MSRB ponders ESG disclosure for muni bonds

Asset managers and states have different takes on requirements

Municipal bonds are a murky area when it comes to ESG reporting, and the Municipal Securities Rulemaking Board is considering changes to make them clearer.

The self-regulatory organization recently received nearly 50 comment letters addressing that issue from state and local governments, asset managers, industry groups and others. MSRB began asking in December whether it should attempt to standardize ESG reporting for muni bonds and whether the current data provided by issuers are adequate.

Asset managers said they would favor access to more consistent data, while governments appeared to be split on how, if at all, MSRB should try to improve ESG reporting.

“Given the rapidly evolving nature of ESG investing and the significant inconsistencies in issuer disclosure of ESG-related information, all investors stand to benefit from expanded access to reliable, comparable ESG data from municipal issuers,” TIAA and subsidiary Nuveen wrote in a comment letter submitted last week. “For that reason, we would support the creation of a new disclosure framework that requires municipal issuers to publicly provide high-quality ESG-related information in a consistent, easily accessible format.”

For example, sector-specific standards and information on the use of bond proceeds, could help fund managers in their analyses, the companies wrote.

Unlike in the public equities and taxable corporate bond markets, the use of ESG data in decision making in the muni bond market has been slow to occur. The main reason for that, TIAA and Nuveen said, is a lack of quality data from issuers.

“The sheer volume of municipal issuers and the relative lack of standardized ESG disclosure by these issuers contribute further to this gap,” they wrote. “As a result, very few municipal strategies explicitly integrate ESG factors or ratings, and those that do tend to focus on social and green labeled bonds.”

Domini Impact Investments pointed to “a wide disparity in the availability and quality of sustainability disclosures among fixed income issuers, especially on systemic risks such as climate change, community impacts and racial justice.”

That company also favored standardized data, but it noted that the MSRB should make any requirements align with those that the Securities and Exchange Commission could issue on climate risk and human capital management.

Meanwhile, Goldman Sachs Asset Management noted that it considers numerous factors in investment decisions around muni bonds. The company might weigh carbon emissions, health effects, law enforcement misconduct, cyber security, retiree health care, substance abuse in communities and online gambling or predatory lending.

“These topics/risks are important to ESG investors and have the potential to divert resources and lead to long term reputational harm for municipalities,” that firm’s letter read.


Meanwhile, an ESG consultant said there is a need for the US to act on ESG disclosures for muni bonds, as the country is far behind others in that aspect of regulation.

“The number one systemic risk to the municipal securities market is ‘greenwash,’” wrote Phil Ludvigsen, senior associate at First Environment.

“[M]isrepresentations (green and social washing) will continue and grow until there is clear regulatory guidance and, as necessary, regulations to ensure regulatory quality ESG-related information is available to all investors who feel it is needed,” Ludvigsen said. “Since there is no formal enforcement or real threat of litigation, market makers probably feel the current ‘Wild West’ situation is working well.”

Not in favor

Utah filed a comment letter signed by attorney general and treasurers from nearly two dozen Republican-majority states, staunchly criticizing MSRB for even considering the issue.

“The seemingly innocuous [request for information] questions are actually precursors to MSRB rules that would require municipalities to make ESG-related disclosures,” the states’ letter read.

“Recognizing the special role of America’s states and local governments, Congress enacted a unique regulatory regime for them, requiring that they abide by anti-fraud provisions but exempting them from onerous disclosure requirements that would otherwise drive up the costs of funding and threaten their ability to govern themselves,” they stated. “Congress maintained this balance when it created the MSRB, strictly forbidding it to demand disclosures from municipal issuers or to specify the content of disclosures. The MSRB should abandon this information gathering process and the creation of any disclosure rules governing municipal issuers.”

Similarly, the Securities Industry and Financial Markets Association and the American Bankers Association discouraged MSRB from considering additional disclosure requirements.

Not entirely opposed

San Francisco’s public utilities commission, which began offering green bonds in 2015, cited the voluntary best-practices disclosure framework for ESG issues from the Government Finance Officers Association. That voluntary design could be preferable to standard disclosure requirements, the group wrote.

The New Jersey Infrastructure Bank, which has issued 20 green bonds, said that “ESG-related disclosures should be standardized and include metrics for distinct types of assets (e.g., alternative energy, transportation projects that reduce the carbon footprint, environmental impact, etc.).”

The New York City comptroller’s office noted the city responds to ESG questions from investors upon request, but whether ESG data and risks should appear in offering documents is more complicated, the office stated.

Climate risk data should be included as a separate section of offering documents, as “that provides information to investors about the specific risks faced and how they are being addressed, together with the anticipated future costs, to the extent they can be quantified.”

But “[f]or the social and governance aspects of ESG-related disclosures, there is no real consensus in the municipal market regarding how to isolate those risks from general considerations of credit worthiness.”

Finding a way to standardize ESG reporting for municipal issuers is thorny, the comptroller’s office said. Climate change affects parts of the country in different ways, for example. Social issues also differ by economic and demographic qualities among local governments.

Governance risks “are similarly not uniform,” the comptroller stated.

“Like unhappy families, every dysfunctional government is dysfunctional in its own way. Therefore, we do not think that standardized disclosure would be useful in this context.”