Standard & Poors is seeking views on a tool that would let investors assess products and companies beyond their credit rating by looking at their environmental impact. The ratings agency wants to provide tools to assess the green attributes of financial products and firms to help those deciding whether to invest.
It has unveiled a Green Bond Evaluation tool that would analyse and estimate the environmental impact of projects or initiatives financed by bonds, and an Environmental, Social and Governance (ESG) evaluation framework and methodology for corporate issuers.
The bond methodology would look at products that aim to mitigate climate change through greenhouse gas reduction, and adaptation projects that mitigate the impact of natural catastrophes. They would be given scores based on transparency, governance and a mitigation or adaption score. All these would be combined to give a final green-bond evaluation.
The proposed ESG evaluation framework would look at a company’s effect on the natural and social environments it inhabits, the governance mechanisms it has in place to oversee those effects, and potential losses it may face as a result of its exposure to these risks.
It will aim to rank issuers on a five-point scale based on the degree of an issuer’s exposure to ESG risk factors over a two- to five-year horizon and beyond.
As currently envisaged, medium-term (two to five-year) and long-term factors will receive different weightings under the proposed methodology, with medium-term risks receiving a greater weighting due to the more apparent nature of the factors and their likely impact.
S&P said that while the proposed tools are not credit ratings or an assessment of creditworthiness, they draw on S&P Global Ratings’ ongoing engagement with the market on environmental, social, and governance issues and green-bond financings.
Michael Wilkins, head of environmental and climate risk research and an infrastructure ratings analyst at S&P Global Ratings, said: “In response to growing market interest, we believe that our proposed tools will offer a unique assessment of risks associated with sustainability over the medium to long-term.
“Investors have told us that they want to develop more meaningful insights into the environmental, social, and governance characteristics of individual debt securities and corporate entities. We believe these two approaches will help to achieve that goal.”
Dave Penny, of Taunton-based Invest Southwest, said: “We certainly encounter a minority of clients who are interested in ethical and/or green investment. It is also fair to say that the definitions of each of those terms are very subjective. There is much debate.
“So any tool which enables us to drill down and attempt to quantify the environmental and social impact of projects cannot be bad. Especially when the tools will enable a better understanding of the effect these factors will have on risk and credit analysis.”