Green Bonds:Perspective and role of ESG rating agencies

VBA conference on Green Bonds

23 March 2017

Leading independent ESG research provider•  Over 20 years of experience in the market•  Team of 110 staff, of which 70 analysts•  Covering 6,200 issuers (5,500 corporates and 700

(sub-)sovereigns)•  Trusted partner of over 160 clients worldwide:

insurance companies, pension funds, foundations, family offices, asset and wealth managers

•  Advising funds and mandates with a total volume of over EUR 1,5 trillion

oekom research’s USP

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Understanding of sustainability•  Local understanding and international standards•  High degree of acceptance from and cooperation with

civil society (advisory board members, NGOs)•  Relevant results through highly industry-specific

approach•  High degree of recognition among rated companies

Quality leadership•  ARISTA certified since 2009•  Gold status of Deep Data Delivery Standard•  Highest quality standard•  Comprehensive training of all analysts•  Transparent methodology•  Comprehensive dialogue with companies•  Integration of trusted independent sources in the rating

process

Independence•  Stability and continuity of the agency and its research

approach (profitability, no mergers and acquisitions)•  No financial service providers or rated issuers among

the shareholders •  No consulting services for companies which could help

them to improve their rating•  Commissioned by investors, not by the issuers

about oekom

international focus

oekom clients

the role of external assurance providers

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•  Greenness: When is a green bond really “green”?•  Credibility: Who can make such a statement?•  Independence: Need for an outside expert view•  Investors: Need for comprehensive information•  Green Bond Principles: Recommendation since 2016

oekom & green bonds

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Background & History

•  Traditional approach: ESG rating applying to all shares and bonds of an individual issuer

•  Since 2012 growing demand by existing/potential clients for specific Green Bond evaluations

•  2012-2014: Scepticism due to questions of independence and some rather ‘immoral’ requests and approaches

•  2014: Development of oekom’s methodology for Second Party Opinions

•  Since August 2014: 22 Second Party Opinions

•  2015-2016: Growing offer in the market with new players, distinction between different types of external assurance

•  2016: Increasing recognition of the quality of oekom’s SPOs in studies, public discussions, awards, etc.

oekom’s second party opinions

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Development of a service for issuers with a specific benefit for investors

Second Party Opinion

Goal: Provide the issuer with a high-quality independent, comprehensive, differentiated and

credible opinion on the sustainability quality of its bond Provide investors on the primary market timely with independent, comprehensive, differentiated information in a condensed form to give them orientation within the short time window of their investment decision

Content:•  Green Bond Principles alignment•  Green Bond Verification Framework•  Use of Proceeds Verification on a Conceptual and on the Project Level•  Issuers ESG performance

oekom’s spo mandatesIssuer Type of Issuer Type of Bond Country Issuance date

1 Land Nordrhein-Westfalen Regional Authority Sustainability Bond DE Feb 17

2 BNP Paribas Bank Green Bond  FR Oct 2016

3 SNCF Réseau Corporate Green Bond Programme FR Oct 2016

4 NRW Bank Bank Green Bond DE Oct 2016

5 TenneT Corporate Green Bonds DE Sep 16

6 Berlin Hyp Bank Green Bond Programme DE Aug 16

7 ABN AMRO Bank Green Bond NL June 2016 

8 DKB Bank Green Bond DE June 2016 

9 TenneT Corporate Green Bond DE May 2016

10 Berlin Hyp AG Bank Green Pfandbrief Re-Verification DE Apr 16

11 Alliander NV Bank Green Bond NL Apr 16

12 Land Nordrhein-Westfalen Regional Authority Sustainability Bond DE March 2016

13 ING Bank Green Bond NL Nov 15

14 VERBUND Corporate Green Bond Re-Verification AT Nov 15

15 NRW Bank Bank Green Bond DE October 2015

16 ABN Amro  Bank Climate Bond NL  June 2015

17 TenneT  Corporate  Green Bond NL May 2015

18 Berlin Hyp Bank Green Pfandbrief DE Apr 15

19 Land Nordrhein-Westfalen Regional Authority Sustainability Bond DE March 2015

20 VERBUND  Corporate Green Bond AT Nov 14

21 NRW.Bank Development Bank Green Bond DE  Okt 14

22 Münchener Hypothekenbank Bank ESG Pfandbrief DE  Sep 14

various providers – different SPOs

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•  thematic focus – some SPOs exclusively assess climate aspects

•  issuer focus – some providers do not include an assessment of the overall ESG performance of the issuer

•  project level – most SPOs do not include an assessment of the individual projects (re-)financed by the bond

•  impartiality – some SPO providers consult and verify at the same time

•  comprehensiveness – sustainability risks and offsets (e.g. in the social dimension) integrated to very differing levels in the SPOs

•  transparency – not all SPOs are publicly available

•  selectivity – some providers will accept any issuer / green bond

•  expertise – SPO providers have different competences as regards the qualitative assessment of ESG criteria, performance, risks and opportunities

potential conflicts of interests

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SPOs commissioned by the issuer – How is impartiality ensured?

•  Core business of oekom research are and will remain Corporate ESG Ratings commissioned by investors

•  SPOs commissioned by the issuers only represent a small percentage of revenues

•  Strictly separated teams in charge of SPOs and Corporate Ratings•  Rigorous and standardised SPO methodology followed•  oekom SPOs include comprehensive, differentiated and balanced

information, including the mentioning of weak points, risks and areas for further improvement

•  No participation in road shows•  All SPOs publicly available on oekom research’s website•  oekom’s Supervisory Board receives and reviews quarterly an

independence report on our SPO business

oekom’s sustainability bond ratings

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Sustainability Bond Rating for comprehensive coverage of the secondary market

Sustainability Bond Rating

Goal:

Provide investors with independent analysis delivering comparable scores of a large variety of different green / sustainability bonds

Content:•  Overall score•  oekom analyst’s opinion •  Strengths and weaknesses•  Scores on individual indicators

sustainability bond ratings

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Background: Investors questions and needs

•  Is the issuer’s ESG rating important?

•  Can a dirty company issue a green bond?

•  How are environmental and social risks managed by the issuer?

•  Does a pure player need to ring fence?

•  How to compare SPOs from different providers?

•  How to evaluate a Green Bond without an SPO?

•  Where to find the time to evaluate new issuances?

⇒  Need for a decision making tool

⇒  Need for comparable data

⇒  Need to outsource the evaluation work

rating methodologyA distinct rating methodology based on three pillars

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A – Issuer’s Evaluation (25%*)

•  Issuer’s oekom score vs. oekom “Prime” status•  Severe controversies related to the bond

B – Alignment with Green Bond Principles (25%*)

•  Alignment with the 4 transparency principles•  External Assurance (scope and quality)

C – Sustainability Quality of Bond (50%*)

•  For each category: Sustainability benefits, Sustainability criteria, Possible controversies

rating results

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Status: Approved/Not approved

Bond rating: one overall score

Rating scale a+ to d-

Analyst’s opinion

List of use of proceeds categories

Scores of 3 rating parts

Distribution of all bond ratings

Strengths and weaknesses of bond

sustainability bond universe

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oekom aims to cover all important issuances in time

•  Currently about 280 outstanding bonds in universe

•  The aim is to cover a universe as large as possible

•  Coverage increase following clients’ demands

•  Primary and secondary market coverage possible

•  Among best scores currently : > Deutsche Kreditbank (a)> TenneT (a-)> ABN AMRO (a-)> Société Générale (a-)

oekom research AG

Dr. Julia HaakeDirector of Paris Office & Green Bond Coordinator166 Rue Saint DenisF – 75002 ParisPhone: + 33 1 73 71 61 76

Mobile: + 33 7 77 32 45 31E-mail :haake@oekom-research.com

Web : www.oekom-research.com

contact

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