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Environmental, Social, & Governance – What It Is & Why It’s Important To School Districts

By Marvin Founds posted 07-07-2022 01:30 PM

  

By Marvin Founds & Susan Reed

Environmental, Social, and Governance (ESG) discussions have become much more prevalent in recent years. Propelled by a strong international focus, ESG has gained momentum in the United States. Much of the focus has been on corporate activity. Environmental topics have included air or water pollution as a result of business activity or product manufacturing. There has been rising social issue awareness in such things as hiring practices and equal opportunities provided to employees. Corporate governance has been a focus with questions of ethical business practices and increasing awareness of corporate behavior.

These areas of focus are making their way to the government sector as well including local government and school districts. As you can imagine, each of the ESG categories can apply to school districts. The chart below provides a few of the general topics under each of the ESG categories as they may apply to school districts.

Investors are advocating for more ESG disclosure and encouraging regulators to provide standards for more ESG transparency. Certain investment pools require bonds to have an ESG-related designation.  Designation criteria are presently going through a natural development process. Some issuers are using a self-designation which may carry less weight in the marketplace. Related, but in the vein of identifying potential investor risk, rating agencies have identified ESG rating topics and criteria that may influence the school district’s overall credit rating.

Although it’s early stages for ESG designation impact in the municipal bond market, it is important for school districts to understand the risks and opportunities associated with each category because these issues and lack of action may eventually impact investor sentiment toward the school district’s bonds. Pro-active school districts may eventually benefit from ESG-awareness and adoption of designation criteria as socially minded investing grows and may lead to favored cost of borrowing for school district projects.

What has propelled the ESG revolution?

There are multiple factors at play that have elevated ESG discussions and have created pressure to increase ESG’s visibility.

Investor focus: Certain investors and investment pools are targeting opportunities that are consistent with their strategies. Investors want to know if an issuer has implemented ESG programs and if there is any risk associated with the strategy. There is a call for transparency around ESG as certain risk factors may impact an issuer’s bottom line.

ESG debt issuance growth: Affordable housing has driven much of the growth of sustainable debt increasing from $27 billion in 2020 to $46 billion in 2021, a growth rate of 71 percent. The breakdown of 2021 figures are $22 billion green bonds, $17 billion social bonds, and $7 billion sustainability bonds.

For municipal bonds, significant growth in the issuance of bonds with an ESG-related designation, such as green, social and sustainable bonds, is expected. School district designations will likely fall in the social or environmental categories.

Community interest: School districts, like all employers, work hard to attract and retain talented employees. Perhaps, the most critical part of any current economic development strategy is the attraction and retention of people to the community, expanding the employee pool. A school district’s strategic ESG program demonstrates a commitment to a sustainable, healthy, and prosperous future, helping to create a vision for its students, employees, and residents about the positive direction for a sustainable future.

Regulatory overlay: Recently, the Securities and Exchange Commission (SEC) has proposed a new rule related to the standardization of a corporation’s climate-related disclosures for investors. While a school district would not fall under the SEC’s oversight under the proposed rule, there are likely to be indirect impacts. The municipal bond market historically has looked to the corporate bond market for standards and these standards may provide municipal bond issuers with insight into whether an ESG-related issue is “material” and disclosure considerations.

ESG considerations: ESG is gaining momentum and is likely here to stay. School districts can take a wait-and-see approach or they can be proactive and consider developing a strategy and programs around ESG that identifies potential benefits and alignment with its goals and practices. This will also prepare them to address ESG questions from investors, credit rating analysts, residents, and corporations in their communities.

Below are some ways to initiate the process:

  • Define your ESG vision – An ESG strategy positions your school district for a sustainable future and should align with your school district’s overall strategic planning and financial plan. Consider convening your local leadership team to discuss ESG opportunities and priorities.

  • Assess your current state – Most school districts have active initiatives and projects that fall under the ESG umbrella. To enable leadership to evaluate strengths and strategize next steps, a school district needs to assess the current state including opportunities and risks.

  • Develop a plan – School districts have an opportunity to develop an investor outreach strategy, particularly if they are planning to issue debt. Issuers should consider opportunities for ESG bond designation and what type of upcoming projects would be strong candidates for such designation. Additionally, planning for material risks around ESG will be helpful for disclosure in financial statements and bond offering documents as well with rating agency discussions.



Marvin Founds, Managing Director at Baker Tilly Municipal Advisors, LLC, an OASBO Gold Sponsor.
marvin.founds@bakertilly.com | 614.987.1689

Susan Reed, Director at Baker Tilly Municipal Advisors, LLC, an OASBO Gold Sponsor.
Susan.reed@bakertilly.com | 317.465.1536

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