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How Do Labeled Green Bonds Measure Up?

S&P Global Ratings

COP24 Special Edition Shining A Light On Climate Finance

S&P Dow Jones Indices

Considering the Risk from Future Carbon Prices

Empowering Public Private Collaboration in Infrastructure

S&P Global

How Can Banks Apply a Quantitative Lens on Climate Risk Exposure


How Do Labeled Green Bonds Measure Up?

Green finance is a fast-expanding market. Driven by a global political push and new market dynamics, it is channeling investments into green technologies and infrastructure that support climate and other environmental-related policies. The challenge ahead is huge: The Paris Agreement--signed by 197 countries in December 2015--requires an estimated $1 trillion in annual investment to transition to a low-carbon economy.

In recent years, green bond issuance has become a bellwether of green finance. These self labeled green bonds have been issued to finance new projects and refinance existing projects with a positive environmental contribution. The market is growing rapidly, expanding by 127% annually since 2012 and S&P Global Ratings expects 2017 to be the fifth consecutive year of growth, with 130 billion of self-labeled green bonds issuance forecast for the full year. The universe for potential green bonds is even higher if one includes projects that have a positive environmental impact but are not labeled as "green".

Overview

  • The results of our retrospective scoring exercise suggest that self-labeled green bonds meeting the CBI eligibility criteria would be likely to score between 50 and 100 under our Green Evaluation.
  • Close to two-thirds (63%) of the green bonds in our sample got an overall score of E2, the second highest score on our scale. Of those, 42% would have been scored E1 if they had achieved higher governance and transparency scores.
  • The main factor explaining the high average overall score is the type of projects financed by the self-labeled green bonds in our sample, the majority of which were in the green energy, buildings, transport, and water sectors.
  • Our hierarchy adjustment positively affects the overall score of these projects, reflecting the higher contribution of these sectors to systemic decarbonization and water system enhancement.
  • The types of projects financed by self-labeled green bonds also explain the limited number of bonds scoring E3 and the absence of bonds scoring E4. Our sample, based on the CBI eligibility criteria excludes projects with a limited environmental contribution, such as upgrades of fossil-fuel technologies, though these could be evaluated under our Green Evaluation.
  • While providing a useful reference point, these results are not representative of the wider unlabeled green finance universe excluded under the CBI criteria.
  • Although the recipient project’s location plays a material role on the overall score of green bonds in our sample, this is typically less significant than the impact of our hierarchy adjustment.
  • There is not one geographical region that scores systematically higher than others in our net benefit ranking. The relative ranking between regions is specific to each project category due to the use of local sector-specific factors in our Green Evaluation for environmental key performance indicators (eKPIs).
  • The average governance and transparency scores of respectively 60 and 51 in our sample reflect the comparatively low level of disclosure in the vintage green bond market, as opposed to the bonds that have been evaluated by S&P Global Ratings to date and point to the need for better transparency of the environmental contribution of green bond transactions.


Considering the Risk from Future Carbon Prices

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change. Carbon prices are already implemented in 40 countries and 20 cities and regions. Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

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Watch: Empowering Public Private Collaboration in Infrastructure

S&P Global CEO Doug Peterson speaks with Maha Eltobgy from the World Economic Forum, on their joint study that looks at how greater collaboration between the public and private sector can accelerate national infrastructure programmes.



How Can Banks Apply a Quantitative Lens on Climate Risk Exposure

Aligning with the Recommendations of the Taskforce on Climate Related Financial Disclosures (TCFD)

Dec. 03 2018 — The signals are clear: central banks and regulators are stepping up action to address the potential systemic risks to financial markets that climate change poses.

This means it will become increasingly necessary for banks to develop a deeper understanding of how climate issues could affect their businesses and those they finance. By effectively managing and responding to these issues, banks can not only help mitigate the risks, but also seize the opportunities presented from the transition to a lower-carbon economy. Trucost has worked with banks for more than a decade to support their climate-related analysis. This paper provides practical guidance to help banks manage and report key climate-related metrics, no matter what level of ambition they may have.

This paper is organized into five sections:

I. What is the TCFD Framework?

II. Measuring the Carbon Footprint of a Bank

III. Translating Climate Exposure into Financial Risk

IV. Incorporating Scenario Analysis

V. Creating Opportunities

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