G – Governance

GFOA has developed a suite of best practices addressing each element of ESG. This best practice focuses on the “G” – Governance factors of ESG and makes recommendations to issuers on how best to identify governance factors relevant to their government, its bonds, and credit quality that it should consider providing in its offering documents. GFOA’s best practice for disclosing the ”E” – Environmental risks provides a framework for developing and providing information related to the “E” of ESG that may be useful to issuers in identifying “G” factors, which should be discussed in its offering documents.

Most subjects included under the “G” umbrella are already routinely included in offering documents. Additionally, credit analysts and the rating agencies have long considered governance factors in their credit analysis because they help sustain credit quality, particularly through economic cycles and the fiscal consequences of unforeseen events. While the “E” and “S” factors likely require additional attention by issuers, considering the “G” factors should be much simpler and generally consist of reviewing information already being routinely provided in your bond offering documents or otherwise available to the municipal marketplace.

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. None of these factors are new and are generally already embedded in established rating agency criteria used in their credit analysis. Because of this, many issuers are familiar with and aware of how these factors are evaluated by rating agencies and credit markets. Additionally, information on organizational structure, management, decision-making, policies, and budget and financial management and reporting is already available from issuers and communicated in some way. However, the focus on ESG provides an opportunity for issuers to think about “G” factors in light of ESG and verify that important information of this nature is available and clearly communicated. Specific examples of Governance factors that are relevant to credit analysis that an issuer should consider discussing in its preliminary and final official statements used for bond sales include:

• Organizational structure – describe whether the governing body is elected or appointed and how it is created (e.g., by home rule, statute, or constitution)
• Legal authority to issue debt – describe legal authority, any limitations, and process for approving debt issuance
• Policy transparency – does your government have budget, debt, and financial management policies? Are they effective and followed to promote prudent financial management practices? How do they enhance your credit quality and bond security?
• Management and policy framework – board oversight, structure, internal controls
• Financial reporting – 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?
• Federal and State framework – how does your entity fit into the federal/state policy and legal framework?
• Risk culture and risk mitigation – does your entity have a cybersecurity plan?
• Budget controls, revenue forecasting, fiscal integrity of the longer term
• Relationship to federal and state funding streams
• Deferred maintenance or the Infrastructure Investment Gap
• Smart growth/land-use planning – long-term economic sustainability
• Pension and OPEB liabilities, funded status, annual contributions, and prioritization

Identifying and Discussing Governance Factors

For most issuers, the first step in assessing “G” disclosure is to consider what information is already included in its offering documents. 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. Issuers should take the opportunity to verify that key elements of its good governance policies and practices are described in its official statements.

Good governance practices are fundamental and routine for governments because they are public bodies not private corporations. For example, most governments are governed by elected bodies whose meetings, agendas, and decisions are open to the public. Also transparency of decision-making and fiscal reporting, a cornerstone of good governance, are standard practices and legally required in most governments. Budget, debt, and financial management policies and practices and financial reporting, including audited financial statements, are again standard for governments. These policies, practices, and legal requirements simply need to be described so that issuers are given credit for their strong governance and management.

After you have identified the “G” factors that are important to your community, consider if there is a nexus to the repayment of your bonds or underlying credit quality of your government and its bonds.

Governance factors and their assessments will continue to evolve so thoughtfulness around their disclosure should be refreshed from time to time to account for changing circumstances. For example, the COVID-19 pandemic and the federal response presented grant financial tracking never before seen in almost entirely every government across the United States. Deployment of those funds required good governance, policy decision-making, and tracking and audit capacities in new and different ways.

Disclosure Considerations

Primary market, annual continuing, or voluntary disclosures related to ESG factors should be carefully considered by issuers and discussed with their bond counsel, disclosure counsel, and municipal advisor. The suite of GFOA best practices provides a framework for addressing disclosure and meeting market expectations. In those cases where issuers determine that information related to ESG factors is meaningful, relevant and material to its credit quality, then disclosures on ESG factors should be made. Many issuers maintain investor websites and investor relations programs designed specifically for analysts and investors to enhance the transparency and marketability of their bonds. If the issuer believes there is value in providing additional information in this manner, then it should consider providing it voluntarily.