Newly released best practices from the Government Finance Officers Association are designed to raise awareness about investor access to municipal issuer financial information and enhance the discussion about how ESG strategies relate to municipal markets.

On Oct. 1, the GFOA executive committee approved best practices on the social and governance factors of ESG as well as a comprehensive best practice on voluntary disclosure.

ESG, which stands for environmental, social and governance–represents a body of strategies for sustainability in investing. GFOA has developed a suite of best practices and non-binding recommendations addressing each element. The best practice for disclosure of environmental risk factors was previously released.

GFOA governmental debt management committee chair, Timothy Ewell, said in an op ed, that the best practices are important contributions to the conversation about ESG and municipal disclosure.

“There has been a long conversation in our market about how ESG concepts translate to municipal securities,” Ewell explained, adding, “The GFOA has taken a leadership role in our market to develop a pragmatic approach to encouraging meaningful disclosure in the area of ESG by state and local governments.”

Regarding voluntary disclosures, Ewell says that “the best way to produce meaningful disclosure to the market is”–in part–through issuer education initiatives.

Timothy Ewell

GFOA’s voluntary disclosure best practice focuses on information issuers provide to the municipal market concerning for example, obligations, credit quality or operating conditions, that is not required under any continuing disclosure agreements.

In evaluating the merits of providing voluntary disclosures, the best practice states that “issuers may want to consult with their bond or disclosure counsel or municipal advisor for a thorough assessment of a nexus to credit.”

This is because of the diverse nature of the municipal market. As GFOA notes, the best practice “cannot prescribe a universal checklist of voluntary disclosures applicable for all issues.”

Despite the fact that there is no one size fits all approach to voluntary disclosures, GFOA believes that enhancing market communication through voluntary disclosure can improve issuer-investor relations.

According to the best practice, “This enhanced communication and improved relations with investors can become an important factor for access to the capital for markets, but more importantly should result in additional demand for its bond offerings that may lead to a lower cost of capital with more favorable terms.”

In any case, GFOA says that voluntary disclosure by an issuer should address any “information, event, action or other situation affecting its obligations, credit or operating information that the issuer believes is important to municipal market participants.”

This could be negative or positive information but what is “material” for purposes of disclosure does not have a clear definition or examples. GFOA also recommends that issuers “examine their own unique circumstances to determine what may constitute information” to be voluntarily disclosed.

For the social element of ESG, “GFOA recommends that issuers identify social factors that may have a material impact on its credit quality or the payment of its bonds…and disclose information related to these social factors.”

The best practice offers examples of some social factors an issuer may want to consider, e.g., availability and affordability of housing for vulnerable populations, labor relations challenges, quality of public education and vocational training, and internet access and affordability.

The association also suggests that issuers explain how those social factors might affect the credit quality of its bonds and what policies or programs it has to address the factors.

Because “credit analysts, investors, and rating agencies have not coalesced around what factors in the [social] category will be important to their credit analysis, investment decision or credit ratings,” issuers need to consider the social factors that are challenging their community, GFOA says.

This, the association points out, will aid the determination whether those factors have a connection to their bonds or could negatively impact operations or financial position over the term of its debt.

As stated in the best practice, “if an issuer determines that these factors do have a nexus to debt repayment or could have a material adverse impact on operations or finances, it should provide information about these factors in its offering documents and any voluntary disclosures to the marketplace.”

Regarding governance, GFOA recommends that issuers “identify governance factors that are meaningful and relevant to its credit quality, financial or budget management practices, or the payment of its bonds and provide information related to these governance factors in its preliminary and final official statements.”

The association says that issuers should also explain how these governance factors may affect its financial performance and position, credit quality, or payment of its bonds – i.e. provide an assessment of the nexus to credit.

Some examples of governance factors to consider include organizational structure, legal authority to issue debt, policy transparency, and management and policy frameworks. Other examples relate to financial reporting, risk mitigation and budget controls.

GFOA poses questions to consider such as, do you have accurate and reliable systems for financial reporting and preparing financial statements? How is the budget monitored during the fiscal year? When is the information produced and is it used to manage your government’s finances?

For most issuers, the best practice states that “the first step in assessing [governance] disclosure is to consider what information is already included in its offering documents.”

GFOA explains that “of the three ESG factors, governance is the most likely already described in various sections of its offering documents and tightly linked to the finance function of the government.”

As a result, the association recommends that issuers “take the opportunity to verify that key elements of [their] good governance policies and practices are described in [their] official statements.”

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