Why ESG and why now?

ESG is an umbrella term that encompasses environmental, social and corporate governance strategies, reporting and action plans that impact an organization’s sustainability.

As ESG is reviewed and discussed further, it becomes evident that many typical governmental tasks and functions are very similar to those included under the ESG umbrella. The ESG concept has gained momentum in recent years due to increased international investors’ interest in corporations’ disclosure and transparency on these issues. These days, ESG is now a critical focus within the U.S. market and has been embedded in organizations’ and governmental entities’ operations and strategies.

Leadership teams everywhere prioritize ESG initiatives– internally and externally – as they strive to connect with their customers and employees, seize growth opportunities for their organization, and of course, make a genuine impact from a sustainability standpoint.

In fact, therein lies the importance of ESG. In the past, it was viewed as a responsibility. Now, corporate stakeholders and governmental leaders see an opportunity to create more sustainable operations while building relevancy and trust among their internal and external stakeholders. As importantly, data indicate corporations with ESG strategies have outperformed their counterparts.

In short, ESG creates value within organizations, communities and the planet for years to come. The key components of ESG go way beyond basic sustainability. As it exists today, ESG includes such concepts as:

• Stewardship/community relations
• Business ethics
• Recycling
• Supplier code of conduct
• Cybersecurity
• Corporate social responsibility
• Worker safety
• Good governance
• Fraud prevention
• Employee development

These concepts are not new, of course, but ESG combines them under one framework that is simultaneously core to an organization’s mission, values and strategy while also being critical to its long-term sustainability.

The list of ESG stakeholders – parties genuinely invested in an organization’s sustainable strategy – can be quite lengthy. It typically includes:

• Investors (i.e., institutional investors and private equity firms)
• Regulators (i.e., SEC, ISSB, and state and federal government)
• Community (i.e., competitors, media, interest groups)
• Employees (i.e., current and prospective employees, and business partners)
• Customers (i.e., retailers, consumers and end users)

Of note, within the regulator’s category is the SEC’s proposed rule that public companies must disclose greenhouse gas emissions, climate-related risks, impacts, and risk management processes within their registration statements and annual filings. Naturally, this rule also impacts private companies and government entities that are in the supply chain of larger public companies.

The global market for interest in ESG and sustainable funds has exploded in the last five years to more than $2.2 trillion. Furthermore, some market data continues to suggest that funds placing a higher priority on ESG have done slightly better than those that don’t prioritize ESG factors.

The growth of ESG in the municipal bond market can be seen in numerous ways, including:

• Bond Buyer visibility – This daily publication for the municipal marketplace conducts weekly stories that indicate the impact of ESG on the municipal marketplace
• Municipal Securities Rulemaking Board – The MSRB’s Electronic Municipal Market Access (EMMA) website has made changes to reflect investors’ growing interest in ESG-designated bonds. Additionally, the MSRB completed a recent Request for Information to gather ESG feedback from many different market participants
• Designated bonds – Pricing of bonds that carry an ESG-related designation have experienced increased order flow and, as a result, potential pricing benefits
• Rating agencies – Leading agency’s focus on ESG-related risk factors are impacting overall bond ratings for municipal issuers
• Financing – Improved ESG disclosures could generate more interest in the financing of ESG bonds, which also impacts financial institutions as they look to add sustainable investments to their portfolios

The general popularity of ESG is expected to continue in 2023, although some could speculate that ESG will underperform this year despite the various metrics indicating that ESG continues to grow in popularity. In either case, virtually everyone agrees that ESG is not going away.