External assessment provider of the year: Cicero Shades of Green

Second-party opinion (SPO) provider Cicero Shades of Green was again voted external assessment provider of the year for its ratings methodology.

The climate risk information that many investors are asking for is not always easy to find, says Cicero. There are hundreds of different providers of ratings and rankings with different scopes and methodologies.

Cicero Shades of Green tries to distinguish itself in this field by focusing on climate change and using three shades of green to indicate relative climate risk:

  1. 'Dark green' solutions are judged to be in line with the Paris Agreement on climate change and incorporate resiliency planning for climate impacts
  2. 'Medium green' initiatives are well on their way towards low carbon
  3. 'Light green' solutions are significant early contributions in transition that do not lock in fossil-based infrastructure.

Harald Francke Lund, CEO at Cicero Shades of Green, says the methodology should help financial actors in a rapidly evolving sector.

This year the company noticed a more diverse set of corporates coming to the market, for example from those involved in recycling and the circular economy, he says.

"We see increasing demand for EU Taxonomy alignment as issuers prepare for reporting requirements.

"There is also more interest in sustainability-linked bonds (SLBs) as the market matures, including on expectations for the ambition level of these instruments. With our close links to climate research, we are in a good position to provide high-quality second party opinions on complex SLB frameworks."

The latest climate science feeds into the company's methodology, which looks at both emissions reduction and climate resiliency plans.

The methodology aims to improve the understanding that all sectors need to transition to low-carbon to avoid the most damaging climate impacts. It encourages early steps in the transition by rewarding the most ambitious actions.

It also incorporates a governance assessment in its SPOs to consider the ability of an issuer to manage potential risks over time.

Examples of the methodology at work in 2021:

  • US mortgage broker Freddie Mac Multifamily received a light green rating for its green bond framework. Ambition levels "fall short" of being aligned with the Paris Agreement target, Cicero says.
  • Indonesia received a medium green rating for its sovereign framework encompassing a wide range of both green and blue projects, including resilience to climate change for highly vulnerable areas and sectors.
  • Denmark was awarded a dark green rating for its sovereign framework focusing on subsidies and tax expenditures to promote renewable energy, railway systems, and low carbon vehicles.