S&P Global Ratings has won Environmental Finance’s External assessment provider of the year award in this year’s Sustainable Debt Awards. Yann Le Pallec and Christa Clapp explain how the firm is rethinking its SPOs and the wider sustainable finance market.
Environmental Finance: What is S&P Global Ratings’ strategic approach to sustainable finance?
Yann Le Pallec: S&P has been investing in sustainable finance because we closely track investors’ needs, opinions and requests: the sustainable finance theme has been increasingly present in our discussions with investors over the last seven to eight years. About six years ago, we launched our second party opinion (SPO) product, and, with the acquisition of Shades of Green from CICERO, we now have 70 sustainable finance analysts.
Our overarching mission is to bring transparency to financial markets and, by bringing transparency and integrity into sustainable finance, we can help to grow that market.
EF: Since acquiring Shades of Green, S&P has integrated its methodology into your SPO offering. Can you explain how the new approach works?
Christa Clapp: When we integrated the two approaches to SPOs last year, we sought to take the best of both. They were a good fit in that we could take the shading methodology to look at green projects and also bring in the issuer context, in relationship to issuers’ finance frameworks, and build on the rigour that S&P had for looking at alignment with the International Capital Market Association (ICMA) Green Bond Principles.
We developed the shading approach at CICERO because, while the Green Bond Principles give a list of eligible project categories, they don’t go into much detail, because that is a job for sustainability experts. We go a step further than alignment with ICMA and talk about how well aligned project categories are with a sustainable future, using our dark green to light green shading methodology for green project categories. With the shading methodology, we’re able to capture the nuances in very different types of projects, from biodiversity and water projects all the way to biofuels or electric vehicles.
EF: SPO reports also now include the “issuer sustainability context”. What is this, and how do you assess it?
CC: The second very visible piece that came out of that integrated SPO is looking at the issuer context. A framework in itself can be very green, but it may or may not be aligned with the key sustainability factors that the issuer is facing. The issuer sustainability context identifies the issuer’s key sustainability factors, and then considers how aligned the use of proceeds is with that broader context.
From a market integrity standpoint, there’s a lot of value in bringing transparency to that, especially if there’s any potential for misalignment, because finance is fungible, even if the issuer has identified use of proceeds.
EF: S&P has extremely wide SPO coverage in terms of geography and issuer type. To what extent does this create challenges for the SPO assessment process?
CC: I actually see it as creating opportunities. Our sustainable finance analyst team is very regionally diverse in terms of location, languages and regional understanding. That diversity helps bring our coverage to life and serves our customers wherever they are located.
From an analytical standpoint, our shading methodology allows for regional nuances. At the end point of the spectrum we use for green projects, dark green is aligned with a sustainable future, with net zero emissions by mid-century and climate resiliency. But starting points can be very different, depending on a region’s resource endowment, economic development pathway and regulatory context. That’s very different between Europe and Southeast Asia, for example. The shading spectrum can capture what it means to be light green in a particular sector and a particular geography, and where there may be nuances regarding opportunities.
EF: How does S&P’s capability in sustainable finance inform the firm’s credit ratings?
YLP: Our 70 sustainable finance analysts sit alongside our 1,700 credit analysts and support them in better understanding the impacts of physical climate risk and the energy transition on the companies that they cover, particularly in hard-to-abate sectors. That is why our investment in sustainable finance is so strategic.
It also works in the other direction. Our credit analysts can help their sustainable finance colleagues understand some of the idiosyncrasies of the industries that the credit analysts have been writing about for decades.
EF: More broadly, how do you see the sustainable finance market evolving, and where do you see opportunities for S&P?
YLP: Since the Covid-19 pandemic and increased geopolitical risks, there’s been growing concern among investors about event risk as well as other emerging risks.
Climate is clearly one. We are publishing a lot of research on these emerging risks and how they are likely to have a credit ratings impact as they become financially material, whether through regulation, litigation, or greater disclosure.
Despite the noise around sustainable finance and ESG, we are not seeing any decline in the concern from long-term investors with regards to those risks. This is why sustainability is a really key strategic area for us: the focus from investors is not moving away. It remains a structural area of interest for them.
CC: Within sustainable finance, the pace of change is accelerating. We’re seeing different types of structured debt, a movement into labelled equity and the proliferation of regional taxonomies and, in some cases, regulation. Our role is to support transparency and integrity wherever these market shifts are happening.
That is why we are focused on providing a high integrity, high quality product.
Yann Le Pallec is head of global ratings services and Christa Clapp is global head of sustainable finance market analytics, at S&P Global Ratings in Paris and Oslo, respectively.
Learn more about S&P Global Ratings’ SPO offering, including how our analysts look at best practice in different sectors, in our recent SPO Spotlight report, and access all published SPOs here.
