GFOA to release ESG best practice

Government officials are responding to a growing call for more ESG disclosure by drafting a best practice document to help issuers provide more information to the market.

The Government Finance Officers Association is preparing to release an ESG (Environmental, Social and Corporate Governance) best practice this summer. This would be the first best practice released by GFOA on that topic.

“We do want to signal and let everybody know that we have this issue and we’re taking this on as issuers and we take it seriously,” said Tim Ewell, chief assistant county administrator in Contra Costa County, California during a GFOA debt committee meeting Wednesday. Ewell is also vice-chair of GFOA’s debt committee.

ESG refers to three key types of factors that can impact an issuer’s credit profile. ESG could pose a risk to the issuer’s ability to repay its debt, such as extreme weather, income level changes and pensions.

“We have consistently addressed ESG,” Emily Brock director of the GFOA’s federal liaison center told The Bond Buyer.

In June 2020, GFOA released a white paper on ESG that served as a guide to issuers on ESG, but the best practice will include issuer disclosure.

“This time we’re taking a huge step forward to craft a best practice and more principles and considerations for issuers as they move forward,” Brock added.

Many market participants want standardized disclosure across government units, but Ewell said it was difficult due to different geography and specific issues to each municipality.

“So in our view, it’s important that individual issuers define those issues for themselves and communicate that out to the market,” Ewell said.

GFOA is also cognizant of resource constraints, but Ewell said some smaller issuers can rely on regional partners, counties and larger cities.

“It’s really to start getting the user of this document to think about the things that may already be being done within their region or within their governmental structure,” Ewell said.

GFOA wants issuers to quantify the impacts of climate, much of which is already done through emergency service offices, Ewell said.

“From a market perspective, we didn’t want the topic to be the issuers aren’t doing enough,” Ewell said. “For the most part we felt there is a lot being done right now, it’s just not being publicized and it’s not being put out there for the market to see.”

A lot of work still needs to be done on ESG, analysts say.

There is not a one size fits all approach, Patrick Luby, municipal strategist at CreditSights, told The Bond Buyer.

“If there is standardized disclosure or a higher level of comfort around disclosure, the market participants can have a higher level of discussion,” Luby said.

Issuers have stepped up in their disclosures due to the pandemic, Luby said. In May 2020, the Securities and Exchange Commission released a statement encouraging more coronavirus-related disclosure.

“The pandemic has shown that it’s possible to be publishing unaudited numbers that the market appreciates that and appreciates those efforts,” Luby said.

GFOA also suggested making edits to its issuing taxables best practices to give more prominent reasoning for choosing taxables over tax-exempt bonds. Some of those changes would be adding reasons to issue taxable debt since that market has grown following low-interest rates and the 2017 Tax Cuts and Jobs Act, which eliminated tax-exempt advance refunding.

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