MSCI has developed a solution set to help corporates to effectively communicate their transition plans to investors and the broader ESG market. Beth Byington, Meghna Mehta and Jakub Malich explain
With over 40 years of experience measuring and modelling the ESG performance of companies, MSCI ESG Research works with thousands of companies to identify their ESG-related opportunities and risks.
This has become more urgent in recent years as companies have been under increasing pressure to improve their performance on sustainability issues and communicate how they are preparing for the low-carbon transition.
One of the solutions developed to help corporates to communicate their transition plans to investors and the broader ESG market is MSCI's Second-Party Opinions (SPOs) offering.
Launched in 2022, for both green bonds and loans, and social bonds and loans, SPOs are one part of a growing suite of sustainable corporate financing solutions at MSCI that are designed to help investors seeking to ascertain whether a financing framework or transaction aligns with globally accepted standards from the International Capital Market Association (ICMA), the Loan Market Association (LMA) and MSCI ESG Research methodology1.
"Our SPO offering builds on our long-standing expertise on the market as well as our deep knowledge of the green bond space, given our leadership position as a provider of Green Bond Indexes," says Beth Byington, global head of corporate ESG & climate solutions at MSCI.
These offerings may be utilised for sustainable debt frameworks, issuances, and/or annual reviews. Based on a commitment to transparency, MSCI has made the full documents for its Green, Social, and Sustainability methodologies available on its website.
MSCI's SPOs are based on relevant ICMA/LMA Principles for bonds and loans, and with MSCI ESG Research methodologies for green, social and sustainability bonds and loans, which aims to "decrease risks of greenwashing and increases investor confidence in the projects funded by the bonds or loans," says Meghna Mehta, vice president of ESG research at MSCI.
MSCI methodologies also go beyond the guiding market principles and have "more stringent and defined use of proceeds criteria," she adds.
"MSCI methodologies have clear inclusion and exclusion criteria, with stringent requirements for technologies with negative externalities like large hydropower, and biomass-based power generation, among others.
"This methodology has informed the award-winning Bloomberg MSCI Green Bond Index, and it is subject to regular consultations and updates with the aim to keep abreast with changing market trends and regulations."
MSCI ESG Research provides SPOs on whether a bond/framework is aligned to:
- The MSCI Green Bond and Green Loan Assessment Methodology, which aligns with and builds on the Green Bond Principles, administered by ICMA and the Green Loan Principles, administered by LMA.
- The MSCI Social Bond and Social Loan Assessment Methodology, which aligns with and build on the Social Bond Principles, administered by ICMA and the Social Loan Principles, administered by LMA.
- The MSCI Sustainability Bond and Sustainability Loan Assessment Methodology, which aligns with and builds on the Sustainability Bond Guidelines, administered by ICMA.
Adding to the ESG solution suite
In addition to the SPO offering, MSCI now offers green bond data, total portfolio foot-printing financed emission estimates, climate metrics relevant to fixed income investors – such as Implied Temperature Rise (ITR) and Climate Value at Risk (CVaR) – indices and research coverage.
"Our Bloomberg MSCI Green Bond Index continues to be a flagship service, but we also offer a range of indices alongside Bloomberg, including Paris Aligned and Climate Transition indices, and proprietorial ESG and climate indices," says Byington.
Jakub Malich, ESG research analyst at MSCI, adds MSCI's ESG and climate indexes act as the "ultimate litmus test" of the quality of MSCI's ESG and climate solutions.
"Building on our extensive body of research, where we explore how ESG and climate factors relate to financial performance, MSCI's ESG and climate index performance ultimately tests the relevance and quality of our underlying company- and security-level ESG and climate assessment methods," he adds.
The Bloomberg MSCI Green Bond Index and the MSCI SPO solution both use the MSCI Green Bond and Green Loan Assessment Methodology to assess the eligibility of a bond.
This is to maintain consistency, outlines Mehta: "If a bond meets the MSCI Green Bond and Green Loan Assessment Methodology, it will get a positive SPO and is eligible for the Bloomberg MSCI Green Bond Index as well if it meets the fixed income criteria. Any index or product we build on social bonds or loans, or sustainability bonds or loans will also use the same methodology that is used to provide SPOs.
Hence, there is a consistency in the methodology used across index and SPOs to prevent 'greenwashing' and 'social washing'," she says.
A unique vantage point
Being a provider of indices also gives MSCI a unique insight into wider green bond market sector trends. For example, analysing the types of companies listed within the Bloomberg MSCI Green Bond Index over the year, MSCI has observed increasing sectoral diversity among issuers as the green bond market has grown; going from being dominated by supranational, financial institutions and utilities in 2015/2016, to a steady increase in sovereign, treasury, industrial and real estate issuers (see Figure 1).
Figure 1: Bloomberg MSCI Global Green Bond Index – Market value by sector
There is increasing geographic diversity as well. Issuers from 15 countries comprised the Index in 2015, which has increased to over 40 countries (as of 30 September 2022), as sovereigns are increasingly using green use-of-proceeds bonds to meet their climate targets, infrastructure needs, biodiversity conservation, and to provide subsidies to their citizens for green projects (see Figure 2).
Figure 2: Bloomberg MSCI Global Green Bond Index – Market value by Country
Issuers from hard-to-abate sectors, such as steel, aluminium, fertilizers and industrial firms, are also entering the green-labelled market as they seek to fund projects that reduce chemical use, waste production, fossil fuel dependence and greenhouse gas emissions. The data also tells a story about which sectors might be lagging or issuing more than "expected", says Malich (see Figure 3).
Figure 3: Labelled bond market breakdown by corporate sector
"While virtually all sectors now issue labelled bonds, there are sectors that issue more than expected (versus their presence in the wider corporate bond market) and those that issue less. For example, utilities and real estate seem to be more active in the labelled bond market, while healthcare and information technology companies lag their overall issuance. Though this could be partly explained by different decarbonisation needs among sectors, the energy sector also issues less labelled bonds compared with its broad market issuance – a huge discrepancy with utilities – as both are among the most carbon-intensive sectors," he says.
Resilience of labelled bonds and investor demand
While bond issuance fell in 2022, as interest rate rises were seen across markets, labelled bond issuance held up well compared to the wider market, showing the resiliency of this sub-asset class, argues Byington.
"In 2023 we expect further widening and deepening of labelled bond issuance. We expect the market successfully to negotiate rising regulatory requirements and the provision of new issue and security level information – ESG and climate information being provided at the bond or loan level, as well as at the issuer company level.
"In the second half of 2023, a rise in 'real world' green CapEx such as new investments in renewable energy, energy efficiency, green buildings, battery storage, plus possibly 'green steel' and 'green cement', spurred on by the US Inflation Reduction Act and Europe's response to this may translate into rising labelled bond issuance," she says.
ESG investors too are increasingly looking for ESG investment solutions across all their investments as the climate transition is expected to drive investment flows over the next decade.
"More and more asset managers and retail investors are looking for ways to hold fixed income securities that either benefit from ESG screens and analysis or that have an impact aspect, such as one finds in the Bloomberg MSCI Green Bond Index or some of the Paris-aligned benchmark indices," says Byington.
"Many investors are now looking not just at the quality of the green bond's use of proceeds but also at the quality of the issuing entity. MSCI's ESG scores on issuers are relevant here, as are MSCI's climate related metrics - ITR and CVaR.
"Investors are also looking for reassurance that green bonds they invest in are SFDR compliant. This is something that is analysed in order for a green bond to enter the Bloomberg MSCI Green Bond Index," she adds.
MSCI provides ESG and climate inputs into a range of indices that highlight corporate ESG leadership and can help inform investors' ESG investment decisions and strategies.
With the Bloomberg MSCI Green Bond Index, MSCI ESG Research assesses each bond, not only at the point of issuance but also on an annual basis, up until maturity or full allocation – whichever is earlier.
The annual green bond reporting for each bond on the Index is scrutinised and bonds that are found to have breached the eligibility criteria (for example, by investing in ineligible projects like coal-based power generation) are taken off the Index.
"This annual review of green bonds use-of-proceeds has helped build investor confidence in the bonds on the Index. It has also driven issuers to be more transparent about planned use-of-proceeds allocation at issuance to prevent confusion in later years," says Mehta.
In addition, corporate net-zero commitments will be an important driver of ESG leadership momentum.
"It is important both that green bond investors are open to supporting new methodologies but, equally, that the market is able successfully to analyse and understand the use of proceeds for such issuances," says Byington.
Increasingly, green bond market participants seem to be looking for metrics to show the impact of their investments. At the security level, MSCI's Total Portfolio Footprinting (TPF) solution offers a way to estimate 'financed emissions' at the security level. The TPF method allows investors to compare financed emission estimates between green bonds and between green and non-green bonds.
"MSCI has created a number of Paris Aligned Benchmarks and Climate Transition Benchmarks, in order to allow asset managers and asset owners to follow this route," says Byington.
Malich adds: "If the market continues to grow in diversity, as it has in the last few years, we might be nearing a point where investors can build bond portfolios exclusively from labelled bonds or other instruments with desired sustainability-related characteristics (e.g., low financed emissions), without having to make compromises in allocations among sectors, maturities, credit quality, yield requirements, etc. This wasn't the case just a few years ago when most of the issuance came from quasi-sovereign agencies and there were no solutions to quantify the sustainability impact of investments, such as the TPF tool."
Looking to 2023 and beyond, Byington says MSCI also intends to launch an SPO solution for sustainability bonds and loans in the first quarter of 2023 and, over time, "we expect to launch SPO offerings for other types of sustainable debt as well."
Watch this space.
For more information, see: https://www.msci.com/our-clients/ corporates/second-party-opinions
1. MSCI's SPOs are not designed to verify or certify the use of proceeds for a specific transaction