ESG or bust



Keeley Webster (00:03):
Hello, welcome to another Bond Buyer podcast. I am Keeley Webster and my guest today is Raul Amezcua, a Senior Managing Director at Ramirez & Co. Raul is a member of the California Green Bond Market Development Committee, a joint effort by the California State Treasurer’s Office, and UC Berkeley’s Environmental Center in the Goldman School of Public Policy. Welcome, Raul.

Raul Amezcua (00:25):
Happy to be here this morning.

Keeley Webster (00:26):
I’m glad to have you. So today we’re going to be discussing the work of California’s Green Bond Committee. The first municipal green bond was issued nearly a decade ago, but the public finance industry and California in particular has been working to take it to the next level. And our guest today, Raul Amezcua, has been a member of California’s Green Bond committee since its inception in 2019. The committee includes public finance bankers, bond attorneys, and financial advisors. It was tasked with uncovering what was preventing issuers from labeling bonds as green. Given the much of what government in California does, given the state’s stringent environmental mandates is environmentally focused. Dave Wooley, who chairs the committee and is executive director of the Goldman’s School’s Environmental Center, has said they expect release recommendations based off the committee’s work sometime next year. So Raul, why do you consider the work of this committee significant?

Raul Amezcua (01:20):
I think the green bond effort, if you will, is really synonymous with just improved disclosure. And I think a lot of issuers have taken the topic very seriously. Many have issued green bonds, as you know, and many have considered it. And I think going forward many more will. And I think this committee’s tasks, if you will, is really to help guide, provide guidance, if you will, leadership a directive on how to best issue green bonds and kind of try to set a standard — maybe standard is too hard too strong of a word, but a model for what issuers should be doing.

Keeley Webster (02:02):
So do you think having more guidance for California issuers would result in more people putting a green label on bonds?

Raul Amezcua (02:09):
Absolutely. I really do believe that. When I talk to issuers of all sizes, oftentimes they say, ‘Well, what is a green bond? What those into making a bond deemed green? What’s the criteria?’ And we often point to international criteria that has been established by international bodies, ICMA, others and things that are really directed to the corporate market. But nothing has ever been written, nothing has ever been established directly for municipal bond bond issues. And I think if there was something that was directed to them that was very clear they would take it seriously, they would consider it, and I think many more people would issue green bonds.

Keeley Webster (02:55):
Okay. Do you think what the Government Finance Officers Association is doing around disclosure is similar to what your committee’s doing?

Raul Amezcua (03:03):
I think what GFOA is doing is fantastic. I’ve read some of their recommended best practices on green bonds on improved disclosure and I think they’re advocating for greater disclosure. I think they’re telling their audience you should be thinking about issuing green bonds. You should consider it. You should recognize that it means additional disclosure, improved disclosure and it’s something that you should give serious consideration to. So given the impact that GFOA has on many governmental bodies across the U.S., I think it’s fantastic that they’re taking that leadership role and asking folks to really consider it. What we would be trying to do in this committee, I think, is taking it to another level, which is just being very specific. What is the exact disclosure that would be required by investors to deem a bond green? What is it exactly that they’re looking for? The more specific we can be, the easier it would be for municipal issuers to consider issuing green bonds.

Keeley Webster (04:04):
So do you think ultimately something will be adopted legislatively in California, codifying green bond disclosure, or will it result in recommendations slash best practices guidance out of CDIAC?

Raul Amezcua (04:18):
That’s a very good question. I would start by saying that obviously at the federal level, there is limited direction as to what the regulatory bodies can impose on municipal issuers because of the Tower Amendment.

At the federal level, there’s very little that can be done to direct issuers to do anything with respect to disclosure. But I think at the state level, if we came up with some guidance, some detailed criteria as I referenced before, I think that would make take us to a huge leap forward. In terms of where we wanna go with this we haven’t really talked about how we incorporate CDIAC. This committee was started by the state treasurer. The state Treasurer of California also oversees CDIAC, which is an incredible resource for California issuers. They hold many, many seminars throughout the year educating issuers on best practices, educating them on the dead issuance process, the responsibilities has issuers, etc. So it would dovetail very nicely, but we haven’t really talked about that.

Keeley Webster (05:30):
So how close is the bond market getting to having better data around pricing green bonds versus playing vanilla bonds in similar categories?

Raul Amezcua (05:38):
Yeah, that is probably the most often asked question especially among issuers because oftentimes the very first thing they ask is ‘what is the benefit for issuing green bonds?’ And I think we are months away, maybe a couple years away from really being able to show that there is a benefit to issuing green bonds. I think once we hit that point, many people will. So I think largely municipal issuers are very, very conscientious. They do a really good job with their disclosure, with their debt issuance policies, procedures, etc. And if they saw that there was a benefit, I always explain it, if there was a benefit to get a second rating, a hundred percent of the issuers will go get it because there’s a benefit, they’ll get a lower rate. So as soon as we can prove to them empirically that there is a benefit I think many, many folks will consider the green issuance.

My only my opinion, and this is my personal opinion is that there is a benefit today. Every time I’ve been involved in the green bond issue, I’ve analyst analyzed a green bond issue. I’ve talked to the underwriters about the sale process for green bonds almost unanimously they say ‘we did get broader investor interest.’ Often they will say, ‘we actually got ESG funds that would’ve not bought the bonds had it not been for the green label.’ I often hear we received larger than expected orders. So you get greater demand, you get a lower interest rate. Now how do you prove that when in our market there are tens and tens of thousands of municipal bond issues, No two bond issues are ever gonna be an apples to apples comparison. So how do we prove that? Yes, exactly. Yeah. We got a 3, 4, 5 basis point benefit for the green label. What are we comparing it to? All we can do is give you the additional data about the size of the orders, the types of investors that came in, the number of investors that came in and kind of our expert opinion, if you will, that you did get a better rate because of the greater demand.

Keeley Webster (07:55):
So I asked this question every time I write something related to green bonds, and I generally get the answer that we’re seeing more investors when we’re seeing, and there’s just so much interest in ESG. There are other things and there are ways of tracking pricing. And the other thing that I hear is, well, there haven’t been enough green bonds issued and it’s hard to do an apples to apples, but the first green bond was issued in 2013, so we’re almost 10 years in. So why don’t we have better data around this?

Raul Amezcua (08:29):
I think it’s one of those Catch 22 situations. I always like to explain it. California typically trades at lower yields than other states because California has a high state income tax rate. And there are California bond funds that can only buy California fund bonds. So they have to buy California bonds, they have to pay up for California bonds. That means they have to accept a lower yield because they have to put California bonds in their California bond fund. So we trade better than the national names. Same should hold true for green bonds. The greater number of ESG funds that are created that exist, the greater demand for ESG bonds from investors who have to buy green bonds. And that’ll dramatically increase the demand. And I think we will see a clear pricing advantage as we see more and more ESG funds. 10 years ago, there were none.

Now in the tax exempt market, there’s probably about 20, and we often hear from investors that they are accumulating green bonds, ESG bonds in anticipation of launching in ESG slash green bond fund, but they just don’t have enough bonds. So it’s this Catch 22. The more bonds we issue, the more that they’re available out there, I think people will create more green bond funds or investment strategies. So the green bond mandate the other part of this I would say is that you, you’ve heard about this for a decade, but we’re now at the cusp of it. But this transfer generational transfer of wealth, I’ve heard the number be 30 trillion, 60 trillion, some huge number like that of wealth that is transferring now from baby boomers to the Gen X millennials, Gen Y and Z folks that are now involved in those investment decisions. And as I’ve heard some investors say, it used to be that the baby boomer generation would say, ‘what’s my rate of return and how do I compare to the benchmark?’ Now when the younger people come in when women investors come in to the table, they say ‘what am I invested in? What is the impact?’ And then they say, ‘what’s my rate of return?’ Now that it’s not important, it’s very important, but they’re also asking these other questions. So as this transformation, this transfer of wealth from one generation to the younger generation that’s very, very keen on ESG continues, I think you’re gonna see again, greater and greater demand.

Keeley Webster (11:12):
From what I understand, part of the premise behind efforts to encourage green bond issuance in California was the idea that much of what gets built in California is already adhering to green bond standards. For instance, long before the concept of issuing green bonds arose in the muni market, California had adopted green building standards. So if the building’s being built in the state and water projects are already adhering to stringent environmental standards, why aren’t more issuers labor labeling their projects is green?

Raul Amezcua (11:54):
Well, you just stole my thunder. So when I speak to issuers, I just say exactly what you just said. I say you’re building LEED-certified buildings. You’re building infrastructure projects to improve water quality supply, etc. All of these projects would meet green bond standards. Why not label them green? You were already doing the work. And I was at the Bond Buyer California conference a couple weeks ago — which by the way was fantastic and had great attendance — there was a panel where someone asked the CFO from the LA world airports, ‘we noticed that you issued two green bonds this year, but you hadn’t issued them before. Why?’ And her response was so spot on. She said, ‘we’ve been doing all the work already. We’ve been doing it since the word sustainability became a word or a concept. And we decided if we’re doing the work, why not get credit for it?’ And that is exactly the point. You’re already doing the work, the data is there, the effort that’s required is transfer that data, that project information, project impact information and data into the official statement that’s required. And I think many, many issuers like LAA will continue to see that they’re already expending that effort. And if they could attract a few more investors, greater orders, they should do this and we’ll get better rates.

Keeley Webster (13:27):
Okay. So I’m gonna throw out a hurdle here that I’ve written about and I wanted to ask you if you feel like it’s changed because it came up as an issue when John Chang was Treasurer and he was hold, he held those big workshops on green bonds and how to get more people issue. And some of the issuers and the bond attorneys were saying that they were actually discouraging issuers from putting a green label on because it was unclear exactly what they needed to be disclosing when they put the preliminary offering documents together and the offering documents and how much disclosure was required afterwards. Do you feel like some of that has been figured out at this point or is that still an issue?

Raul Amezcua (14:15):
In my opinion, I think it’s still an issue because there’s not a clear cut guidance directed to municipal issuers. So kind of creating something that’s directed and written specifically for municipal issuers will get people over the fence and will address that concern.

Keeley Webster (14:32):
I mean, it seems like that’s at the heart of what the committee you’re on is doing is trying to establish best practices around this so people know.

Raul Amezcua (14:44):
We are definitely trying to take that challenge on and come up with some sort of guidance. And we are in the process of trying to enlist participation from as many investors as we can so that we can have input from the source, from investors telling us exactly what do they wanna see in the OS before we put anything out. But that is exactly the effort we’re trying to undertake.

Keeley Webster (15:09):
So what are you hearing from them specifically because there are green bond issuers now what do they consider? I don’t know. Do they say San Francisco PUC did a really good job and we like people to do what they’re doing? I mean, are you hearing things like that?

Raul Amezcua (15:27):
San Francisco PUC is often cited as the benchmark, the example of how to do it right. What I tell folks though is what investors tell me that, and I’ve heard this from so many, is if you issue a green bond and you said it’s LEED-certified Gold period, therefore it’s green, that’s not enough, that’s not enough. Tell us about the project. How did it reach that level of certification? What are the water efficiencies, construction efficiencies, energy efficiencies? What is the impact of building the project to this standard on climate? Just give us some data, some metrics so that we could tell our folks who invest with us the impact that they’re having by investing in this bond. Don’t just say it’s lead certified. Tell us about the project. Give us data points as many as you can. And that’s really what they seek is really just more information, more data about the project. I’m not talking about a whole chapter or 10 pages, but I think you could put in a solid page, page and a half, two pages max, a lot of information about the project and its impact and that’s really what investors are seeking.

Keeley Webster (16:49):
So it seems like one of the challenges, and in California, not just on green bonds but just with bonds in general, is you have larger issuers like San Francisco PUC, and then you have really small school districts who’re also issuing debt. So when you guys are working on best practices, how do you establish guidelines that work for both of them? Because what I hear from small issuers was is we have a small staff, say a small school district, we can’t do what Los Angeles Unified School District does. They have a whole team to work on this. We have one person and then we’ll hire an FA and a banker to work on a deal, but how are we supposed to do all this disclosure? So what’s the answer to that?

Raul Amezcua (17:40):
So that is a great point. It’s something that Tim Schaffer from the state Treasurer’s office has brought up repeatedly. We have to take into consideration the smaller issuers who don’t have the same resources. By the way, I’ve heard that acknowledgement from investors as well that they recognize that there is a difference among issuers and some have the resources, they have full-time debt management staffs and other folks have very thin staffs as it relates to a debt. They issue bonds infrequently. And there is a difference. So one of the thoughts that has come up with is we should make an effort to provide issuers, all issuers, but especially target at the smaller issuers, all of the resources that are out there already that they can use to assess climate impact in the region on their project. There’s a lot of resources out there, many from universities, from the state on this topic. We could also help the smaller issuers by being very specific and giving them examples. This is what is deemed necessary. Are you able to get this information in a timely manner to include the OS? So we can help the small issuers for sure by giving them direction as to what’s available out there by giving them very specific examples that they could replicate if they have the resources to do so. But there’s definitely recognition on this topic. Keeley, I’m glad you brought that up.

Keeley Webster (19:13):
So looking forward to seeing what the committee comes up with next year. It sounds like you guys have all been really digging in on these topics. Raul, thanks for joining me here today to discuss the evolution of green bond issuance and disclosure from the California perspective.
And to our listeners, thanks for tuning in to another Bond Buyer podcast. You can learn more about topics confronting the municipal bond market at the Until next time, this is Keeley Webster.

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