S&P Global Ratings provides independent, transparent opinions on the robustness of a company's climate transition plan, grounded in its award-winning Shades of Green approach.
The green bond market has seen extraordinary growth over the past decade, and the resilience of the 'green' label through challenging market conditions is a success story for sustainable finance. However, companies in the earlier stages of transition, including those in high-emitting and hard-to-abate sectors, have difficulty accessing the green bond market and face limited options for obtaining sustainable financing. This is a significant problem for achieving the collective emissions reductions goals of the Paris Agreement, especially for high-emitting and hard-to-abate sectors.
We believe part of the reason for the difficulties faced by these companies is that investors may need additional context to understand if a company is following through on credible transition steps. 'Net-zero' targets set in the distant future are now commonplace, but they can be misleading, and they provide minimal insight to market participants on the company's individual, realistic transition trajectory.
The ability to fill this information gap and give financial market participants confidence that a transition activity or target is backed by a decarbonisation plan that is robust, and appropriately ambitious in the sectoral and regional context, will play an important role in increasing financing for transition initiatives.
Climate Transition Assessments, featuring Shades of Green
We've set out to fill this information gap in the market with our Climate Transition Assessment, built on the Shades of Green approach. Our Climate Transition Assessment goes beyond long-term net-zero targets and assesses a company's near-term plans for capital expenditure, revenues, and implementation. We analyse whether the plans are specific enough to be credible in light of the company's stated targets.
Source: S&P Global Ratings' Analytical Approach: Climate Transition Assessments
We also consider potential implementation blockers that may challenge the company's ability to deliver on its plans. Examples of potential implementation blockers that we factor into our assessment could be:
- Significant stakeholder opposition (e.g., community pushback preventing an energy company from acquiring land on which to build new wind farms);
- Over-reliance on unproven or undeveloped technological innovations (e.g., an airline relying on the development of electric airplanes to achieve its plan when there are none currently existing that could support the airline's capacity and range requirements); or
- An unfavourable regulatory environment (e.g., an electric utility having difficulty obtaining regulatory approval to close its coal plants before the end of their economically useful lives).
The outcome of the Climate Transition Assessment is a 'shade' reflecting the company's expected future state, on a spectrum from 'dark green' (representing consistency with a low-carbon, climate-resilient future aligned with the Paris Agreement), to 'red' (representing a direct impediment to the Paris Agreement, such as direct fossil fuel exposure). If a company receives a 'dark green' Climate Transition Assessment outcome, it means we expect the entity will eliminate all 'red' activities from its operations and transition mainly to 'dark green' activities with limited implementation risks.
We recognise, too, that 'dark green' is not the only shade of green. Our shading spectrum also includes 'medium green' (representing significant steps toward a low-carbon, climate resilient future but will require further improvements to be solutions for the long term), and 'light green' (representing transition steps in the near term that avoid emissions lock-in but are not long-term low-carbon climate resilient solutions). All three green shades signify important steps along the transition pathway toward the Paris Agreement's goals. We also use the shades of green scale to illuminate company activities that are not yet green (yellow, orange or red).
An important aspect to our approach in assigning a shade considers the regional development contexts in which activities and investments take place. For instance, we recognise that a substantial portion of manufacturing processes in hard-to-abate sectors is concentrated in lower- to upper-middle income countries. We consider the impacts of emissions from activities and investments but also the relevance to economic development and the region's distinct transition starting point.
Providing transparency to investors - including for green designations on stock exchanges
Our expectation is that the Climate Transition Assessment will help companies – particularly those in the earlier stages of their transition journey – communicate the robustness of their transition plans to market participants and attract much-needed transition financing. For example, the assessment could be used as a precursor to define a specific type of fixed income financing framework, giving companies a better understanding of where their economic activities fit on the transition scale and demonstrating to investors that the financing is backed by a credible company-level transition plan.
Companies can also use the Climate Transition Assessment to confirm alignment with green equity designations, such as the Nasdaq Green Equity Designations, the Brazilian B3 Ações Verdes green equity designation, and the Swiss SIX 1.5°C Climate Equity Flag. Green equity designations clearly identify qualifying companies on exchanges and provide additional information for investors. While the green equity market is still in early stages, we can see some parallels with the beginnings of the green bond market, with the World Federation of Exchanges Green Equity Principles providing a common framework for exchanges to draw upon.
Learn more about our Climate Transition Assessments and the Shades of Green scale, or get in touch with us directly.