LA’s carbon reduction efforts: progress towards ESG standards

Carbon emissions reduction targets are often important goals for major cities today, with municipalities and local governments across the globe coming up with individual or joint plans based on existing mechanisms or ones that reflect the circumstances and priorities of a particular city.

Market participants are increasingly interested in carbon reduction and other environmental, social, and governance (ESG) factors, and in developing tools to assess their effectiveness and progress.

This KBRA report focuses on the city of Los Angeles’ Green New Deal, Sustainable City Plan (GND) which, in our view, is not only broad and ambitious, but also contains many smaller and more manageable objectives and milestones designed to achieve the larger goals. To measure its progress, the city produces the LA’s Green New Deal annual report, which discusses the actions taken to reach the milestones identified in the GND. The milestones are generally quantifiable steps developed to achieve overall targets. KBRA believes the GND annual report can develop into a useful framework for reviewing ESG data for market participants, recognizing there may not be any credit impact.

Key Takeaways

• The ability to assess the nature and effectiveness of measures designed to address ESG factors is important to municipal market participants, although they may not rise to matters that effect credit.

• ESG factors, both in the municipal and other markets, lack universal and consistent standards and metrics.

• LA’s GND is a good example of a detailed approach to carbon reduction with many useful and quantifiable milestones, a framework that should facilitate comparison across issuers.

ESG Standards

The review of ESG factors and data is of increasing importance in the municipal market. However, narrowing down what factors and data are important, and how they are quantified and analyzed, remains uncertain. The Paris Agreement and the UN Sustainability Development Goals can provide broad frameworks for reviewing ESG factors, but goals and implementation vary across issuers. In addition, the type of ESG issues that municipalities face can vary. The nature of climate risk, for example, is influenced by location. Further, substantially all ESG information and data is self-reported by issuers, which raises matters of conflict and reliability. KBRA expects that ESG data and reporting frameworks will improve over time and that the careful review of disclosure now available will contribute to that result.

LA’s Green New Deal

LA’s GND was adopted in 2019 and was an update to the Sustainable City Plan of 2015. The GND was prepared with extensive input from stakeholders including community organizations, businesses, academia, labour groups, and city departments. The GND targets a zero carbon grid, transportation, and buildings within the city of Los Angeles.

The GND is organized by chapter, with each identifying a general area to be addressed, such as Environmental Justice, Local Water, Zero Emission Vehicles, and Food Systems. GND then sets targets for each area. For example, the LA Department of Water and Power was recommended to “supply 55% renewable energy by 2025; 80% by 2036; 100% by 2045” and “local solar to increase to 900MW-1,500MW by 2025; 1,500MW-1,800MW by 2035; and 1,950MW by 2050.” Initiatives are also designed to help achieve the targets and milestones measure the progress over time (see Figure 1).

Annual Report 2020-2021

The city of Los Angeles produces the annual report to monitor its progress against the goals established in the GND. Management of the GND and the preparation of the annual report is overseen by the Mayor’s Office of Sustainability and the Chief Sustainability Officer, supplemented by chief sustainability officers within each department of the city.

As shown in Figure 2, the selected milestones represent measurable goals that could serve as a point of comparison to other cities. However, even with this level of specificity, there are many goals that may be best suited to certain cities and their respective climates and geographies. For example, the transition to “cool roofs” (those that are lighter colored and do not contain heat retaining elements) and increasing the number of trees and shade canopies, will likely be more beneficial in L.A. than to the northern cities of the U.S. The milestones highlighted below have been either completed, are on track, or those that are designated as “making progress” are somewhat behind schedule as of the publication of the most recent annual report.

Conclusion

The analysis of ESG factors is becoming increasingly important in the municipal market even when there is no specific credit impact. The nature of the data and information that is reviewed is developing. The analysis of information currently available from issuers and the resulting commentary will improve ESG reporting and contribute to effective comparison across municipalities. L.A.’s GND stands out for its detailed approach to carbon reduction with many useful and quantifiable milestones, a framework that should facilitate comparison across issuers.