ESG: THE MISSING PIECE TO Better Planning: Why and how ESG should be included in CIPs.

• Author: Bain, Kevin
• Position: Environmental, social, and governance, capital improvement plan

Everyone seems to be talking about environmental, social, and governance [ESG] investing--that is, mission-oriented investments with positive impacts beyond economic returns. But we're still working out how ESG fits into public finance and how governments can take part.

Most of the thought leadership so far, including from GFOA itself, has focused on municipal debt in the form of ESG bonds. But some securities are basically E, S, or G in name only. Governments of all sizes should expand their focus from the financing stage all the way to the initial planning phase to truly maximize the potential of ESG. [See Exhibit 1]

The successful execution of a capital improvement plan [CIP] is inextricably linked to the ability to finance the designated projects. Debt plays a key role in funding capital projects for many governments, and with municipal investors heightening both their demand for and scrutiny of ESG bonds, the integration of these metrics is increasingly crucial in the drafting of capital plans. The finance officers in charge of capital planning need to consider these factors, but they must also highlight them in the CIP so that their colleagues who obtain financing [such as debt, grants, and development] can clearly identify and disclose which projects meet certain metrics.

With this in mind, in fall 2022, GFOA's Committee on Economic Development and Capital Planning revised its best practice, Multi-Year Capital Planning, to include integrating ESG into planning. In 2021, GFOA published Best Practices on ESG Disclosures to assist finance officers who are planning to issue municipal debt instruments in considering their ESG disclosure practices. These best practices [which you can find at gfoa. org] list and describe types of projects that would align with one of the E, S or G categories, then offer guidance as to what information to include in public disclosures. The purpose of this article is to provide guidance on why and how these factors should be considered far in advance of a debt offering.

FIRST, THE WHY.

There are many reasons to contemplate ESG factors in the capital planning process--for example, investing in environmental resilience or social issues certainly strengthens communities. But this article will focus on the financial and economic benefits.

Executing the CIP requires optimizing all sources of financing, and municipal debt investors are not the only stakeholders who care about ESG. Federal and state government...