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S&P buys SPO provider amid criticism of GSSS ratings credibility

© Shutterstock / AntonSANS&P Global.
S&P Global.

S&P Global has acquired second party opinion (SPO) provider Shades of Green, despite recent accusations of SPO greenwashing during the assessment of green, social and sustainability-linked (GSSS) bond frameworks. 

  • Credit ratings agency S&P Global has acquired the Centre for International Climate Research’s (CICERO) Shades of Green business. 
  • The deal strengthens S&P’s existing SPO offering, which provides independent assessments of the extent to which different bonds and financial frameworks are aligned with green, social, sustainable and sustainability-linked (GSSS) principles. 
  • The acquisition will help S&P to expand its ESG debt rating market share, but questions have been raised over the validity of GSSS bond frameworks and related SPOs. 

S&P boosts market share with Shades of Green acquisition 

S&P Global Inc. (NYQ:SPGI) has expanded its share of the GSSS bond ratings market by acquiring Shades of Green from Norway’s CICERO. Shades of Green is a prominent provider of second party opinions (SPOs), the first of which was for a green bond framework issued by the World Bank in 2008. 

An SPO provides an independent assessment of the financing framework that is necessary for the issuance of GSSS bonds. They are considered a de facto requirement, and are supposed to provide investors with reassurance that a GSSS instrument will meet its sustainability claims and requirements. 

One of the defining characteristic of SPOs is that they are issued by an independent third party, which assures investors of the alignment of a green bond and its accompanying framework with the issuing entity’s sustainability aims and goals. 

Shades of Green  has developed its own methodology for assessing an issuer’s ability to meet its stated intentions. Classification ranges from Dark Green to Red, with Medium Green, Light Green and Yellow serving as interim categories. 

Make or buy, credit rating agency SPOs raise questions about independence 

Providers of SPOs vary across the ESG information services landscape, and include major data and analytics providers such as ISS or Sustainalytics, risk management firms like DNV, and some of the largest credit ratings agencies (CRAs). These agencies also provide opinions on the credit ratings awarded to GSSS bonds. 

Sustainable Fitch and MFR are among the CRAs that have developed their own SPO offerings. S&P Global has taken the alternative route of acquiring specialised SPO providers. In 2019, Moody’s followed a similar strategy with its acquisition of a majority stake in Vigeo Eiris, a provider of SPOs and other ESG data.  

Regulatory concerns over CRA conflicts of interest  

It is unclear whether Moody’s majority stake in VE has raised any claims of conflict of interests, given that Moody’s is rating the underlying debt. What is also unknown is whether Moody’s has attempted to maintain VE’s independence by employing a third party to provide SPOs for the GSSS bonds that it has provided with credit ratings. 

Conflicts of interest are among the major concerns that have been identified by regulators when supervising CRAs. In a portfolio letter to the CEOs of CRAs, the UK FCA noted an increasing number of activities undertaken by these agencies that go beyond regulated credit ratings. It went on to identify conflicts of interest as posing a significant risk to the quality and independence of regulated activities 

In particular, it called attention to ESG ratings, scores and data, as well as products that sit beyond its current regulatory remit. It called for CRA’s to ensure that proper governance and management guidelines were established to avoid conflicts of interest, particularly relating to the sharing of data that falls outside of its oversight. 

Misleading information relating to the validity of sustainability claims can also lead to accusations of greenwashing. Indeed, a June 2022 letter on greening the financial market by European Securities and Markets Authority chair Verena Ross warns that: “Transparency is essential to ensure that associated investments do account for the purpose for which they are marketed, and that a rush for the ‘ESG gold’ does not lead to greenwashing”. 

“Greenwash of the year” accusations question SPO credibility

An accusation of greenwash has already been levelled against BNP Paribas (PAR:BNP) and Michelin (PAR:ML), concerning the sustainability claims of a green bond that they sold. A Mighty Earth report on the case raises specific questions as to the integrity of SPOs. 

The report found that Michelin’s Royal Lestari Utama (RUL) project was responsible for extensive deforestation in one of the most biodiverse locations in Asia. RUL was supported by a green bond, the issuance of which was arranged by BNP, with SPO verification from VE. 

The bonds were sold to investors for financial support of an ‘eco-friendly’ rubber plantation in Sumatra. It later emerged, however, that Michelin’s local project partner had been clearing thousands of hectares of tiger, elephant and orangutan habitats. 

Michelin’s $95 million, 15-year green bonds have since been fully redeemed for undisclosed reasons. Yet, the project continues to displace wildlife and local communities while still being associated with the typical environmental impacts of commercial rubber plantations. 

Who watches the watchers? 

A further condemnation of BNP’s green bond issuance process was that the project had been approved by the Climate Bonds Initiative (CBI). As an international organisation dedicated to the mobilisation of capital for climate action, CBI’s certification of climate bonds is meant to provide assurance to investors. 

While the investigation by Mighty Earth and Voxeurop, an independent European press society, has exposed the potential shortcomings of independent certification and assessment processes in GSSS bond issuance, this is of little reassurance as the RUL project continues its contribution to ecological destruction. 

What the case has highlighted is the urgent need for further strengthening of the regulatory standards through which GSSS bond issuance is governed. Regulators and policy-makers should also bear some responsibility for backing these changes up with stricter enforcement of the rules. They could, for example, begin imposing penalties that would serve as an important deterrent of future issuances that would allow investors to be misled. 

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