follow IRS guidance closely.”

He added, most green bond disclosure for munis doesn’t include enforceable contractual obligations in covenants, and that disclosure is more a statement of intent.

The legal documents provide flexibility in case the issuer has cost overruns and has to adjust its project plans.

“The reporting requirement may be contractual,” Civale said. “If so, consider making it a separate document from your continuing disclosure you are undertaking under rule 15c2-12. If you are going to make it contractual, keep it separate from your annual reports.”

Disclosure should emphasize the green bond designation does not mean the bondholder gets additional security, or additional revenue streams, or that the bonds will get priority payments, he added. “It’s important to make that clear.”

And, if issuers “commit to post-issuance reporting make sure it’s accurate,” Civale said. “It’s not the place to oversell what the benefits have been.”

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