ESG Disclosure

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.

GFOA recommends that governments evaluate the development and disclosure of information regarding the primary environmental, social, and governmental risks applicable to municipal issuers and their bonds in their preliminary and final official statements used in connection with bond sales and in other voluntary disclosure.

Environmental

The increase in the number of extreme weather events in recent years has raised public awareness about climate change. Investors and rating analysts are not just looking to see if risks are present, but also want information regarding what plans a government has to address these risks.

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Social

It is important for issuers to consider the social factors that are challenging their community and decide if any have a connection to repayment of their bonds or could negatively impact operations or financial position over the term of its debt.

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Governance

Governance factors have always been a part of government management, operations, and finances. Governance includes governmental decision-making, policies, legal requirements, organizational structure, and financial and budget management practices.

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Additional Information

New GFOA Best Practice Marketing Municipal Bonds as Green, Sustainable, Social, or Other Alternatively Designated Bonds

For governments considering formally designating bonds as having positive social, environmental, sustainable or other impacts, GFOA recommends they critically evaluate the potential benefits and associated costs.

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GFOA Best Practice on Voluntary Disclosure

Issuers should consider policies and practices to govern the process of providing voluntary disclosures to municipal market participants. Voluntary disclosure is financial or operating information related to an issuer’s obligations, credit, or operating conditions that an issuer chooses to provide in addition to information required by the issuer’s Continuing Disclosure Agreements.

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ESG Considerations for Governmental Issuers

Understanding ESG opportunities and risk factors and why governments should make them a priority

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Meaningful Disclosure Encouraged in ESG by State and Local Governments

GFOA's Executive Board approved several new best practices on the Social and Governance factors of ESG and Disclosure as well as a comprehensive best practice on voluntary disclosure

GFOA Letter to SEC on Climate Disclosures

On July 1, 2021, GFOA submitted a letter to the chairman of the Securities and Exchange Commission regarding climate disclosures and our current work on best practices on ESG disclosures.


Debt 101: Issuing Bonds and Your Continuing Obligations

Issuing debt and the responsibilities that follow once the bond sale is complete cannot be taken lightly and possibly could create an unanticipated burden not foreseen at the beginning of the process.

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