S&P Global Ratings has launched a proposal for a Green Bond Evaluation tool to analyse and estimate the environmental impact of projects or initiatives financed by bonds.
The proposed Green Bond Evaluation, which is not a credit rating, would be based on a newly developed green bond evaluation framework and scoring methodology.
“Our proposed Green Bond Evaluation methodology looks beyond the governance and management of a bond by providing an analysis and estimate of the environmental impact of the projects or initiatives financed by the bond's proceeds over its lifetime relative to a local baseline," says S&P Global Ratings head of environmental and climate risk research Michael Wilkins. "This would be in addition to assessing the governance and transparency surrounding the bond."
When evaluating the environmental impact, the methodology would consider both projects that aim to mitigate climate change by reducing or preventing the emission of greenhouse gases, and adaptation projects that aim to take practical steps toward reducing the exposure to and managing the impact of natural catastrophes.
The output of the Green Bond Evaluation would include at least three scores: a transparency score, a governance score, and a mitigation score and/or adaptation score. The proposed approach would evaluate a bond financing against each category, with the resulting scores weighted and amalgamated into an overall final Green Bond Evaluation.
Financing on a significant scale will be required to meet the Paris Agreement's target of limiting the rise in global temperature to no more than two degrees above pre-industrial levels, the report says. The International Energy Agency estimates this will cost around USD1 trillion per year globally until 2050, which is approximately 1.3 per cent of the world's annual output of goods and services.
The sheer scale of the financing required has led to the development of a range of green finance instruments designed to increase investment flows into projects and technologies to prevent or mitigate climate change, to improve resilience, or help adapt to the impact of climate change.
"As market interest for information relating to the green credentials of capital market instruments continues to grow, S&P Global Ratings believes that development of a Green Bond Evaluation product may further serve to meet informational needs of market participants," says Wilkins. "We look forward to receiving feedback on our proposed Green Bond Evaluation product, framework, and methodology and our specific questions in the report, and to discussing our approach on this important issue with investors, issuers, governments, multilaterals, and intermediaries."