As ESG interest grows, Moody's retires green bond assessments, transitions to affiliates for designations

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As the environmental, social and governance market grows within the municipal market, Moody’s Investors Service this week withdrew its Green Bond Assessment product for various corporate and muni bonds after pivoting to using its affiliate Vigeo Eiris to designate sustainable/ESG investments.

This move follows the recently announced formation of the Moody’s ESG Solutions Group and last year’s expansion of Moody’s ESG capabilities with investments in V.E. and Four Twenty Seven, a "leader" in climate risk analysis, the agency said in a release.

California’s East Bay Regional Park District is among U.S. municipal issuers affected by Moody’s withdrawal of green bond assessments.

“The sustainable bond market has been on a remarkable growth trajectory and is expected to play a central role in financing the recovery from COVID-19, achieving the Sustainable Development Goals, and accelerating action on the energy transition,” said Andrea Blackman, Moody’s Global Head of ESG Solutions, in a release. “V.E.’s leading second-party opinion service supports the integrity of this growing market by providing independent, transparent, and standards-based expert analysis of sustainability credentials.”

Vigeo Eiris, a global provider of ESG research, data and assessments, rebranded to become V.E, an affiliate of Moody’s.

“The rebrand marks an important milestone in the transformational journey that V.E embarked upon when Moody’s Corporation acquired a majority stake in April 2019,” the firm said. “V.E will operate as a key component of Moody’s newly formed ESG Solutions Group.”

The change mostly affects corporate bonds but munis are peppered into a list of those Moody’s withdrew its own GBAs from. It was unclear whether the ESG Solutions Group covers the municipal market.

Moody’s could not respond to a request for comment by deadline on how these changes may affect the municipal issuers or whether issuers had paid for the initial Moody’s GBA designation or whether the new V.E. assessment would simply replace the GBA.

The list of municipal issuers for whom Moody’s “retired” its own GBA are: American Municipal Power, Inc.; the District of Columbia Water & Sewer Authority; the East Bay Regional Park District, California; Ligonier Valley School District, Pennsylvania; the Metropolitan Government of Nashville & Davidson County Water & Sewer Enterprise, Tennessee; and the Upper Mohawk Valley Regional Water Finance Authority, New York.

Meanwhile, other rating agencies, including S&P Global Ratings, Fitch Ratings and Kroll Bond Rating Agency, factor ESG into their methodologies in various ways and said they recognize that ESG — and social impact specifically — is of growing importance in the municipal investing world.

And others in the municipal industry are making their footprint in ESG and social visible. Market participants including rating agencies are focusing on ESG, climate change and green bonds, from the largest asset managers to third-party verifiers to issuers themselves. COVID-19 has put a cloud over much of 2020, but investors and issuers say that it potentially makes ESG and climate change even more important going forward.

More large financial institutions are joining the chorus that ESG is becoming an integral part of investor intrigue across markets. Morgan Stanley CEO James Gorman spoke at the Securities Industry and Financial Markets Annual Meeting, saying that ESG is not a fad, is not going away and may be one of the most important factors in investment decision-making going forward.

Michael Ferguson, Sustainable Finance Americas Team Leader at S&P Global Ratings, said the agency has been working on two tracks for the past year and half or so, looking at ESG impacts on credit quality and specific credit ratings.

The first is providing disclosures on the ratings impacts of ESG on companies or public finance entities relative to their peers, with the goal of “making a connection between ESG and credit ratings more transparent because investors are asking for it,” he said.

The second is a new product called the ESG evaluation that it is also based on sustainability using a qualitative analysis that produces a report to support a score from 1-100. The score isn’t a credit rating but is similarly a relative assessment of ESG factors across sectors and regions. Ferguson said it is a time-consuming and qualitative process that relies on both environmental, social, and governance data points and meeting with the company.

While S&P currently focuses on corporates and financial institutions, the agency also believes the public finance sector is garnering more significant ESG focus as they engage with a broader suite of stakeholders.

Social bonds have piqued S&P’s interest, as well, from clients wanting that information as the space has grown in recent months and years, as well as internally, S&P analysts have become far more interested in dissecting how “social” investments affect the markets.

“The sustainable/social impact finance market for awhile was sort of lumped into the ‘green’ market but that is changing. Now it is a much larger focal point for us and for investors around the globe,” Ferguson said, adding that S&P is actively monitoring the movements in various sectors.

Marcy Block, senior director in Sustainable Finance, ESG Analytics for Public Finance & Infrastructure at Fitch Ratings, said Fitch rolled out ESG relevance scores in May of 2019 for municipal and infrastructure credits.

In September, Block moved to the Sustainable Finance Group at Fitch to be a liaison between Sustainable Finance and U.S. Public Finance, International Public Finance and Global Infrastructure.

Fitch’s ESG relevance scores look for an overlap of credit risk and ESG risk, identifying them on a scale of one to five. One is ESG risk is irrelevant to the sector and to the issuer, while five would indicate that ESG risks are a key rating driver, generally with a negative impact on a rating. Block said as of now, positive ESG relevance scores are only found in a few sectors at Fitch.

Block said in terms of the impact itself, “if you look at the public finance and infrastructure portfolio as a whole, in about 6% of ratings we note there is a moderate to high impact on the ratings from ESG factors. In total, the scores apply to about 2,600 public finance and global infrastructure issuers.

“In terms of these scores, we divide them between the E and S and G and each have different factors, so it ends up being more than 37,000 scores for these issuers or transactions” in all areas they evaluate, she said.

Kroll Bond Rating Agency also focuses closely on “all relevant credit factors” in its ratings, including credit-relevant ESG factors, however the agency does not provide separate ESG scores outside of their ratings.

“We do not believe that stand-alone ESG scores help fixed income investors to understand credit risk. In fact we do not believe these can be correlated to anything other than the subjective methodology from which they are derived," said Kate Kennedy, managing director of business development at Kroll. "Instead we analyze E, S, and G credit-related risks and strengths along with other credit relevant factors into all of our ratings”

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