Consulting firm EY launches Chinese green bonds ratings system as market grows

Giant Bank of China issue is so far the only issue assessed under the system

Consulting and professional services firm EY (Ernst & Young) has launched a green ratings system for Chinese green bonds as the country takes the lead in the ‘climate-aligned’ bond market.

And it comes as the G20 has for the first time included ‘green finance’ as one of its major policy themes ahead of the G20 Leaders Summit in China next month.

The financial services giant has developed the ‘EY Green Evaluation System’, which RI understands is applicable only to labelled green bonds out of China. So far, the only bond to be assessed under the programme is Bank of China’s $3.1bn transaction last month – the biggest to be issued in the international market so far.

State-owned Bank of China described the ratings system as assessing “the effectiveness of its organisational management in relation to the green bond issuance and the social and environmental performance of the nominated projects” to which the bond “will potentially be allocated”.

Bank of China was awarded a ‘dark green’ rating by EY – the highest on the three-tier scale. The tiers are delineated by a bond’s aggregated scores: 60-74 points is a ‘light green’ rating – also known as GB-A; 75-89 gives a bond a ‘green’ rating (GB-AA); and 90-100 makes a transaction ‘dark green’ (GB-AAA).

According to EY’s methodology, “the social and environmental performance of a green bond is generally evaluated against management, social and environmental criteria, selected specially for each project category. All criteria are individually weighted, evaluated and aggregated to yield an overall score”.There are two segments in the scoring system – Part I, which looks at “organisational management” and Part II, which evaluates the projects.

A bond must secure at least 60% in each segment to be given a green rating.

The Bank of China bond, for example, was scored on ‘information disclosure & reporting’, ‘management of proceeds’, ‘project evaluation & selection’ and ‘use of proceeds’ in Part I, scoring 90 or more in each section. For Part II, it was assessed on its ‘nominated project categories’, which comprise wind, solar, urban rail and wastewater treatment, scoring around 80 in each sector.

No further details are given as to the rationale behind the score, or whether third-party environmental research companies are used to help make the assessment. RI was unable to secure comment from EY about the ratings system.

Norwegian climate analysis firm Cicero launched a three-tier green ratings system last year, but does not have an established presence in Asia. So far, green bonds out of China and India have tended to have independent reviews from EY, KMPG and Deloitte rather than environmental, social and governance (ESG) analysis houses that are prevalent in Europe and the US.

The Climate Bonds Initiative advocacy group says China is the largest country of issuance in the “climate-aligned bond universe” – with unlabelled issuance dominated by China Railway Corporation (largest issuer with $194bn).

“China is also seen as a leader in the labelled green bond market and is the largest country of issuance in 2016 year-to-date,” the group said.