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Sustainable Fitch’s inaugural ratings highlight issuer-framework gap

© Shutterstock / Deemerwha studioESG elements.

In the inaugural publication of its ESG ratings, Sustainable Fitch (SF) highlights an important gap between the frameworks to which issuers align their bonds and that of  the underlying entity itself. 

The gap in ratings is explained by the ability of a company with a core business that may be deemed environmentally or socially harmful to issue a best-in-class labelled bond with proceeds financing green or socially beneficial activities. 

Unsurprisingly, use of proceeds instruments like green bonds rated higher than sustainability-linked bonds, while public entities with beneficial environmental and social impacts from core operations topped among business activities.

Regionally, EMEA had the largest share of issuers in the dataset, and also the highest average entity score. Yet this wasn’t substantially higher than the scores for Asia-Pacific and the Americas, with entities in all three regions earning an equivalent average rating of 3, or neutral.

The 220 entities and 640 bonds frameworks rated each received an entity score on a scale of 0-100, which were divided into a ratings scale from 1-5. SF found that issuers did a better job of aligning their ESG labelled bonds to international best practice, even though their underlying business activities only had average sustainability performance.

Frameworks rated higher than issuing entities

Across the 220 entities and 640 bond frameworks rated by Sustainable Fitch, frameworks received an average score of 74, equating to an average rating of 1.94, compared to an average rating of 2.68 for entities, with a score of 56.

European companies with large renewable portfolios, an auto manufacturer and a global pharmaceutical company ranked highly in the framework category, with the top framework receiving a score of 94 and a rating of 1.

Highest average framework scores by sector came from utilities and electricity providers, while the lowest came from food and beverage, and tobacco. 

Companies in sectors such as transportation, agriculture, banks and real estate had the lowest-rated frameworks, with the lowest score of 33 attracting a rating of 4. Factors contributing to low framework scores include scant project selection criteria, a lack of information on the delineation and management of projects, and the inclusion of large amounts of working capital or operating expenditures.

Going beyond the explanation of environmentally harmful companies issuing best-in-class labelled green bonds, it also speaks to a company’s transition strategy. A high-quality green or socially positive project is a key part of an overall improvement in the entity’s sustainability profile.

Green bond frameworks provide the best transparency

Use of proceeds instruments like green bonds had the highest average framework score of 76, owing to the criteria of financing environmentally positive activities and projects. They also made up the largest group among the 470 frameworks rated, reflecting their relative size of issuance within the GSSS space. Sustainability bonds were next, with an average score of 71 reflecting a mix of activities between green and social objectives.

By sector, the largest sector among the green bonds rated (35%) was power and electricity distribution, with the vast majority financing renewable or low-carbon energy generation.  This was followed by banks (23%), where proceeds typically went to green lending and financing activity.

As of the current writing there doesn’t seem to be an appreciable difference between the cost of debt at a corporate level, and for GSSS instruments, even those that are perfectly aligned to international best labelling practices. However, were this to happen, it could raise concerns about entities with lesser ESG ratings being able to issue higher rated instruments.

Sustainable Fitch was launched by the Fitch Group in 2021, as a new sustainability-focused analytics ecosystem, with the introduction of new ESG ratings products targeting GSSS investment products.


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