Credit rating agency S&P has developed a tool to evaluate green bonds and a framework for assessing corporate issuers’ exposure to environmental, social and governance (ESG) risk.

The rating agency is seeking feedback from investors and other bond market participants on proposals for both products.

The rating agency placed its green bond evaluation tool in the context of the emergence of a range of green finance instruments and investors’ evolving needs for information about these instruments.

The green bond tool will score a given bond issue in at least three areas – transparency, governance and mitigation/adaptation, as relevant – with these scores then amalgamated and weighted to produce a final score.

Michael Wilkins, head of environmental and climate risk research at S&P Global Ratings, said: “Our proposed Green Bond Evaluation methodology looks beyond the governance and management of a bond by providing an analysis and estimate of the environmental impact of the projects or initiatives financed by the bond’s proceeds over its lifetime relative to a local baseline.”

The rating agency also launched a proposal for an ESG evaluation of corporate bond issuers, based on a new framework and scoring methodology.

The assessment would evaluate a company’s impact on the natural and social environments in which it operates, the governance arrangements it has in place to oversee these effects, and potential losses crystallising from its exposure to environmental and social risks.

Medium-term focus

S&P’s proposal comes after it signed up to an initiative launched earlier this year by the UN-backed Principles for Responsible Investment, which aims to “enhance systematic and transparent consideration of ESG factors in the assessment of creditworthiness”.

Neither of the two new evaluation tools S&P is proposing are credit ratings, however.

The rating agency said its ESG assessments would be “offered separately from our credit ratings to provide greater transparency into ESG risk”.

As proposed, its ESG assessments would involve the rating agency ranking corporate issuers on a five-point scale based on its view on the degree to which an issuer is exposed to ESG risk over the medium to long term.

S&P would analyse a company with respect to its environmental and social risk profiles, management and governance, as well as its environmental and social risk management.

It plans to assign a greater weighting to the medium term, which it defines as the next 2-5 years, because it considers that medium-term risk “is more discernible” and that the impacts of these nearer-term risks are “more assessable in terms of risk to creditworthiness”.