In two white papers, the prominent ratings agency S&P has revealed its plans for a new green bonds evaluation tool as well as an environmental, social, and governance assessment tool.
The two proposed tools would be used for the assessment of investment exposure to growing environmental risks — or, to put that another way, to explore the environmental impact of initiatives or projects that are financed by bonds.
The first of the two, the so-called Green Bond Evaluation Tool, would be used to describe projects that claim to be intended to either reduce greenhouse gas emissions or to reduce the potential impacts of future natural disasters.
As the image above shows, the evaluation considers transparency, governance, and mitigation and/or adaptation. “We expect that projects will be assessed in either the mitigation or adaptation category,” S&P 500 writes. “However, in some cases, both adaptation and mitigation evaluations will be important. For example, within the green buildings sector the mitigation category would examine the environmental impact in terms of carbon, waste, and water savings in order to establish its relative greenness compared to its peers in the sector. At the same time, the adaptation category would assess the resilience of the building to climate change risks where relevant. The location of the project would likely inform the analysis by taking into account, for example, whether it is built in an area likely to suffer from increasingly severe weather such as storms and floods. In cases where both a Mitigation and an Adaptation score would be calculated, we anticipate amalgamating those scores into a single score along with governance and transparency scores, according to a category weighting.”
Business Green adds: “Alongside the green bond tool, S&P also launched a proposal for a Environmental, Social, and Governance (ESG) Assessment tool. This would evaluate the impact of a firm on the natural and social environment, as well as any potential losses due to its exposure to the associated risks. It would also assess the strength of the governance mechanisms the company has in place to address these risks.”
The rating agency claims that these two proposed tools would work to provide some sort of market standardization. Considering that relevant investments continue to rise rapidly, the seems like it would be valuable.
“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,” stated Michael Wilkins, head of environmental and climate risk research at S&P Global Ratings. “We believe that our proposed tools will offer a unique assessment of risks associated with sustainability over the medium to long term.”
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