By: Mark Glennon*
This fall, Chicago will sell its first bonds designed to appeal to investors concerned about environmental, social and governance issues. This is called ESG investing, and the city will label between $100 million and $200 million of bonds as ESG bonds. Details are in a recent Bond Buyer article.
This amount of ESG obligation is not a big deal in the grand scheme of things; it’s not a big part of the city’s financial picture. But the subject is interesting as a marketing strategy – a strategy that has become commonplace in finance.
We are harshly critical of ESG investing when done by the government using your tax dollars. See the glaring examples just from Illinois linked below. It’s different, however, because the shoe will be on the other foot with the government taking the money, so keeping an open mind is in order. It can be about giving customers – bond buyers – what they want.
ESG bonds will be part of a larger sale tied to funding Chicago’s $1.2 billion stimulus plan, which the city has outlined here, which is only part of Chicago’s much larger borrowing plans .
Chicago’s stimulus package will be funded in part with federal money that has been dumped on states and cities under the guise of pandemic relief, and in part with borrowed money through the supply of obligations. This plan has a strong focus on social justice goals. “We want to structure an ESG bond issuance that really fits the core of ESG because the proceeds from the bonds will go to projects the city sees as critical to social issues,” Chicago’s chief financial officer told The Bond. Buyer.
Labeling some of the borrowings for the program as ESG bonds therefore seems appropriate if this plan unfolds as planned.
The most important questions are the underlying ones that don’t relate to how bonds are labeled and marketed. Instead, the real issues are whether the underlying plan is properly designed – how the money will be used, and whether the spending is an unsustainable misuse of federal aid mobilized by excessive borrowing.
But our discussion of these issues will have to wait until August, when the city holds its annual meeting with the municipal bond community. A separate column on bond buyers outlines some of the issues the city will face. “What I hope to hear is the impact of the COVID-19 pandemic on the current economy of the city and what they expect in the future and are they really careful in using the money federal for one-time expenses and not to create recurring expenses,” Howard Cure, director of municipal bond research at Evercore Wealth Management told The Bond Buyer.
His “long list of questions ranges from the city’s crime-fighting efforts given the harm that negative headlines are doing to the city’s appeal to residents, tourists and businesses,” says the Bond Buyer. “The potential long-term impacts of the pandemic on the commercial real estate market, particularly downtown where a lackluster return to the office could damage property assessments and reduce sales taxes, Cure also worries. How do they budget for this,” Cure asked.
We too look forward to hearing those answers in August, and we are not optimistic.
On the surface, the city will enter these meetings with seemingly good news. Last week, the city released its full 2021 annual financial report. Unlike recent years, it showed modest progress on the city’s negative net position, which improved by nearly $1 billion to reach $29.5 billion.
However, that’s largely thanks to about $3.6 billion in direct federal assistance to the city during the pandemic and tax revenue bolstered by federal assistance to the private sector.
Aside from all those big questions about fundamentals, ESG bonds are notable because they reflect a broader trend in finance and the number of investments sold.
For better or for worse, the market for investors who want to feel good about their investments is truly huge. According to analysis by Bloomberg, global ESG assets are on track to surpass $53 trillion by 2025, representing more than a third of the projected $140.5 trillion in total assets under management. According to an Ernst & Young survey, 39% of investors are invested in some ESG product, and one in five investors say they decided not to invest with a manager because their ESG policies were inadequate.
So Chicago can be said to be doing much the same as the financial firms that have flocked to ESG to cash in on the growing demand. Nothing wrong with that if it works for the city by allowing it to sell bonds at a higher price with lower interest charges and if borrowing makes sense.
The city plans to market the bonds aggressively to Chicago residents, its chief financial officer told The Bond Buyer. He is considering radio commercials, public service announcements and prioritizing orders from certain zip codes.
Cynics may suggest prioritizing postcodes with the most traffic signs such as “Hate Has No Home Here”, BLM, “Science Lives Here”. And maybe the city will offer new construction site signs to buyers: “I bought Chicago ESG bonds”. A little extra proof of virtue never hurts. In fact, the city has yet to choose a name for its ESG obligations, so suggestions are welcome.
I dislike the ESG concept in general for the same reasons that it has suffered a substantial setback in recent months. Many purported ESG investments have been said to be “greenwashed”, meaning they give the impression that they are following ESG principles when they are not. The SEC has now decided to scrutinize this. Moreover, social justice goals are subject to the political winds of the day. In May, Tesla was dropped from S&P’s ESG index, ostensibly for management reasons, but it is widely suspected that the left’s new contempt for Elon Musk had something to do with it. And industries are sometimes blacklisted by ESG, which they shouldn’t be. The boycott of fossil fuel producers, for example, has been an ESG staple and this madness is helping to drive up gas costs. Many ESG investors have also been criticized for investing without remorse in Russia and China. And what a mess we will have when conservatives start doing the same to promote political goals that can be opposed to ESG.
It also seems particularly wrong on the part of ESG proponents to claim, as they often do, that ESG does not mean sacrificing the goal of achieving the highest returns. This statement is illogical on the face of it because, if it were true, ESG investing would not exist. Anyone looking to maximize returns would be an ESG investor.
But these are issues for buyers to consider, not sellers, so I sincerely hope the bond offering works out for the city, on condition that he somehow comes up with an overall financial plan that makes sense. If he found a way to make investors feel good about themselves when they hand over money, great. Dark.
*Mark Glennon is the founder of Wirepoints.
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