ESG (environmental, social, and governance) refers to three key types of factors that can impact a government’s credit profile. In general, ESG factors represent areas believed to affect the long-term sustainability of a community, such as a community’s exposure to climate risk (“E”), longterm demographic changes (“S”), or management of pension liabilities, among other governance issues (“G”). An increasing percentage of investors are considering ESG factors when evaluating, selecting, and monitoring their municipal bond investments. Many governmental issuers are also focused on addressing the significant ESG issues affecting their communities (e.g., climate change, pollution, cybersecurity, fraud, etc.) and how these ESG risks, as well as strategies and plans to mitigate them, are communicated to the municipal bond market and the public.
The majority of ESG factors are not new to issuers or investors; many ESG factors coincide with traditional credit factors historically looked at by both investors and credit rating agencies. However, current challenges, such as the climate crisis and concerns about population declines, particularly in rural areas, and the uptick in frequency and sophistication of cyber attacks have increased the focus on social issues, environmental risks and governance planning.Additionally, more information is now available, making it easier for investors to incorporate ESG factors into investment decisions.
ESG is being discussed and explored across the public finance industry. This resource is intended to help GFOA members understand the importance of ESG and how it relates to their communities.
- Publication date: June 2020