Environmental, social and governance (ESG) is an organizational social responsibility initiative used to track and measure an organization’s approach and footprint related to environment and social impacts, among other things. Internationally, ESG has been a more prominent focus for investors, and these issues are now gaining traction in the United States. In fact, ESG discussions and needs continue to rise in prevalence among U.S. state and local governments, particularly municipal issuers.
While there are no universally accepted ESG standards in the U.S. at this time, some disclosure considerations are generally included in each category which are relevant for state and local governments. The enumerations below highlights some of these considerations.
Environmental
- Risk of natural disaster
- Pollution/cleanup costs
- Energy diversity/climate
- Infrastructure sufficiency
- Mandates – state, regional or local
- Natural resources/water availability
Social
- Public health
- Community social/economic factors
- Social equity
- Diversity initiatives and considerations
- Employee/labor relations
- Affordable and available housing
Governance
- Governance structure
- Financial reporting transparency
- Cybersecurity
- Management policies, including a budget, debt and reserve policies
- Board oversight and internal controls
What are some tips to consider when evaluating ESG disclosure?
- Consider the type of security for the bond issue and potential ESG factors which may be relevant.
- ESG relevance may also depend on the type of issuer.
- Consider completing either a detailed or high-level ESG assessment
- If you are making an ESG disclosure in your financial statements or other publicly available reports — particularly related to your finances — consider whether incorporating a similar statement in your offering document makes sense.
Again, because there is not a bright-line approach to ESG-related disclosure, take steps to address questions with your counsel and financing team. These discussions are important to ensure that you are making appropriate disclosures, both required due to the information’s materiality as well as offering voluntary information.
Once you are educated around ESG issues, you will be in a better position to assess potential risks and the disclosure of ESG risks when issuing bonds or releasing financial statements.
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