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Q&A: Green Evaluations–Transaction And Framework Alignment Opinions With The GBP And GLP


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Q&A: Green Evaluations–Transaction And Framework Alignment Opinions With The GBP And GLP

(Editor's Note: This article supersedes "Frequently Asked Questions: Green Evaluations And Transaction Alignment With The Green Bond Principles 2018," published on July 24, 2018. See the "Revisions And Updates" section to see what's new in this revised version.)

Here, S&P Global Ratings responds to questions about its "Green Evaluation Analytical Approach" and our opinions on transaction and framework alignment with the Green Bond and Green Loan Principles. On June 5, 2020, we expanded the approach to provide an opinion about green financing frameworks and how they align with the Green Bond Principles 2018 (GBP) and the Green Loan Principles (GLP). Among other questions, we address:

  • The Green Evaluation and how the approach is applied to the GBP and GLP.
  • How we opine on the alignment of transactions with the GBP and GLP.
  • Our Green Financing Framework Alignment Opinion, and how we determine an alignment opinion of a green financing framework with the GBP or GLP.



What is a Green Evaluation?

S&P Global Ratings' Green Evaluation is a point-in-time assessment of the environmental credentials of a financing transaction or portfolio. It includes a ranking of its relative net environmental benefit along with an assessment of its governance and transparency provisions (see "Green Evaluation Analytical Approach," published Dec. 4, 2019, on RatingsDirect). The evaluation of a transaction involves the assessment of transparency, governance, and the relative net environmental impact, or mitigation, on a scale of 0-100. It then combines these three elements to provide a final Green Evaluation score from 0-100, and from E1-E4, which is 0-100 in quartiles. For transactions funding resilience projects instead of mitigation projects, we assess the resilience benefit and provide an adaptation score on a scale of 0-100, and R1-R4. A higher number, such as 100, E1, or R1, indicates a higher net environmental impact or resilience benefit, respectively, over the funded assets' life relative to the environmental contribution of other green financings (see chart).

As a point-in-time assessment, a Green Evaluation is in part based on an estimate of the expected lifetime net environmental impact of a project should it perform to industry average. S&P Global Ratings does not maintain ongoing surveillance on a Green Evaluation. A Green Evaluation is not a credit rating.

What transaction types can be evaluated under the Green Evaluation?

We do not limit Green Evaluations to issuer self-labeled green bonds. We can also evaluate unlabeled bonds, equity transactions, bank loans, private placements, project finance debt, hybrids, portfolios, asset-backed securities, and other financial transactions. Informing our evaluation are the cash flow management processes and environmental measures in the offering documents or other reports, committed to by the issuer.

What are the different analytic approaches included in the Green Evaluation?

A Green Evaluation gives a ranking of the relative net environmental or resilience (mitigation or adaptation) benefits of a project or projects being financed by a green financial instrument. It also considers the quality of transparency and governance of the financing transaction. Additionally, it can provide an opinion on the transaction's alignment with the GBP or GLP--referred to as a Transaction Alignment Opinion.

We also provide a Green Financing Framework Alignment Opinion as a stand-alone opinion on a seeker of finance's green financing framework's alignment with the GBP or GLP. Finally, the analysis can provide a combination of a Green Evaluation (which may include a Transaction Alignment Opinion) and a Framework Alignment Opinion.


What are the Green Bond Principles?

The International Capital Markets Association (ICMA), which acts as the secretariat to the GBP and the Social Bond Principles Executive Committee, describes the principles as "voluntary process guidelines that recommend transparency and disclosure and promote integrity in the development of the green bond market by clarifying the approach for issuance of a green bond." (Green Bond Principles, June 2018.)

The four core components of the GBP 2018 are:

  • Use of proceeds,
  • Process for project evaluation and selection,
  • Management of proceeds, and
  • Reporting.
What is a green bond?

Here, we use the term green bond to refer to a bond that an issuer has self-labeled green, based on its view that it has voluntarily complied with the GBP's recommended four components. In cases where an issuer labels a bond as green using a rationale or set of principles other than the GBP, we would not offer a GBP alignment opinion.

What are the Green Loan Principles?

The GLP build on and refer to the GBP and aim to promote consistency across financial markets. They are administered by the Loan Market Association. The GLP are voluntary, recommended guidelines that "set out a clear framework, enabling all market participants to clearly understand the characteristics of a green loan, based around the [the same] four core components [as the GBP]…". (Green Loan Principles, December 2018).

What is a green loan?

According to GLP, "green loans are any type of loan instrument made available exclusively to finance or refinance, in whole or in part, new and/or existing eligible Green Projects." Green loans must align with the four components of the GLP, as set out above.

Our Green Evaluation, The GBP, And The GLP

Is the Green Evaluation approach to the GBP different than for the GLP?

After reviewing the published guidelines under the GLP, we believe they are essentially the same as the GBP. Therefore, we conclude that our Green Evaluation Analytical Approach that we use to determine alignment with GBP can also be used for alignment with GLP.

Does a Green Evaluation of an issuer's self-labeled green bond constitute an external review under the GBP or GLP?

Yes. We believe an opinion on alignment from an independent party such as S&P Global Ratings provides a second opinion, which is referred to as a form of external review under the GBP and the GLP. We note, however, that our Green Evaluation is not a verification, certification, audit, or credit rating.

Does the Green Evaluation constitute verification or certification of a self-labeled green bond under the GBP or GLP?

No. Our Green Evaluation does not constitute a verification, certification, audit, or rating. Our Green Evaluation of a transaction provides an independent second opinion of a particular financing transaction, at a point in time, based on our analytical approach. The report might or might not provide a second opinion on a transaction's alignment with the GBP or GLP.

Do all elements of the Green Evaluation analytical approach contribute to S&P Global Ratings' transaction alignment opinion?

No. We base our alignment opinion on our assessment of transparency and governance. Our mitigation and adaptation scores do not contribute to our alignment opinion.

We provide second opinions on transaction alignment with the GBP or the GLP only when requested by the issuer, and when some, if not all, the projects financed by the transaction fall within the scope of our Green Evaluation analytical approach (see table 1).

Table 1

Carbon, Water, Waste, And Land Use Hierarchies
Sector Technology
Tier 1: Systemic decarbonization Green energy: Wind power
Green energy: Solar power
Green energy: Small hydro
Green energy: Large hydro (excluding tropical areas)
Energy efficiency: Energy management and control
Tier 2: Significant decarbonization of key sectors through low-carbon solutions Green transport without fossil fuel combustion
Green buildings – new build
Tier 3: Decarbonization by alleviating emissions in carbon-intensive industries Energy efficient projects (industrial efficiencies and energy star products)
Green transport with fossil fuel combustion
Green buildings refurbishment
Tier 4: Decarbonization technologies with significant environmental hazards Nuclear power
Green energy: Large hydro in tropical areas
Tier 5: Improvement of fossil fuel-based activities’ environmental efficiency Fossil fuel power plants: Coal to natural gas
Fossil fuel power plants: Cleaner fuel production
Fossil fuel power plants: Cleaner use of coal
Tier 1: System enhancements Recycling wastewater to supply potable municipal water
Recycling wastewater to supply non-potable water for agricultural uses
Recycling wastewater to supply non-potable water for other industries
Wastewater treatment with no energy recovery
Wastewater treatment with energy recovery
Tier 2: Marginal system enhancements Reducing water losses in the water distribution network
Tier 3: System enhancements with significant negative impacts Water desalination to supply potable municipal water
Tier 4: Demand-side improvements Conservation measure in residential buildings
Conservation measure in commercial buildings
Conservation measure in industrial buildings
Smart metering in residential buildings
Tier 1: Waste reduction Reduction in food loss
Tier 2: Waste management withmaterial reuse Aerobic composting with fertilizer reuse
Tier 3: Waste management for energy recovery Anaerobic digestion
Gasification/pyrolysis with waste feedback
Waste to energy
Tier 4: Waste management improvements Hazardous waste management
Tier 1: Maintenance of natural state Land restoration to natural state
Forest protection and restoration
Tier 2: Low human intervention Low tillage
Forestry expansion for non-timber forest products
Forestry protection
Tier 3: Alternative farming Sustainable fertilizers
Organic farming
Drought-resistant crops
Rotational grazing
Tier 4: Improvements in conventional agriculture and forestry System of rice intensification
Precision agriculture & livestock
Sustainable forest management for timber production
Tier 5: Intensive land use Plantation forestry
Crop-based products (biofuels)
Land restoration to agriculture
Source: S&P Global Ratings.
In what way is the transparency and governance assessment aligned with the GBP and GLP?

In our assessment of transparency and governance on a transaction for the purpose of the Green Evaluation, we consider whether:

  • The net proceeds have been or are expected to be committed to eligible green projects.
  • The issuer has used and disclosed or is expected to use and disclose clear criteria in allocating funds to select environmentally beneficial projects.
  • The proceeds have or are expected to be tracked (potentially with the use of subaccounts) and the issuer will seek verification of their proceeds allocation by either an auditor or an independent third party.
  • The issuer has or is expected to report on the funded projects' environmental impact and the use of proceeds, and how often it expects to do this.

In our view, these categories align with the GBP and GLP.

What is an eligible green project?

Green taxonomies vary around the globe. In China, for instance, efficiency upgrades to coal-fired power stations are considered green. Although the GBP and GLP do not exclude issuer self-labeled green bonds from funding fossil-fuel-related projects, some issuers or borrowers (or investors) might believe that anything fossil-fuel-related should be excluded from consideration as a green investment.

In the context of performing a Green Evaluation on a transaction, we refer to the issuer's definition of what constitutes a green use of proceeds, as long as we believe the project (or a discrete component thereof) falls within the scope of our published approach. Pursuant to our transparency and governance scoring, we consider (among other things) the strategies, criteria, policies, and financing covenants in place that provide comfort that the proceeds have been, or will be, applied to eligible green projects (as defined by the issuer).

How does the transparency and governance scoring differ from those under the GBP and GLP? 

The GBP and GLP provide a framework of recommended processes and measures that an issuer may use as the basis for self-labeling its bond or loan as green.

Our Green Evaluation on a transaction is a second opinion about the relative environmental impact of a financing based on our analytical approach, which is aligned with both the GBP and GLP. The evaluation includes a transparency and a governance score, both on a scale of 0-100. We determine these scores based on a set of questions we have developed, a subset of which covers the four components the GBP and GLP require.

The weightings we apply to derive our transparency and governance scores on a scale of 0-100 are our own. Some of the factors we consider in our scoring that we believe advance governance objectives and enhance overall transparency relative to current market standards include:

  • Disclosure of the methodology used to calculate estimated or actual environmental impact. We believe disclosing each metric's methodology enables investors to better understand and have confidence in the environmental impact that a financing will have.
  • Intention to follow local environmental regulations. We believe this is important in achieving impact and avoiding adverse consequences.
  • The depth of the environmental metrics to be reported on. We believe it is appropriate to rank issuers that provide more in-depth environmental metrics higher than those who provide less detailed information.
  • Intention to meet established standards such as Leadership in Energy and Environmental Design, known as LEED, or the Building Research Establishment Environmental Assessment Method, known as BREAM. We believe attaining such a certification with established standards provides additional comfort with respect to the environmental impact.

Transaction Alignment Opinion

What kind of transaction would be aligned with the GBP and GLP as part of a Green Evaluation?

A transaction must meet several conditions within the Green Evaluation analytic approach for S&P Global Ratings to consider a green bond aligned with the GBP or GLP.

First, all net proceeds must be allocated to eligible green projects as described above.

Second, the bond or loan must meet the basics of the four components of the GBP or GLP, indicating a commitment to:

  • Use the net bond proceeds for eligible green projects as stated above,
  • Use clear criteria in selecting projects for funding,
  • Manage and track proceeds, and
  • Commit to regular reporting of environmental impact and use of proceeds.

Third, under our approach to assessing alignment, we believe that a bond or loan must receive a governance score of 58 or more and a minimum transparency score of 42 or more.

If all three conditions are satisfied, S&P Global Ratings might view an issuer self-labeled green bond or loan as being aligned with the GBP or GLP.

A transaction could conceivably score adequately from a numeric standpoint on our scale from 0-100 but not meet the basics of the four components of the GBP or GLP. In this case, the green bond or loan would not be aligned with the GBP or GLP, in our view.

If a transaction scores E1 on the Green Evaluation scale, does it indicate alignment with the GBP or GLP?

Not necessarily, for several reasons.

Under our analytical approach, we derive the final Green Evaluation on a scale of 0-100 by weighting the transparency score by 15%, the governance score by 25%, and the mitigation score by 60%. With an excellent mitigation score of 90-100, a bond could achieve an E1 (an overall score of 75-100) yet have a weak transparency score (below 40) and an average governance score (below 60) that did not align with the four components of the GBP or GLP.

Under our analytical approach, a portion of a financing transaction could score E1, although allocating some of the funds to ineligible (non-green) projects would negatively affect our scores. To be aligned with the GBP or GLP, all transaction proceeds must be disbursed to eligible green projects.

Could an E4 bond or loan be aligned with the GBP or GLP?

Yes. Under our approach, despite excellent transparency and governance scores, the mitigation score or net environmental impact of the technology could limit the final Green Evaluation to the lower quartile, or E4. Our mitigation scores cap the final Green Evaluation, no matter how good the transparency and governance. As an example, a fossil fuel plant efficiency upgrade could have transparency and governance scores well above the minimum levels for GBP or GLP alignment, but our environmental impact assessment would limit the final Green Evaluation score. The GBP and GLP do not preclude an issuer from self-labeling a transaction funding a fossil fuel plant efficiency upgrade as green.

Can a transaction be viewed as aligned with the GBP or GLP if the Green Evaluation mitigation or adaptation assessment covers less than the entire green bond or loan?

Yes, a Green Evaluation could apply to only a portion of an issuer's self-labeled green bond or loan, and the transaction could still be eligible for an alignment opinion if the entire transaction's transparency and governance meets our conditions for alignment, as outlined above.

An issuer might have communicated their intention to allocate all proceeds to green projects (as defined by the issuer), but we might not be in a position to provide a Green Evaluation for the entire transaction if some of the green projects do not fall within the scope of our analytical approach.

Our Green Evaluation reports identify the proportion of the financing that we can evaluate using our methodology. The related reports also clearly state the proportion of a financing the issuer has allocated or intends to allocate to green projects. For example, let's consider an issuer that intends to allocate proceeds of a $150 million bond as follows: $100 million of proceeds to a wind energy project (covered by our methodology) and $50 million to a sustainable fishing project (not yet covered by our analytical approach). In our report, we would note that the Green Evaluation applies to 66% of the $150 million transaction in the report, and that all proceeds are funding green projects (thus meeting our first condition for alignment).

Can a Green Evaluation of a refinancing be considered aligned with the GBP or GLP?

The GBP provides that "Green bonds are any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance, in part or in full, new and/or existing eligible green projects … and which are aligned with the four core components of the GBP." Green loans apply the same approach for a refinancing.

Based on this definition, we believe that a refinancing may be eligible for an alignment opinion with the GBP or GLP if it meets the three conditions outlined above.

Will S&P Global Ratings publish transaction alignment opinions?

If requested by the seeker of finance, we might include a transaction alignment opinion in our green evaluation reports. Green Evaluation reports are point-in-time evaluations and become public only at the seeker of finance's request.

Green Financing Framework Alignment Opinion

Can S&P Global Ratings provide an alignment opinion of a green financing framework with the GBP or GLP?

Yes, S&P Global Ratings offers a stand-alone opinion on a green financing framework's alignment with the GBP or GLP.

What is a Green Financing Framework?

A green financing framework is a document created by the issuer or borrower that clearly articulates the entity's proposed use of proceeds from a green bond or loan and how they support environmental benefits. A framework typically includes information on the eligible categories (as per the GBP or GLP) under which the projects being financed or refinanced fit, as well as information about the transaction's governance and transparency.

What does a Green Financing Framework Alignment Opinion with the GBP or GLP involve?

In our Framework Alignment Opinion, we provide a second-party opinion about whether a green financing framework aligns with the four components of the GBP or GLP and where, in our view, the framework goes beyond the requirements of either the GBP or GLP.

To be considered aligned with the GBP or GLP by S&P Global Ratings, a green financing framework must first state that all net proceeds of any instrument issued under the framework will be allocated to eligible green projects.

Second, the framework must meet the four components of the GBP or GLP 2018, indicating a commitment to:

  • Use the net bond proceeds for eligible green projects,
  • Use clear criteria in selecting projects for funding,
  • Manage and track proceeds, and
  • Commit to regular reporting of environmental impact and use of proceeds.

In addition to GBP or GLP alignment, S&P Global Ratings' Framework Alignment Opinion provides:

  • A detailed explanation of aspects contained in the framework that are required for GLP or GBP alignment;
  • A description of the seeker of finance's sustainability objectives, as articulated in their green financing framework; and
  • A description of the additional features of the framework that follow the recommended aspects of the GBP or GLP.
Do all elements of the Green Evaluation analytical approach contribute to the framework alignment opinion?

No. We base our Green Financing Framework Alignment Opinion on our assessment of whether the framework satisfies all the requirements of the GBP or GLP. A Green Financing Framework Alignment Opinion does not include a mitigation or resilience assessment nor a final numerical score.

Why is the methodology different for a transaction alignment opinion than it is for a green financing framework alignment opinion?

A green financing framework covers all green bonds, loans, and financial instruments issued by a seeker of finance according to the criteria and principles established in the green financing framework. These include the eligibility criteria for green projects, the process for proceeds management, and the types of environmental indicators reported, among others. Green financial transactions, in turn are often an application of the framework for a specific issuance and include the specific projects being financed. As such, we structure the analysis of our Green Financing Framework Alignment Opinion differently to reflect the various details in green financing frameworks relative to individual transactions and do not link eligible projects to our various hierarchies.

Does the Green Evaluation satisfy the Climate Bonds Initiative certification standard?

No. There are several reasons for this:

  • Some green projects might be considered green under the GBP and fall within the scope of our green evaluation approach but are excluded from CBI certification standards, such as nuclear and fossil fuel projects.
  • Green Evaluations and alignment opinions are not certifications.
  • CBI certification requires reporting until all proceeds of the transaction are disbursed. The Green Evaluation is a point-in-time evaluation of a transaction based on actual or expected allocation of proceeds.

Revisions And Updates

We published this article on June 5, 2020, to reflect the expanded scope of our "Green Evaluation Analytical Approach," which itself was updated on June 5, 2020, to include transaction alignment with the Green Loan Principles (2018) and to take into account expanded application of the Green Evaluation to a green financing framework and its alignment with the GBP and the GLP.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Corinne B Bendersky, London + 44 20 7176 0216;
Secondary Contacts:Michael Wilkins, London (44) 20-7176-3528;
Kurt E Forsgren, Boston (1) 617-530-8308;
Anna Liubachyna, London;
Maurice Bryson, London;

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