MBA develops ESG bond framework

Top: Tim Seagrave, Victoria Worsfold, Peter Findlay. Bottom: Chistian Wall, Fraser McKay.

Room151’s LATIF event saw news that the Municipal Bonds Agency is working on a plan that will allow local authorities to issue ESG bonds.

“Music to my ears.” Those were the comments of one expert at Room151’s Local Authority Treasurers’ Investment Forum (LATIF) after hearing that the Municipal Bonds Agency (MBA) is developing an ESG framework for local government bonds.

There is reason to celebrate. The framework should allow capital markets investors to lend to local government for projects that meet ESG criteria. Revealed by Christian Wall, a director at PFM, the MBA’s managed service provider, at LATIF, the good news is that the framework should also offer cheaper money for local government.

June Matte, PFM’s managing director, told Room151 that there is a supply imbalance: The level of ESG bond issuance has failed to keep up with demand. For that reason investors are willing to pay a “premium” to ESG issuers to purchase bonds.

According to Wall, ESG bonds in Europe have offered savings of between 10 and 15 basis points (bps). UK bonds so far have offered between two and seven bps. Wall believes ESG bonds could beat PWLB rates.

“It’s still worth having, particularly if you are issuing below the PWLB rate: you get a much bigger saving,” said Wall.

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Draft

A draft ESG framework was due to be considered by the MBA’s board this week, according to Matte. If approved the next step will be developing the procedure to move either a standalone or pooled bond to market.

“The agency will have its ESG framework in place very shortly,” said Wall, “…that will lead to more savings that will demonstrate very clearly for local authorities that have clear political and public commitments to green and sustainable financing, that they can get a better rate than PWLB.”

It was Tim Seagrave, group finance lead at Manchester City Council, who greeted the news with the most enthusiasm.

“This is something the sector is really looking for,” he said. “There’s an appetite out there for investors wanting to put their money in local government infrastructure.

“A lot of what we do is around social benefit, be that a tram system, be that care homes or social care facilities. The more we highlight those virtues, the more we can have one-to-one conversations with investors and explore options.”

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Alternatives

Room151’s conference last week took place after a year in which the PWLB rate was raised by a percentage point and then cut again in November as the Treasury revealed new borrowing rules for councils.

The rate rise caused local government to look at the capital markets for alternatives sources of borrowing.

Despite the rate cut, councils have retained interest in alternative sources of borrowing. A Room151/CCLA survey revealed that of those inclined to look beyond PWLB almost 35% of treasurers consider the MBA an attractive source of borrowing while private placement bonds scored support of more than 20%.

Victoria Worsfold, 151 officer at Guildford Council, backed suggestions that borrowing diversity remains a key consideration and debt portfolios should be managed “as you would an investment portfolio.”

She added: “I think there’s a big place for the capital markets to reach out to local authorities. You need a whole suite of options.”
However, there may still be some work to do in helping capital markets investors understand the strengths of local government finance.

“There’s a good deal of investor education still needed,” said Wall. “We’ve been asked how much of the debt Northamptonshire defaulted on, how much has there been a haircut? Of course, there’s been none.”

To watch the full discussion of alternative sources of funding on Day 2 of LATIF, click here.