S&P Global Ratings Awarded “Environmental Finance”■ Received External Assessment Provider of the Year at this year's Sustainable Debt Awards. Yann Le Pallec and Christa Clapp explain how the company is rethinking his SPO and the broader sustainable finance market.
environmental finance: What is S&P Global Ratings' strategic approach to sustainable finance?
Yan Le Parec: S&P invests in sustainable finance because we closely track the needs, opinions, and desires of our investors. The topic of sustainable finance has increasingly come up in discussions with investors over the past seven to eight years. About six years ago, we launched our Second Party Opinion (SPO) product, acquired Shades of Green from CICERO, and now have 70 sustainable finance analysts.
Our overarching mission is to bring transparency to financial markets, and by bringing transparency and integrity to sustainable finance, we can help 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 combined our two approaches to SPO last year, we tried to take the best of both worlds. These adopt a shading methodology to consider green projects, introduce the issuer's context in relation to the issuer's financial framework, and increase the rigor that S&P had to consider alignment with international capital. It was a good fit in that it could be built. Green Bond Principles of the International Market Association (ICMA).
We developed the shading approach at CICERO because the Green Bond Principles provide a list of eligible project categories but do not go into detail. Because this is the job of sustainability experts. We go one step further from our work with ICMA and use the dark green to light green shading technique for green project categories to discuss how well project categories align with a sustainable future. Shading techniques can be used to capture nuances in many different types of projects, from biodiversity and water projects to biofuels and electric vehicles.
EF: SPO reports now also include “Issuer Sustainability Context.” What is this? How do you rate it?
CC: The second very tangible takeaway from an integrated SPO is a focus on the issuer's context. While the framework itself is very green, it may or may not align with the key sustainability factors facing issuers. In the issuer sustainability context, we identify the issuer's key sustainability drivers and consider how the use of proceeds aligns with that broader context.
From a market integrity perspective, even if the issuer specifies how the proceeds will be used, the fungibility of finance makes it difficult to bring transparency, especially where there is potential for mismatch. It's worth a lot.
EF: S&P covers a very wide range of SPOs in terms of geography and issuer type. How much of a challenge does this pose to the SPO evaluation process?
CC: Actually, I think it's creating opportunities. Our sustainable finance analyst team is highly diverse geographically in terms of location, language and regional understanding. This diversity enriches our services and enables us to serve our customers wherever they are.
From an analytical perspective, our shading method takes regional nuances into account. At the end of the spectrum we use for green projects, dark green is consistent with a sustainable future with net-zero emissions and climate resilience by mid-century. However, depending on the region's resource resources, economic development paths, and regulatory context, starting points can vary widely. For example, Europe and Southeast Asia are very different. The shading spectrum can capture what it means to be light green in certain sectors and certain regions, and where nuances of opportunity may exist.
EF: How does S&P's competency in sustainable finance impact the company's credit rating?
YLP: Our 70 sustainable finance analysts, alongside our 1,700 credit analysts, help companies better understand the impact of physical climate risks and the energy transition on target companies, especially hard-to-mitigate sectors. . That's why our investments in sustainable finance are so strategic.
It also works in the opposite direction. Our credit analysts help our sustainable finance colleagues understand some of the industry idiosyncrasies that credit analysts have been writing about for decades.
EF: More broadly, how do you think the sustainable finance market is evolving and where do you see the opportunities for S&P?
YLP: Since the COVID-19 pandemic and the rise in geopolitical risks, investors have become increasingly concerned about event risk and other emerging risks.
Climate is obviously one thing. We have published a number of studies on these new risks and how they may impact credit ratings as they become financially significant through regulation, litigation, increased disclosure, etc. doing.
Despite all the noise surrounding sustainable finance and ESG, long-term investors' concerns about these risks continue unabated. This is why sustainability is a very important strategic area for us, and investors' attention will continue unabated. It's still an interesting structural area for them.
CC: The pace of change in sustainable finance is accelerating. We are seeing different types of structured debt, a move to labeled equity, the proliferation of regional classifications and, in some cases, regulation. Our role is to support transparency and integrity wherever these market shifts occur.
That's why we focus on providing reliable, high-quality products.
Jan Le Parec is Global Head of Rating Services and Krista Clapp is Global Head of Sustainable Finance Market Analysis at S&P Global Ratings in Paris and Oslo.
Learn more about S&P Global Ratings' SPO offering, including how our analysts break down best practices across sectors in our latest SPO Spotlight report. You can also access all published SPOs from here.
