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Environmental, social and governance (ESG) practices in the municipal market are becoming increasingly important to regulators, including the Municipal Securities Rulemaking Board (MSRB). In December 2021, the MSRB issued a request for information (RFI) to solicit public as well as market participants’ perspectives on ESG, and responses are due on March 8, 2022.

Using the RFI, the MSRB seeks input on ESG-related considerations, including:

  • enhancing issuer and investor protections,
  • promoting overall fairness and efficiency related to ESG-related risk factors and ESG-related practices,
  • considerations around bonds issued with an ESG Label designation such as green bonds, social bonds, environmental impact bonds and sustainable bonds.

Overview of MSRB’s RFI on ESG

The MSRB RFI contains a series of questions posed directly to issuers of municipal bonds. Some of these questions are listed below; however, each question also contains follow-up questions:

  • Question 1: Are you currently providing ESG-Related Disclosures or ESG-related information beyond the legally required disclosures in your offering documents, continuing disclosures, or other investor communications?
  • Question 2: Do you believe that the information included in ESG-Related Disclosures should be standardized?
  • Question 3: Have you issued ESG-Labeled Bonds?
  • Question 4: If you issued ESG-Labeled Bonds, did you commit to providing any ongoing or continuing disclosure related to the ESG designation?
  • Question 5: Are you providing information to credit rating agencies regarding ESG-related risk factors and ESG-related practices?

Even if issuers have not yet experienced the effects of the ESG focus, ESG considerations are likely to become a normal part of disclosure and rating preparation discussions. Most issuers provide some ESG-Related Disclosures in their offering documents even if these disclosures are not specifically delineated in an ESG-specific section of the official statement. For example, if the issuer discusses its succession plans for its management team, this is a governance-related disclosure. Many bonds issued to fund utility infrastructure projects also benefit the environment by reducing pollution or energy consumption. If there is a discussion of the environmental benefits of the utility project, this is arguably an ESG-Related Disclosure.

ESG disclosure and the issuer

Disclosure around ESG has two basic purposes: to disclose material ESG-related risks and to highlight ESG-focused initiatives for the issuer or the financed projects. With respect to material risk disclosures, the consideration is whether the disclosure of the omitted information would have been viewed by a reasonable investor as having significantly altered the “total mix” of the information made available. When making this assessment through the ESG lens, the issuer needs to assess whether there is an ESG-Related Disclosure that significantly impacts its financial health, the project(s), or the financing(s). An issuer may also opt to put in voluntary ESG disclosures to elevate investor interest. When making any disclosure, including ESG-Related Disclosures, the issuer should consider whether there are any material omissions or misstatements related to the information provided and consult legal, bond and disclosure counsel.

Additionally, as market benefits for ESG-Labeled Bonds increase, discussions around ESG Labels will become more prevalent.

Responding to the MSRB ESG RFI is a great opportunity to provide important market input prior to the development of any additional regulation or guidance around this increasingly important issue. You can respond to the RFI here.

RFI response and ESG designation considerations

Our team is available to assist as you consider and develop responses to the RFI. We can also assist issuers as they evaluate the considerations around ESG designation, both at the time the bonds are issued and ongoing market reporting requirements.

Susan Borries Reed
Alyssa Glaser
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