Environmental, social and governance (ESG) is an organizational social responsibility initiative used to track and measure an organization’s approach and footprint related to environment and social impacts, among other things. Internationally, ESG has been a more prominent focus for investors, and these issues are now gaining traction in the United States. In fact, ESG discussions and needs continue to rise in prevalence among U.S. state and local governments, particularly municipal issuers.
Multiple drivers propel ESG assessments, disclosures and considerations forward. First, investors demand to know more about ESG-related risks that may have material impacts on investment decisions, for both public companies and municipal issuers. Investors also seek more transparency around these ESG issues to align their investments with socially and environmentally responsible companies that demonstrate corporate values consistent with their values related to ESG or furthering their ESG goals. Additionally, COVID-19 impacts on municipal issuers placed heightened importance on governance and social issues. Finally, the Biden administration continues its focus on climate change-related issues and discussions, making environmental issues, including green projects, energy diversification and carbon reduction, increasingly important.
While there are no universally accepted ESG standards in the U.S. at this time, some disclosure considerations are generally included in each category which are relevant for state and local governments. The table below highlights some of these considerations.
Not every ESG category applies to each municipal bond issuer, but many of the same considerations extend across the many types of governmental entities. Additionally, some ESG considerations may find that more than one ESG category applies. For example, if an issuer is investing in bike trails to promote wellness within the community, but the trails also make it easier to commute to work and reduce carbon emissions, then there are both social and environmental implications.
Now that ESG disclosure has emerged, it is here to stay. Governmental entities should prepare now to address ESG questions from 1) investors in their bonds and 2) members of the public and corporations in their communities alike. Regulators are also discussing and contemplating more ways to encourage transparency and consistency around ESG disclosures.
What can a governmental entity, school, college or university, utility or library do to better understand these issues? Factor in the considerations below to evaluate potential disclosures around ESG and possible ideas to mitigate existing risks:
Again, because there is not a bright-line approach to ESG-related disclosure, take steps to address questions with your counsel and financing team. These discussions are important to ensure that you are making appropriate disclosures, both required due to the information’s materiality as well as offering voluntary information.
Once you are educated around ESG issues, you will be in a better position to assess potential risks and the disclosure of ESG risks when issuing bonds or releasing financial statements.
Our team can help you on your ESG journey. For additional information or to learn more about how Baker Tilly can help your community with an ESG assessment, plan and reporting, contact our team.