It is already becoming increasingly well known that not all ESG rating agencies are the same and that the ratings they provide can be challenging to understand and wildly divergent (predominantly because they scrape publicly available data and code responses in a binary manner). Whilst this state of affairs is problematic for the general market, it is grossly unfit for purpose when it comes to Green and Social Bonds – given the very specific claims made about the purpose of these Bonds. Consequently, ICMA has produced principles that define Green, Social and Sustainable (i.e. Green+Social) Bonds, ‘information templates’ for issuers to complete in issuing such Bonds and the concept of Second Party Opinions.
Any issuer wishing to bring Green, Social or Sustainable Bonds to market (within the EU) must now comply with ICMA principles and they must obtain (and repeat annually) a Second Party Opinion.
Second Party Opinions can only be obtained from an ICMA approved list of ESG/specialist ratings agencies – so-called ‘External Reviewers’ (https://www.icmagroup.org/sustainable-finance/external-reviews/). These Second Party Opinion providers must, in turn, assess companies/projects/bonds using bespoke assessment tools developed and provided by ICMA (https://www.icmagroup.org/sustainable-finance/green-social-and-sustainability-bonds-database/#Templatesforissuers).
ICMA stands for The International Capital Market Association (https://www.icmagroup.org/). Look under the ‘Sustainable Finance’ tag for relevant documentation. The ICMA should not be confused with International City/County Management Association
The purpose of all this ICMA activity in this area is, of course, 1) to bring consistency to the issuance of Green, Social and Sustainable Bonds, 2) to give investors confidence in the integrity of such Bonds and 3) to promote the issuance and investment in such bonds.
It’s important, therefore, to ask: to what extent do the measures introduced by ICMA achieve their objectives?
The answer is a qualified: in part.
Part of the difficulty in coming to a definitive assessment of the ICMA measures is that it is rather too soon to tell. The introduction of Second Party Opinions (and their compulsory nature) is a relatively new measure and this is a fast moving field – so look out for new developments.
Presently, however, there are a number of weaknesses to the Second Party Opinion process that require airing and, therefore, caution in the way in which they are used. Not in any order of priority or importance or significance, these issues, as far as we see them, are:
Overall, therefore, there is still a long way to go before the ICMA route is the preferred route to market for many issuers. Indeed, one has to ask: is the ICMA way the best way for both issuers and investors? One (of the many) reasons why we put so much emphasis on the G in ESG is that it embodies transparency and integrity in issuer and investor. This is, in our view, an essential component of modern market behaviour.