US muni bond regulator seeks input on ‘value’ of second-party opinion providers

The regulator for the $4trn US municipal bond market is looking at the value of second party opinion providers in the marketplace as it seeks information from market participants on ESG practices. 

Mark Kim, CEO of the Municipal Securities Rulemaking Board (MSRB), told RI that the regulator is looking to understand from investors “whether these second party opinions […] are valuable, whether they’re important [and] whether they’re incorporated within the investment screening process”. 

“We’ve heard – anecdotally – different views on the value of those independent certifications,” he continued. “From an issuer protection standpoint, those opinions come at a cost and so we're really interested in better understanding what the benefits are from those investments.” 

In early December last year, the MSRB launched a request for information on ESG practices within the market, looking at ESG disclosures for both labelled and non-labelled munis, availability of ESG data for investors, and compliance issues for broker dealers and municipal advisers dealing with ESG-labelled bonds and disclosures. 

While the first green municipal bond was issued by the state of Massachusetts in 2013, and volumes of labelled munis have significantly grown in recent years, Kim denied that the regulator was late to the party.  

“I consider the US municipal securities market to be one of the original ESG investments given the nature of state and local governments and the type of projects and outcomes that these bonds are intended to finance,” he said.  

While the muni market has been offering these investment opportunities for centuries, it is only recently that these issuances have been given labels, which is why “now is the right time and place for our market to consider [these] issues”, Kim continued. 

Kim also said that the MSRB was hearing directly from investors that climate risk disclosures are material to their investment decisions. 

“That’s a very important point from a regulatory standpoint because materiality is one of the defining criterion of the disclosure framework in our securities market,” he said. 

The MSRB does not have any firm plans to take regulatory action as a result of the call for evidence, and is still in “the very earliest stages of understanding”. Even if the call for evidence did identify challenges, industry- or market-led initiatives “may negate the need for regulatory solutions”, Kim said, cautioning that the unique nature of the muni market means it may face regulatory challenges which are not present in EU capital markets or the US corporate space. 

While the MSRB is not responsible for regulating issuers themselves – only broker dealers and municipal advisors fall within its mandate – it has been mandated by Congress to “protect” issuers and investors.  

The municipal market is notable for its high proportion of retail investors, and the rise of ESG data providers “could preclude certain retail investors from having access to that same type of proprietary information”, Kim said. “Whenever there’s the potential for asymmetric information, that always is a cause for regulatory concern and scrutiny.” 

Kim also raised concerns around labelling. “If an investment is being marketed as a green bond, for example, and being sold to an investor as a green bond, and that investor is buying it and relying on those assurances and purchasing it because it is a green bond and it turns out that however we define green, that that bond subsequently is not a green bond then arguably that investor has been harmed,” he said. “There is absolutely a regulatory concern around making sure that all material information that is relevant for an investor is provided to the marketplace and is transparent.” 

He refused to be drawn on whether he thought greenwashing was a material risk in the muni market, but said his sense was that investors are becoming increasingly concerned about the issue.