ESG Focus | Jul 15 2021
FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/
ESG Focus: It's Easy Being Green – For Now (Part 3)
BIS Pursues Green Bond Rating System.
Part 2 of our green bond story It’s Easy Being Green – For Now (link below), touches on the steps to make carbon intensity the common denominator for a green-bond ratings system, to aid fungibility and liquidity, and reduce greenwashing and other abuse.
Here, FNArena has included a heavily edited version of the Bank for International Settlements' (BIS) complimentary discussion on the subject for bond enthusiasts.
BIS says ideally:
“A firm-level green rating system should have three high-level objectives”:
– It should provide extra incentives for the rated companies to contribute to the attainment of climate goals;
– It should help investors in their decision-making processes, particularly those investors without resources to conduct their own green due diligence; and
– The system should allow investors and other stakeholders such as auditors, regulators and policymakers, to check an organisation’s improvement and verify that the desired climate mitigation effects are achieved.
By way of solutions for point 1 (incentives), BIS suggests:
– an organisational level rating for green issuance;
– the right measures (BIS suggests carbon intensity);
– ratings buckets (divided by industry) to make comparison between companies easier, and to motivate corporate competition; and
– the rating placement on a finer grid for organisations with a higher carbon intensity.
For point 2 (simplifying investor decision-making), BIS suggests:
-Taking a simple approach to ratings that relies on a backward measure of climate attainment;
– transparency; and
– granularity (so that investors know if the projects fit with their investment strategy) to determine likely performance over time;
– and again use the bucket concept, which is already familiar to investors.
On the subject of verification (point 3), BIS suggests:
– adopting the carbon intensity as the standard measurement as it is easily verifiable and is based on outcomes;
– basing verification on scope 1, 2 and 3 emissions (at present, they may be based on just 1 and 2, which ignores company wide emissions) and the broadest types of emissions available, in order to capture the emissions for an organisation’s entire value chain;
– adopting mandatory audits of emissions data and mandatory reporting based on legal standards (which are already being developed); and
– emanding data on broader emission scopes from third-party to help assess an organisation’s overall carbon footprint.
In summary, existing ratings for green bonds are not a good measure for a corporation’s carbon-intensity performance, measured as emissions relative to revenue.
By rating firms, rather than bonds, on their overall carbon intensity could encourage them to increase their carbon efficiency and help investors sort the wheat from the chaff.
It would provide extra incentives for large carbon emitters to battle climate changes.
For further reading:
It's Easy Being Green – For Now: https://www.fnarena.com/index.php/2021/07/09/esg-focus-its-easy-being-green-for-now/
It's Easy Being Green – For Now (Part 2): https://www.fnarena.com/index.php/2021/07/12/esg-focus-its-easy-being-green-for-now-part-2/
FNArena's dedicated ESG Focus news section zooms in on matters Environmental, Social & Governance (ESG) that are increasingly guiding investors preferences and decisions globally. For more news updates, past and future:
https://www.fnarena.com/index.php/financial-news/daily-financial-news/category/esg-focus/
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
FNArena is proud about its track record and past achievements: Ten Years On
