Environmental, social and governance factors are becoming increasingly important to municipal securities investors, and that trend may be transforming the information considered material for disclosure purposes, Municipal Securities Rulemaking Board CEO Mark Kim said Wednesday.
“Investors and other market participants are increasingly integrating ESG factors into their investment decisions and credit analysis,” Kim said.
Kim’s comments came during an Oct. 20 presentation at the Government Finance Officers Association’s 3rd Annual MiniMuni Conference. The multiday, virtual event allows attendees to dialogue with issuer peers and hear from key Washington leaders.
Kim, who is a former issuer official, shared a story about how Prince Harry and Megan Markle are reportedly getting into the sustainable investment space by “joining a Fintech asset manager as asset partners, looking to make investments in the ESG space.”
“When my teenage daughter starts asking me about impact investing and Prince Harry, I know that ESG has gone viral,” Kim mused.
ESG represents a body of strategies for sustainability in investing.
As further evidence that ESG strategies have gained significance in recent years, Kim pointed to data from a recent Arizent/Bond Buyer Research survey. That survey showed that a majority of municipal market participants think that ESG is “critical” or “very important” to the municipal industry at large.
Because of these ESG trends, Kim emphasized the importance of applying appropriate standards of materiality to financial and ESG-related disclosures.
“Remember, the standard of materiality is not what the reasonable issuer thinks is material, it is what the reasonable investor thinks is material,” Kim said.
In Kim’s view, the kind of information that a reasonable investor thinks is material is evolving. However, Kim noted that determining materiality remains a function of facts and circumstances and judgment.
Kim also reiterated that when the offer and sale of municipal securities is involved, ”the issuer’s financial position is [clearly] deemed to be material.”
“Only material information, which is subject to a duty to disclose, is required [under the federal securities law] to be disclosed,” Kim explained. However, he said that often, information that is not expressly identified in applicable rules ”might nonetheless need to be disclosed to investors.”
For example, that may include any information that is necessary to provide context for other information that is disclosed, so as not to mislead investors.
In terms of materiality and ESG-related disclosures, Kim applauded the effort of the GFOA debt committee, which developed a suite of best practices and non-binding recommendations addressing each element. The best practices focus on both the identification of ESG risks or factors and the policy actions taken to address those risks and factors.
Though the GFOA acknowledges that there is no one size fits all approach to ESG strategies, the organization’s governmental debt management committee chair, Timothy Ewell, wrote that the best practices are “important contributions to the conversation about ESG and municipal disclosure.”
For its part, Kim said that the “MSRB will be issuing a request for information in the coming weeks seeking comment from market participants on ESG trends in the municipal securities market.”
The organization is interested in whether issuers are currently providing the market with climate risk and other types of ESG disclosures and if so, what those disclosures look like.
Kim also pointed out that the MSRB is separately interested in whether issuers have self-labeled their bonds, e.g., as green, climate, social or sustainable and the reasons and standards for marketing the bonds as such.
“I want to assure you that the MSRB appreciates that there is a difference between ESG-related disclosures … and the labeling and marketing of bond deals on the other hand,” Kim explained.
However, Kim added that both topics are of interest to the MSRB and overall, acknowledged that “ESG means different things to different people.”