ESG is an acronym that many of our readers will be familiar with. These days, it is almost impossible to have a conversation without ESG being mentioned. These conversations are not just solely about the environmental or societal implications of decisions either, the ‘G’ for Governance can be just as important too.
Government borrowing statistics for March 2021 showed that local authorities have lent over £14bn to their peers, raising an interesting question, how “ESG” is a local authority?
Starting with the ‘Environmental’, many local authorities have now declared a climate emergency since Bristol City Council was the first to do so in 2018. Councils are taking steps to reduce their own carbon emissions within their area and in doing so are helping to achieve the UK’s target of becoming net-zero on all greenhouse gases by 2050. Some Councils have decided that this timescale is too long and are aiming to achieve this well before this date. Local authorities have a huge role to play in alleviating the climate crisis by encouraging greener infrastructure, cycle to work schemes or the implementation of more energy-efficient measures such as solar panels or low-carbon heating.
Investors with a rampant appetite for anything and everything “ESG” have begun to explore how local authorities can help meet these investment objectives. Warrington Borough Council has launched a green bond to help finance its solar and battery storage sectors, while West Berkshire Council has issued a community municipal fund to help fund rooftop solar panels. The MBA’s ESG bond framework for local authorities has recently been given the ‘green’ light (pardon the pun) and will soon allow local authorities to issue ESG bonds to help fund a wide range of projects.
Local authorities provide services with significant social value to its residents. For example, the provision of social housing and care services for those in need. Local authorities also provide and maintain many a range of recreational services such as parks, commons, playgrounds and exercise areas to benefit their communities further.
Last but not least, Governance factors are hugely influential in an organisation’s decision-making process and procedures. Local authorities are, of course, very much in the public eye and look to uphold the highest standards of conduct and behaviour, therefore demonstrating strong governance. They ensure that decisions made are lawful and based on objective and reliable advice (if advice is needed). Authorities are required to post agendas and minutes of committee meetings on their websites, hence increasing transparency and allowing for a sufficient level of scrutiny. Members and officers have clearly defined functions and roles and work together to achieve the authority’s goals, ensuring a clear oversight in decision making.
CIPFA’s recent consultation that included a look at ESG was an important move towards potentially integrating these aforementioned factors into the Treasury Management Code. At the very least it raises the profile of ESG and highlights the importance it has in today’s world. The idea of a new treasury management practise (TMP) was initially floated but many respondents to the consultation were not in agreement with this and so instead the revised code will make reference to ESG issues. Clearly then, and maybe a bit further down the line, the tricky part will be how a local authority decides to implement ESG and whether it is applied holistically or to specific parts of the strategy, for example to commercial property or to an authority’s counterparty list.
Over recent years, there has been a shift from traditional investments such as bank and building society deposits to lending to LA peers. This shift satisfies the requirement of security, liquidity and yield, as well as upholding an ESG overlay.
One question that will become increasingly important is how will investors actually access this ESG market? Matching platforms like iDealTrade.net or aggregators like the MBA are likely to play a prominent role. ESG is a topic that will only exponentially increase in importance and this will lead to investors wanting to achieve these goals, whether they are environmental, social, governance or all three. Investing with a local authority offers a great chance to do just so.