Christa Clapp and Erik Christianto of S&P Global Ratings talk to Environmental Finance about how the firm's second party opinion offering has changed one year on from the acquisition of the Shades of Green business from CICERO
Environmental Finance: Can you outline S&P Global Ratings' current approach to Shades of Green and how the shading scale has evolved in the past year?
Christa Clapp: We introduced the Shades of Green methodology back in 2015 when we were part of CICERO. Because it is a principles-based methodology, rather than a taxonomy, it has been both flexible and robust as different market conditions and technologies have evolved.
Since the acquisition of Shades of Green by S&P Global, besides integrating the Shades of Green scale into S&P Global Ratings' second party opinion (SPO) methodology, the basis of the methodology hasn't changed much since it was launched.
In July 2023, in line with the integration of the Shades of Green and S&P Global Ratings' methodology, we introduced an orange shade.
Previously, we had a yellow shade – which indicated that an activity was not yet green, and red was directly associated with fossil fuels. We had been thinking for some time about how to better illuminate the full spectrum of transition and we didn't feel we had enough shades to capture that.
The orange shade is meant to highlight improvements from direct fossil fuel use but aren't quite in the yellow zone yet, where their impact would be minimal. Orange indicates there are still substantial emission impacts, but it is an improvement on red. It could include conventional steel production, for example.
We now have a spectrum of three Shades of Green plus three non-green shades that we can apply across a range of activities and entities. For a financing framework to be aligned with ICMA's Green Bond Principles (GBP), it needs to be aligned with either Light, Medium, or Dark Green.
EF: How has incorporating the Shades of Green methodology impacted S&P Global Ratings' SPOs?
Erik Christianto: With the Shades of Green methodology, we can really look under the hood with our SPOs. The different shades allow us to understand and inform stakeholders regarding our view of how consistent the eligible projects or the company's economic activities are with a low-carbon climate resilient (LCCR) future. This has led to people asking questions around how it relates to taxonomies that are being developed around the world. Several of the taxonomies in the APAC region, for example, have started to adopt some sort of shading as well.
The ASEAN Taxonomy, Indonesia Green Taxonomy, and the proposed Singapore-Asia Taxonomy, for instance, also adopt a shading classification – traffic light system – which is similar to what we are doing through Shades of Green.
"Our adoption of the Shades of Green methodology is important as it recognises the jurisdictional distinctions which are very important in the topic of transition" Erik Christianto, S&P Global Ratings
Our adoption of the Shades of Green methodology is important as it recognises the jurisdictional distinctions which are very important in the topic of transition. What can constitute a transition activity in an emerging market may not be in the developed world. For example, a hybrid vehicle in Indonesia can be considered a transition asset but the same vehicle in Norway is not. That is what we're trying to solve with applying Shades of Green, which can provide additional context alongside regional taxonomies.
EF: What are the challenges with identifying different Shades of Green?
CC: The Dark Green shade equates to activities with net zero emissions by mid-century and is relatively clear cut. The Light Green end of the green scale is more challenging. Light Green represents significant emission reductions and the avoidance of locking in fossil fuels for the lifetime of longer infrastructure assets.
However, our analysis also allows for different starting points for these important emission reductions in different regions and sectors. For example, for the Delhi International Airport SPO (which was conducted prior to the integration with S&P Global), we looked at efficiency improvements that were planned as part of their green financing framework. As part of this, we analysed both the emission impacts but also considered the importance of international air travel to economic development for India. In the end, we gave it a Light Green shading, but it might have had a different shade in a different development context.
EF: How does S&P Global Ratings' SPO support financing of credible transition plans?
EC: In the fixed income space there has been criticism of hard-to-abate sectors that finance green assets but don't make transformational changes to their core business activities. This leads to GSSSB (green, social, sustainable, and sustainability-linked bonds) investors beginning to ask questions on the company's overall sustainability plan. Within our SPO approach, we analyse the sustainability context of an issuer and look at whether the company recognises and plans to address any of the other material ESG risks that are relevant to them. We can do that much better with our Shades of Green approach. This is important because we want to showcase that an issuer is not just financing green assets but is moving the entire business towards being low-carbon.
CC: Whether it's Light Green or elsewhere in the spectrum, a credible transition pathway needs ambition and a robust plan. We also want to follow the progress to see if the entity is moving in the right direction.
EF: What are the limits of labels and how can this be more flexible in order to deliver impact when financing net-zero transitions?
CC: The challenge for sustainable finance is how we start closing the transition finance gap. We'd like to support transparency in this area regardless of labels. Sometimes it seems like the market sees the transition label as a static one and I do think it's hard for a company to issue under one label and then later move to another label. But that is one of the things that we're trying to address with our shading – we believe it is a dynamic space and that we can track movement over time.
EC: Many issuers use new labels as a way to plant a flag and say 'we were the first to do it'. But a blue bond or an SDG bond is still a use-of-proceeds bond – the structure still follows the ICMA Green Bond Principles, Social Bond Principles, or Sustainability Bond Guidelines. At S&P Global Ratings, we look beyond how the clients want to label a transaction and evaluate the structure and the real impact they are trying to deliver.
EF: What's next for you both? What are the priorities for the next year or so?
EC: Our priority is to educate the market about the importance of the different shades so that they are comfortable with our assessment approach. It is fine for an issuer to finance Light Green projects because the world needs every single sector to move towards net zero, not just the green companies. Some issuers are nervous with a Light Green assessment outcome, but we tell them that many investors are understanding of that, especially in emerging markets and in issuers from hard-to-abate sectors. We believe stakeholders want companies to focus on demonstrating commitment and progress towards reducing emissions.
CC: One of the biggest global green bond issuers is Fannie Mae, the US government-sponsored enterprise, which has a Light Green label. They are transparent with investors on where they are in their transition journey and that is seen as a positive. If we have more examples like that, and from heavy-emitting industries, it might take away some the stigma of being on the lower end of the spectrum because it is exactly where we need the most movement to address the climate challenge.
Christa Clapp is a managing director, sustainable finance, and co-founder of Shades of Green, formerly part of CICERO, now a part of S&P Global. Erik Christianto is a head of product solutions, sustainable finance specialist for S&P Global Ratings in APAC.
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