Municipal Bond Strategy:
We often engage directly with issuers when circumstances warrant or an opportunity exists. More specifically, we speak directly with issuers when there are significant developments that impact credit quality. We also participate in industry conferences and deal roadshows, where we have the opportunity to speak directly with management. Lastly, we actively participate in ESG investment related industry conferences for both issuers and investors.
The level of direct issuer engagements varies by sector as well as the credit quality of the issuer. When engaging an issuer, we address credit issues as well as specific ESG issues when relevant. For example:
- We continually encourage issuers to provide better and timelier disclosures.
- In our engagements with issuers that have litigation concerns, we seek to understand the issues and inquire about remediation and prevention plans for future litigation risks.
- In conversations with issuers on retiree liabilities, pension funding plans and pension investment policies, views on the plans' legal protections are considered.
- In our conversations with infrastructure issuers, we often discuss resiliency plans (i.e., anti-seismic improvements and insurance policies) against natural disasters.
- In our conversations with charter school borrowers, management succession planning is often addressed. Many schools were founded by an individual or small group of individuals who shared a common belief regarding the particular mission of a school. In cases where management or members of the board are original founders there is often a question about continuity of the school’s mission once some or all of those individuals leave.
- In conversations with project-financing issuers (e.g., toll roads), we often discuss the project’s environmental study and how the sponsor plans to meet the various environmental requirements.
- Many charter school facilities are either repurposed existing facilities or new construction, often on property that formerly was used for unrelated purposes or is located in a high-density urban area. Therefore, we are raising more questions to management regarding previous environmental remediation or
- In conversations with issuers that face environmental challenges (e.g., sea level rise), we have discussed their general and capital planning against these challenges.
- In our conversations with mission-oriented not-for-profit issuers (e.g., cultural institutions, research laboratories, and retirement communities), we seek to understand the social mission behind an issuer’s operating principals and capital financing objectives.
While we strive to engage issuers to the extent possible, we feel it is important to note that the municipal industry is not as advanced as the corporate sector with respect to engagement on ESG issues. This is mainly the result of the breadth of issuers in municipal investment universe. With over 50,000 issuers in the Barclays Municipal Bond and High Yield Municipal Bond indices (and many out of index issuers), the issuers in the municipal market are very diverse with respect to both size and sophistication, particularly in regard to financial and other disclosure. With many small issuers, engagement is a challenge and thus our engagement as described above is more typical of more sophisticated issuers. However, we continually communicate to issuers, rating agencies, bankers, data vendors and other investors, the need for better ESG disclosure and data within the sector.
Green Bond Strategy:
Our Green Bond investors have continued to engage with multiple issuers in the past year to encourage them to adopt Green Bonds Principles to support standardization within the space.
As we continue to develop a robust Green Bond framework, our investors and analysts are engaging issuers prior to bringing new Green Bonds to the market. Credit analysts are evaluating Green Bond compliance with both industry practices as well as the developing internal framework. On several occasions our analysts have reached out to issuers to express concerns over use of proceeds and segregation of proceeds issues that were not in compliance with Green Bond Principles.
We have ongoing dialogue with existing and potential Green Bond issuers. We expressed a need for additional standardization within the marketplace and communicated that we would like to see entities establish Green Bond Frameworks consistent with the Green Bond Principles established by the ICMA. We have communicated to issuers that we expect any new Green Bond that comes to the market to, at least, meet Green Bond Principles standards. We have also communicated our internal Green Bond Framework and approach to evaluating and labelling green bond issuers and issues.
We continue to advocate the benefits of issuing larger (benchmark-sized) green bond programs (when applicable) to the market. We communicated to the issuers and underwriters that we estimate liquidity costs associated with deviations from typical benchmark issuance size. We factor this liquidity cost into our overall total return framework when evaluating the attractiveness of new issuance. We communicated/quantified the benefits of bringing a traditional (general purpose) benchmark size for a green issuance. We highlighted the improved secondary liquidity profile, which we believed would enhance the development of the green market and more easily identify the value propositions embedded within the green bonds. We have established a secondary valuation metric for liquid DM issuers which looks at the value behavior of green bonds against general purpose bond curves historically.