Overview And Scope
This article describes S&P Global Ratings' analytical approach for providing Second Party Opinions (SPOs) on types of sustainable financing where proceeds are allocated to specific environmental or social projects. It also explains how we determine an S&P Global Ratings Shade of Green (Shade) for environmental projects. In addition, we provide context on how the sustainable financing addresses what we consider to be the issuer's most material sustainability factors, as well as our view of the issuer's management of additional sustainability factors that are relevant to the sustainable financing.
SPOs are not credit ratings, do not consider credit quality, and do not factor into our credit ratings.
Our SPOs are a point-in-time analysis of a sustainable finance instrument, program, transaction, or framework and the characteristics of the issuing entity that we consider relevant for the implementation of the instrument, program, transaction, or framework. We use the term financing to mean any sustainable finance instrument, program, transaction, or framework that can be assessed under this analytical approach.
Our analysis produces four analytical outputs
An alignment assessment: Our opinion of whether the financing's documentation aligns with certain third-party published sustainable finance principles and guidelines identified by the issuer.
Shade of Green: Our qualitative opinion of how consistent an economic activity or financial investment is with a low-carbon climate resilient future.
Issuer sustainability context: This provides our opinion on how the financing contributes to addressing what we consider to be the issuer's most material sustainability factors. We identify and consider which sustainability factors are most material for the issuer and how they are addressed by the financing; we also review the issuer's strategy for the sustainability factors relevant to the financing.
EU Taxonomy assessment: Upon request from the issuer, we provide an assessment of the financing's alignment with the EU Taxonomy.
This analytical approach is applicable to a wide variety of financial instruments and financing frameworks, including those issued by corporate entities; project and structured finance vehicles; financial institutions; multilateral development banks; and sovereign, regional, and local governments.
We do not limit our opinions to bonds for new projects that issuers label as green, social, or sustainability. We can provide SPOs on any refinancing, bonds, bank loans, private placements, project finance debt, hybrids, portfolios, fund holdings, asset-backed securities, and other financial transactions, excluding common and preferred equity transactions.
Our analytical approach is relevant for pre- and post-closing of a financing and pre- or post-implementation of a project. Our SPO on a framework does not automatically apply to individual transactions under that framework. We would need to independently review the transaction documentation to assess the alignment of any given transaction.
To help communicate the findings from our SPO analysis, our SPO reports include a summary of our key analytical conclusions, presented as strengths, weaknesses, and areas to watch. With this summary, we highlight the strengths and weaknesses of the financing relative to its stated sustainability objectives and identify potential risks related to the financing. This summary is a way of presenting findings from other areas of our analysis and is not a separate analytical exercise.
- We consider a strength to be a feature of the financing that stands out as positive compared with our view of standard practices. For example, we could consider value-chain policies that address material sustainability factors and support the implementation of the financing to be a strength for an issuer. We may also see the inclusion of components that far exceed the minimum requirements of the Principles as a strength.
- We consider a weakness to be a significant limitation, identified in our analysis, that would likely prevent the financing from achieving the full benefits of its sustainability objectives. For example, we would consider the failure to exclude diesel-powered back-up generators from the financing of newly constructed buildings to be a weakness for an issuer.
- We consider an area to watch to be a potential problem or risk related to the financing. In general, areas to watch are risks that the issuer plans to mitigate, or residual risks that remain after mitigating actions the issuer has taken. For example, if an issuer is exposed to material physical climate risk that necessitates active mitigation, we could consider this an area to watch.
We consider a weakness to be more serious than an area to watch.
The Alignment Assessment
A. Determining the alignment of sustainable finance transactions or frameworks
We provide an opinion on whether the documentation of the financing aligns with certain third-party published sustainable finance principles and guidelines (Principles) requested by the issuer. There are several Principles on which we can offer an alignment opinion, and we adapt our analysis to the specific Principles we are assessing the financing against. Principles that are in scope for alignment opinions on the publication date of this article are:
- International Capital Market Association's (ICMA's) Green Bond Principles (GBPs);
- ICMA's Social Bond Principles (SBPs);
- ICMA's Sustainability Bond Guidelines (SBGs);
- The Loan Market Association (LMA)'s, Asia-Pacific Loan Market Association (APLMA)'s, and Loan Syndications and Trading Association (LSTA)'s Green Loan Principles (GLPs);
- LMA/APLMA/LSTA's Social Loan Principles (SLPs); and
- ASEAN Capital Markets Forum, Green Bond Standards (AGBS).
Our alignment analysis typically has two possible outcomes: aligned, or not aligned. An opinion of aligned means that, in our view, the financing meets the minimum requirements for alignment with the relevant Principles. In rare cases, we determine the financing to be conceptually aligned, which means we believe it meets the minimum requirements for alignment with the relevant Principles, but that characteristics of the financing do not technically match the scope of the Principles. In those cases, we apply the Principles as closely as possible, after making any necessary changes to our analysis. For example, this could be relevant for funds or other sustainability frameworks that are not directly tied to a financial instrument.
Our alignment analysis is organized into standardized analytical components that match the common areas of the various Principles. The analytical components we use to determine our alignment opinion are:
- Use of proceeds,
- Process for project evaluation and selection,
- Management of proceeds, and
For each component relevant to our analysis of the financing, we assess whether the financing meets the minimum requirements for alignment with the corresponding section of the relevant Principles. All relevant analytical components must be aligned to achieve an overall outcome of aligned.
When we assess the financing's alignment with ICMA's SBGs, we consider alignment with both the GBPs (Green Bonds Principles) and the SBPs (Social Bond Principles) for all projects. For example, for use-of-proceeds assessments, we take the view that, for the financing to be aligned with the SBGs, all projects that have green and social co-benefits should meet the eligibility criteria of both the GBPs and the SBPs.
When relevant, we assess adherence to ICMA's Climate Transition Finance Handbook (CTFH) and comment on this in our SPO analysis. Our assessment of CTFH adherence does not have an impact on our alignment opinion.
Upon request from the issuer, where the financing documentation references the Sustainable Development Goals (SDGs), we consider which of the goals it contributes to. We compare the activities funded by the financing to ICMA's mapping of SDGs and outline the intended linkages within our SPO analysis. Our assessment of SDG mapping does not have an impact on our alignment opinion.
B. Use-of-proceeds analysis
Our use-of-proceeds analysis considers whether commitments made in the financing's documentation are aligned with the relevant use-of-proceeds Principles. We focus on how clearly the issuer sets out its commitment to using the funds raised for sustainability projects. For us to consider use of proceeds aligned for a green project, we require project categories directly funded by the financing to be designated one of the three green Shades. For us to consider the use of proceeds to be aligned for social projects, we require that the social projects directly aim to address or mitigate a specific social issue or provide clear social benefits to the target population.
Principles and sustainability taxonomies may have different requirements for what qualifies as an eligible green or environmental project, and therefore also for use-of-proceeds eligibility. If a Principle requires adherence to a specific taxonomy, we consider that in our use-of-proceeds analysis.
C. Process for project evaluation and selection
Our analysis focuses on how clearly, in documentation, the issuer outlines a project evaluation and selection process that ensures any projects it chooses align with the environmental or social requirements of the relevant Principles. What qualifies as an environmental or social project differs between Principles.
Typically, the Principles require the issuer to explain its project selection process, the eligibility criteria it applies to select those projects--including exclusion criteria, if applicable--and the overall sustainability objectives that underpin the selection process.
ICMA's Green Bonds Principles and Social Bond Principles, and the LMA's Green Loan Principles and Social Loan Principles, include consideration of whether the issuer clearly communicates complementary information on processes by which it identifies and manages perceived social and environmental risks associated with the relevant projects, regardless of the project type. We take note of this consideration during our assessments.
D. Management of proceeds
Our management of proceeds analysis considers whether the financing's documentation is aligned with the relevant Principles on how the proceeds will be managed over time. We focus on how clear the issuer's commitment is to ensuring that the funds raised will remain dedicated to eligible sustainability projects throughout the life of the financing.
For example, the ICMA Principles require an issuer to monitor the net proceeds of all outstanding green and social bond transactions, which includes appropriately tracking the proceeds and adjusting the balance of net proceeds to match allocations to eligible green and social projects. ICMA's Green Bond Principles and Social Bond Principles also require an issuer to disclose to investors the types of temporary placement they intend to use for unallocated proceeds.
Our analysis considers whether the financing's documentation is aligned with the relevant Principles on reporting.
The Principles in scope for this section differ in their requirements for reporting. We therefore tailor our analysis to the Principles we are assessing alignment with. For example, ICMA's Principles stipulate that an issuer should report on the use of proceeds annually until full allocation. They also state that information presented must include a list of the projects that receive financing, a description of each project (including the amount allocated to each project), and their expected environmental and social impacts. The ASEAN Green Bond Standards, meanwhile, specify that an issuer must report at least annually, but outline specific content to include in reporting as recommendations, rather than requirements.
Determining A Shade
The Shades represent our qualitative opinion of how consistent the activities funded by the financing are with a low-carbon climate resilient future. We determine Shades based on our analysis of climate and nonclimate environmental factors. Our analysis does not reflect an activity's social risks or benefits. Therefore, we do not determine a shade for the financing's social activities.
To determine a Shade for a project category, we first consider the underlying activities (often called projects) within that project category.
We do so by applying our "Analytical Approach: Shades Of Green Assessments" (click here to view on spglobal.com). If all activities within a project category are the same Shade, or the project category is focused on activities of a particular Shade, we designate that Shade to the project category.
If a project category includes activities with multiple shades, we may determine a shading interval across two adjacent Shades. For example, if a project category includes Medium green and Dark green activities, we may determine a project category shading interval of Medium green to Dark green. We use the shading interval to show variation within a project category. A shading interval cannot extend across more than two adjacent Shades. There cannot be, for example, a shading interval of Dark green to Light green. If a project category includes activities of all Shades of green, we may designate either a single Shade or an interval to the project category, depending on its characteristics.
We do not determine a Shade for social project categories. However, if activities under social project categories have clear environmental risks, we assess and comment on those risks and the actions taken by the issuer to mitigate them. Examples of risks associated with social projects that we may highlight are emissions lock-in, deforestation and biodiversity loss, and exposure to physical climate risks.
To determine an overall Shade for a financing, we take an average of the project categories the financing funds, weighted by the expected proportion of financing allocated to each project category over the three years following issuance. If there is insufficient information for us to take an informed view, we take a conservative approach to weighting activity allocations. If the financing includes social project categories, we do not determine an overall shade for the financing.
Some issuers, such as financial institutions, sovereigns, and local and regional governments, facilitate the activities of other entities rather than carry out the activities themselves. When analyzing such issuers, our analysis focuses on the underlying activities that the issuer is facilitating. For example, a financial institution may issue a residential mortgage-backed security (RMBS) program for which the underlying portfolio comprises pools of loans that finance energy-efficient buildings. To determine a Shade for this program, we would assess the characteristics of the underlying properties, or the minimum requirements they must meet for inclusion in an RMBS pool.
Issuer Sustainability Context
We provide issuer sustainability context to show our opinion on how the financing contributes to addressing what we consider to be the issuer's most material sustainability factors. This context also identifies the issuer's management of additional sustainability factors that we consider relevant to the financing.
We provide context on two components:
- We review the overlap between sustainability factors we've identified as relevant to the financing and those we consider to be most material for the issuer. We do so by considering the issuer's sector, geography, and operating activities, as well as the scope of the financing.
- We review the issuer's strategy for these overlapping sustainability factors by considering related public statements, actions, goals, and policies.
In this part of our analysis, we may consider the context of other entities related to the legal issuer, when relevant.
The EU Taxonomy Assessment
In our EU Taxonomy assessment, we give our opinion on whether an eligible project to be financed aligns with the EU Taxonomy in cases when the economic activity is covered by technical screening criteria that is incorporated into European law via delegated acts.
This analysis aims to help readers see how activities that will be funded by proceeds from a financing framework, or a specific transaction, align with the EU Taxonomy. The EU Taxonomy defines six environmental objectives (EU Objectives):
- Climate change mitigation,
- Climate change adaptation,
- The sustainable use and protection of water and marine resources,
- The transition to a circular economy,
- Pollution prevention and control, and
- The protection and restoration of biodiversity and ecosystems.
Our assessment is organized into the three conditions set by the EU Taxonomy regulation. According to the regulation, to qualify as environmentally sustainable, an activity must have three elements:
- Make a substantial contribution to at least one of the EU Objectives.
- Do not significant harm (DNSH) to any other EU Objective.
- Meet minimum safeguards.
The substantial contribution and DNSH elements are defined by the EU Taxonomy technical screening criteria.
Our focus is on the evidence to support alignment with the three elements. Evidence means there is a commitment in the financing--and in the answers provided by the issuer, its related internal policies, and procedures--that demonstrate the issuer can meet the criteria for the three elements described above.
Determining overall alignment with the EU Taxonomy
We consider financing to be aligned with the EU Taxonomy only when our opinion is fully aligned. We differentiate nonalignment with the EU Taxonomy into two categories of partially aligned and not aligned as summarized in the table below.
|Overall EU Taxonomy Alignment Opinion On Financing|
|Fully aligned*||All economic activities that can be funded by the financing are covered by the technical screening criteria.|
|All activities align with all technical screening criteria for substantial contributions and for DNSH.|
|The issuer's procedures are aligned with the minimum safeguards.|
|Partially aligned*||Financing is not fully aligned but at least one economic activity that can be funded by the financing is covered by the technical screening criteria.|
|At least one activity aligns with all technical screening criteria for substantial contribution and for DNSH.|
|The issuer's procedures are aligned with the minimum safeguards.|
|All activities not covered by the technical screening criteria are at least aligned as defined in both use of proceeds and process for project evaluation and selection in the section titled "The Alignment Assessment" in this Analytical Approach.|
|Not aligned§||No activities covered by the technical screening criteria, that can be funded by the financing, meet the criteria for substantial contribution and DNSH.|
|The issuer's procedures are not aligned with the minimum safeguards.|
|Any activity not covered by the technical screening criteria is not aligned for either use of proceeds and process for project evaluation and selection above.|
|*Must meet all factors listed. §Meets one of the factors listed. DNSH--Do no significant harm.|
Alignment of each economic activity with the EU Taxonomy
First, we consider whether each economic activity that can be funded by the financing is aligned or not aligned with the EU Taxonomy or not covered by the technical screening criteria as per the table below.
|Alignment Opinion For An Economic Activity|
|Aligned||The economic activity meets the substantial contribution and DNSH technical screening criteria, and the issuer's procedures meet minimum safeguards.|
|Not aligned||The economic activity does not meet the substantial contribution or DNSH technical screening criteria, or the issuer's procedures do not meet the minimum safeguards.|
|Not covered by the technical screening criteria||The economic activity is not covered by the technical screening criteria.|
|DNSH--Do no significant harm.|
Applying the substantial contribution and DNSH technical screening criteria to each economic activity
We review each economic activity covered by the financing to conclude whether it is aligned, not aligned with the substantial contribution criteria, or not covered by the technical screening criteria.
|Alignment With Substantial Contribution Criteria|
|Aligned||The economic activity matches the description in the EU Taxonomy regulation for contributing to an EU Objective and meets all the criteria of the substantial contribution technical screening criteria. There is also a specific reference in the financing committing to meet the substantial contribution technical screening criteria.|
|Not aligned*||The economic activity matches the description in the EU Taxonomy regulation for contributing to an EU Objective but does not meet the criteria of the substantial contribution technical screening criteria.|
|Missing information or external factors prevent us from concluding that the economic activity is aligned.|
|The economic activity does not match the description in the EU Taxonomy regulation for contributing to an EU Objective.|
|There is not a specific reference in the financing to meet the substantial contribution technical screening criteria.|
|Not covered by the technical screening criteria||The economic activity is not covered by the technical screening criteria.|
|*Meets any of the factors listed.|
We review each economic activity covered by the financing to conclude whether it is aligned, not aligned with the DNSH criteria, or not covered by the technical screening criteria.
|Alignment With The Do No Significant Harm Criteria|
|Aligned||The economic activity meets all the DNSH technical screening criteria for the other EU Objectives. And there is a specific reference in the financing committing to meet the DNSH technical screening criteria.|
|Not aligned||The economic activity does not meet the criteria of the DNSH technical screening criteria for the other EU Objectives, or there is not a specific reference in the financing committing to meet the DNSH technical screening criteria.|
|Not covered by the criteria||The economic activity is not covered by the technical screening criteria.|
|DNSH--Do no significant harm.|
For projects that can be funded by the financing that are covered by the technical screening criteria, we provide an overview table in the report that shows which criteria these activities are aligned with and which ones they are not aligned with.
For each activity, where our assessment does not lead to a clear and conclusive determination that all the relevant technical screening criteria are met, we will consider it to be not aligned.
Applying the minimum safeguards to the issuer
We assess whether the issuer is aligned or not aligned with the minimum safeguards defined in the EU Taxonomy regulation. Our analysis is not subject to ongoing surveillance, so any breach of these safeguards would not automatically trigger a review of our opinion. This assessment is done once for the whole financing framework or transaction document, and not separately for each economic activity.
The EU Taxonomy regulation defines the minimum safeguards as the procedures implemented, by an issuer that is carrying out an economic activity, to ensure the alignment with guidelines and principles set out in a number of texts. These are: the OECD Guidelines for Multinational Enterprises, the U.N. Guiding Principles on Business and Human Rights, the Declaration of the International Labour Organization on Fundamental Principles and Rights at Work, and the International Bill of Human Rights.
The European Commission's Platform on Sustainable Finance (PSF) has a permanent expert group, which published a Final Report on Minimum Safeguards that provides background information and gives help to companies and investors navigating the minimum safeguards criteria in practice. This report does not represent an official legal interpretation or guidance.
Our minimum safeguards assessment considers whether the issuer is to align with minimum safeguards over the life of the funding, based on the four core components recommended by the PSF. These are:
- Human rights, including workers' rights;
- Taxation; and
- Fair competition.
For all the core topics, the PSF recommends assessing whether the issuer has appropriately responded to any court cases that have led to convictions on these topics. It also recommends assessing the issuer's engagement with stakeholders if allegations of breaches have been made.
|Alignment With Minimum Safeguards|
|Aligned||The issuer commits to meeting minimum safeguards described in the EU Taxonomy regulation with a specific comment in the financing.|
|Evidence that the issuer's procedures meet all the core topics of the minimum safeguards over the life of the funding.|
|Not aligned||There is no specific reference in the financing committing to meet the minimum safeguards described in the EU Taxonomy regulation.|
|There is not sufficient evidence that the issuer's procedures meet all the core components of the minimum safeguards over the life of the funding.|
Where our assessment does not lead to a clear and conclusive determination that all the relevant minimum safeguards are met, we will consider the financing to be not aligned. We use the external public sources recommended by the PSF to identify those signals of noncompliance with the minimum safeguards. We do not apply a forensic approach to seeking evidence of compliance with all minimum safeguards.
This report does not constitute a rating action.
- Analytical Approach: Shades Of Green Assessments, July 27, 2023
- FAQ: Applying Our Integrated Analytical Approach For Use-Of-Proceeds Second Party Opinions, July 27, 2023
|Authors:||Charlie Cowcher, CFA, London +44 7977 595797;|
|Beth Burks, London + 44 20 7176 9829;|
|Luis Solis, Madrid +34 914233218;|
|Florence Devevey, Paris + 33 1 40 75 25 01;|
|Patrice Cochelin, Paris + 33144207325;|
|Hans Wright, London + 44 20 7176 7015;|
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.