What is ESG?

ESG refers to three key factors that affect a government’s credit profile, including an exposure to climate risk and other environmental factors (“E”), long-term social factors (“S”), and governance issues (“G”). ESG factors represent areas affecting the long-term sustainability of a community. Both investors and rating analysts have increasingly utilized outside resources to assess ESG risks for municipal issuers. Governments play an important role in that overall assessment by providing specifics about their ESG challenges and action plans and in doing so, increasing transparency to the entire municipal market.

Why is ESG important to state and local government?

Issuers of governmental securities should be aware that there could be credit rating differentiation depending on their approach to addressing ESG factors. Without clear ESG information—either through a rating agency report or disclosures—potential buyers of municipal bonds are likely to conduct their own ESG analysis, which may not include all relevant information or context that a government can provide especially regarding steps taken to mitigate these risks. These factors should serve as motivation for governments issuing municipal bonds that are still questioning if ESG should be considered for their disclosure practices, to invest the time to explore the subject, consider its application, and communicate their efforts to address challenges, specifically with regard to climate change and other environmental risks of the ever-changing world.  The importance and content of ESG disclosure will vary depending on the geographic location and unique demographics of each government. In cases where a government does not have any E-environmental concerns or risks, the government should consider discussing that position in their disclosure documents.