Overview And Scope

This article describes S&P Global Ratings' analytical approach for providing Second Party Opinions (SPOs) on sustainable financings where proceeds are allocated to specific environmental or social projects Use of Proceeds (UoP) as well as where financial characteristics are tied to predefined sustainability objectives (sustainability-linked). It also explains how we determine an S&P Global Ratings Shade of Green (Shade) for environmental projects and investments in UoP financings. In addition, we provide context on how the sustainable financing addresses what we consider to be the issuer's most material sustainability factors. For UoP financing, this context focuses on our view of the issuer's management of additional sustainability factors that are relevant to the sustainable financing. For sustainability-linked financing, this context focuses on whether the issuer's investment plans are consistent with a sustainable future, as defined below. For sustainability-linked SPOs, we also comment on the financial characteristics of the financing where relevant and when sufficient information exists.

This analytical approach is applicable to a wide variety of sustainable financings, including those issued by corporate entities, project and structured finance vehicles, financial institutions, multilateral development banks, and sovereign, regional, and local governments.

We do not limit our opinions to bonds for new projects that issuers label as green, social, sustainable, or sustainability-linked. We can provide SPOs on any refinancing, bonds, bank loans, private placements, project finance debt, hybrids, portfolios, fund holdings, asset-backed securities, and other financial transactions.

SPOs are not credit ratings, do not assess credit quality, and do not factor into our credit ratings.

Our SPOs are a point-in-time analysis of a sustainable financing (meaning finance instrument, program, transaction, or framework) and the characteristics of the issuer that we consider relevant to the financing.

Sustainable Future

We associate a sustainable future with one that has a low-carbon economy and is resilient to the physical impacts of climate change, often referred to as a low-carbon climate resilient future (LCCR). We also consider how the transition to a sustainable future is managed. The goals of the Paris Agreement underpin our definition of a sustainable future, which will require a deep and large-scale transition of economic activity. Some activities will be essential in this transition, while others will be phased out. There are many different pathways to achieving the goals of the Paris Agreement, but a common element is that all sectors reach close to zero emissions in the second half of this century. The agreement also calls for these transitions to be delivered on the basis of equity and in the context of sustainable development and with efforts to eradicate poverty, and to develop resilience to the physical impact of climate change.

Analytical Outputs

An alignment assessment:   Our opinion of whether the financing's documentation aligns with certain third-party published sustainable finance principles and guidelines identified by the issuer.

Additional opinions for UoP financing:   We assign a shade of green to environmental projects financed by the framework or transaction. A shade of green is our qualitative opinion of how consistent an economic activity is with a sustainable future. The shade of green however does not reflect social risks or benefits related to the activity.

Additional opinions for sustainability-linked financing:   In addition to the alignment assessments against third-party principles, we also provide additional opinions on the relevance of key performance indicators (KPIs) and ambition of sustainability performance targets (SPTs).

Issuer sustainability context: We provide our assessment of the relevant context about the issuer that are tailored to the specifics of the sustainable financing, whether intended to finance specific projects or used for general corporate purposes.

Other optional assessments:   Upon request from the issuer, we provide an assessment of the financing's alignment with the EU Taxonomy. We may also comment on consistency with the Climate Transition Finance Handbook (CTFH) , Sustainable Development Goals (SDGs), ICMA's practitioner's guide for bonds to finance the sustainable blue economy ("blue bonds"), or other external frameworks.

Our analytical approach is relevant for pre- and post-closing of a financing and pre- or post-implementation of a project. Our SPO on a framework does not apply to individual transactions under that framework. We would need to independently review the transaction documentation to assess the alignment of any given transaction.

Our SPO reports include a summary of our key analytical conclusions, presented as strengths, weaknesses, and areas to watch. With this summary, we highlight our views on the strengths and weaknesses of the financing relative to its stated sustainability objectives and identify potential risks related to the financing. This summary presents findings from other areas of our analysis and is not a separate analytical exercise.

• We consider a strength to be a feature of the financing that stands out as positive compared with our view of standard practices. For example, we could consider value-chain policies that address material sustainability factors and support the implementation of the financing, or the progress towards an SPT to be a strength for an issuer. We may also see the inclusion of components that far exceed the minimum requirements of the Principles as a strength.
• We consider a weakness to be a significant limitation, identified in our analysis, that would likely prevent the financing from achieving the full benefits of its sustainability objectives. For example, we would consider the failure to exclude diesel-powered back-up generators from the financing of newly constructed buildings, or the inclusion of a call option before a financing's target date, to be a weakness.
• We consider an area to watch to be a potential problem or risk related to the financing. In general, areas to watch are risks that the issuer plans to mitigate, or residual risks that remain after mitigating actions the issuer has taken. For example, if an issuer is exposed to material physical climate risk that necessitates active mitigation or is unclear as to what circumstances may trigger its recalculation policy, we could consider this an area to watch.

We consider weaknesses to be more serious than areas to watch.

The Alignment Assessment

A. Determining the alignment of sustainable financings.

We provide an opinion on whether the documentation of the financing aligns with certain third-party published sustainable finance principles and guidelines (Principles) requested by the issuer. There are several Principles on which we can offer an alignment opinion, and we adapt our analysis to the specific Principles we are assessing the financing against. Principles that are in scope for alignment opinions on the publication date of this article are:

• International Capital Market Association's (ICMA's) Green Bond Principles (GBPs);
• ICMA's Social Bond Principles (SBPs);
• ICMA's Sustainability Bond Guidelines (SBGs);
• The Loan Market Association (LMA)'s, Asia-Pacific Loan Market Association (APLMA)'s, and Loan Syndications and Trading Association (LSTA)'s Green Loan Principles (GLPs);
• LMA/APLMA/LSTA's Social Loan Principles (SLPs); and
• ASEAN Capital Markets Forum's, Green Bond Standards (AGBS).
• ICMA's Sustainability-Linked Bond Principles
• LMA/LSTA/APLMA's Sustainability-Linked Loan Principles

Our alignment analysis typically has two outcomes: aligned, or not aligned.   An opinion of aligned means that, in our view, the financing meets the minimum requirements for alignment with the relevant Principles. In rare cases, we determine the financing to be conceptually aligned, which means we believe it meets the minimum requirements for alignment with the relevant Principles, but that characteristics of the financing do not technically match the scope of the Principles. In those cases, we apply the Principles as closely as possible, after making any necessary changes to our analysis. For example, this could be relevant for bank sustainability lending frameworks or other sustainability frameworks that are not directly tied to a financial instrument.

Our alignment analysis is organized into standardized analytical components that match the common areas of the various Principles.   The analytical components we use to determine our alignment opinion for UoP SPOs are:

• Use of proceeds;
• Process for project evaluation and selection;
• Management of proceeds; and
• Reporting.

The analytical components we use to determine our alignment opinion for sustainability-linked SPOs are:

• Relevance of KPIs;
• Ambition of SPTs;
• Instrument characteristics;
• Reporting; and
• Post-issuance review.

For each component relevant to our analysis of the financing, we assess whether the financing meets the minimum requirements for alignment with the corresponding component of the relevant Principles. All relevant analytical components must be aligned to achieve an overall outcome of aligned.

When we assess the financing's alignment with ICMA's SBGs, we consider alignment with both the GBPs and the SBPs for all projects, as required by the Guidelines.   For example, for UoP assessments, we take the view that, for the financing to be aligned with the SBGs, all projects that have green and social co-benefits should meet the eligibility criteria of both the GBPs and the SBPs.

Upon request from the issuer, we provide an assessment of the financing's alignment with the EU Taxonomy. We may also comment on consistency with CTFH, SDGs, ICMA's practitioner's guide for bonds to finance the sustainable blue economy ("blue bonds"), or other external frameworks.

B. Use-of-proceeds analysis

Our use-of-proceeds analysis considers whether commitments made in the financing's documentation are aligned with the relevant use-of-proceeds Principles. We focus on how clearly the issuer sets out its commitment to using the funds raised for sustainability projects. For us to consider the use-of-proceeds component aligned for a green financing, we require all project categories in the financing to be designated one of the three green Shades, as defined in the "Analytical Approach: Shades of Green Assessments". For us to consider the use of proceeds component to be aligned for social financings, we require that all social projects in the financing directly aim to address or mitigate a specific social issue or provide clear social benefits to the target population.

Principles and sustainability taxonomies may have different requirements for what qualifies as an eligible green, environmental, or social project, and therefore also for use-of-proceeds eligibility. If a Principle requires adherence to a specific taxonomy, we consider that in our use-of-proceeds analysis.

C. Process for project evaluation and selection

Our analysis focuses on how clearly, in financing documentation, the issuer outlines a project evaluation and selection process that ensures any projects it chooses align with the environmental or social requirements of the relevant Principles.

Typically, the Principles require the issuer to explain its project selection process, the eligibility criteria it applies to select those projects--including exclusion criteria, if applicable--and the overall sustainability objectives that underpin the selection process.

ICMA's GBPs and SBPs, and the GLPs and SLPs, require that the issuer clearly communicates complementary information on processes by which it identifies and manages perceived social and environmental risks associated with the relevant projects.

D. Management of proceeds

Our management of proceeds analysis considers whether the financing's documentation is aligned with the relevant Principles on how the proceeds will be managed over time. We focus on how clear the issuer's commitment is to ensure that the funds raised will remain dedicated to eligible sustainability projects throughout the life of the financing.

For example, the ICMA Principles require an issuer to monitor the net proceeds of all outstanding green and social bond transactions, which includes appropriately tracking the proceeds and adjusting the balance of net proceeds to match allocations to eligible green and social projects. ICMA's GBP and SBP also require an issuer to disclose to investors the types of temporary placement they intend to use for unallocated proceeds.

E. Reporting

Our analysis considers whether the financing's documentation is aligned with the relevant Principles on reporting.

The Principles in scope for this section differ in their requirements for reporting. We therefore tailor our analysis to the Principles we are assessing alignment with. For example, ICMA's Principles stipulate that an issuer should report on the use of proceeds annually until full allocation. They also state that information presented must include a list of the projects that receive financing, a description of each project (including the amount allocated to each project), and their expected environmental and social impacts. The ASEAN Green Bond Standards, meanwhile, specify that an issuer must report at least annually, but outline specific content to include in reporting as recommendations, rather than requirements.

F. Relevance of KPIs

Our KPI relevance analysis considers whether the KPIs identified in the financing's documentation are aligned with the KPI component of the Principles. We focus on the level of relevance the KPI has to the issuer and how robust the definition, scope and calculation of the KPI are. To qualify as aligned under our analysis, each KPI must be assessed as at least Relevant in our Relevance assessment, defined below in the section "Determining Relevance."

G. Ambition of SPTs

We assess the extent to which an SPT represents progress or significant progress beyond business-as-usual trajectory. To qualify as aligned under our analysis, each SPT must be assessed as at least Ambitious in our Ambition assessment, defined below in the section "Determining Ambition."

H. Instrument characteristics

Our opinion describes whether the documentation is aligned, or not aligned, with the relevant Principles based on disclosure of the instrument's characteristics. The alignment opinion focuses on the disclosure of the type of financial and/or structural effects involving trigger event(s), and the potential variation of the instrument's financial and/or structural characteristics. We expect the information disclosed for a transaction to be more specific than the information in framework documentation.

In addition, when sufficient information about the financial characteristics of a sustainability-linked financing exists, we provide our opinion on its key features. This may include our opinion on how meaningful any penalty associated with an instrument is, relative to market practices, as well as any strengths, weaknesses, or areas to watch as they relate to the structure of the instrument.

We focus on the characteristics which incentivize the issuer to meet its sustainability performance targets, such as the magnitude of a coupon step-up or the timing of a call option for a sustainability-linked bond.

I. Post-issuance review

When the relevant Principles require post-issuance review, this opinion describes whether the documentation is aligned, or not aligned, with those requirements. The alignment opinion focuses on the issuer's post-issuance review commitments including the type of post issuance third-party verification, periodicity, and how this will be made available to key stakeholders. Please note, our SPO is not itself a post-issuance review.

Determining A Shade for UoP Project Categories

The Shades of Green represent our qualitative opinion of how consistent the activities funded by the financing are with a sustainable future.   We determine Shades based on our analysis of climate and non-climate environmental factors. Our analysis does not reflect an activity's social risks or benefits. Therefore, we do not determine a Shade for the financing's social project categories.

To determine a Shade for a project category, we first consider the underlying activities (often called projects) within that project category.   We do so by applying our "Analytical Approach: Shades Of Green Assessments." If all activities within a project category are the same Shade, or the project category is focused on activities of a particular Shade, we designate that Shade to the project category.

If a project category includes activities with multiple Shades, we may determine a shading interval across two adjacent Shades.   For example, if a project category includes Medium green and Dark green activities, we may determine a project category shading interval of Medium green to Dark green. We use the shading interval to show variation within a project category. A shading interval cannot extend across more than two adjacent Shades. There cannot be, for example, a shading interval of Dark green to Light green. If a project category includes activities of all Shades of green, we may designate either a single Shade or an interval to the project category, depending on its characteristics.

We do not assign a Shade to social project categories.   However, if activities under social project categories have clear environmental risks, we assess and comment on these risks and the actions taken by the issuer to mitigate them. Examples of risks associated with social projects that we may highlight are emissions lock-in, deforestation and biodiversity loss, and exposure to physical climate risks.

To determine an overall Shade for a financing, we take an average of the project categories the financing funds, weighted by the expected proportion of financing allocated to each project category over the three years following issuance.   If there is insufficient information, we take a conservative approach to weighting activity allocations. If the financing includes social project categories, we do not determine an overall Shade for the financing.

Some issuers, such as financial institutions, sovereigns, and local and regional governments, facilitate the activities of other entities rather than carry out the activities themselves. When analyzing such issuers, our analysis focuses on the underlying activities that the issuer is facilitating. For example, a financial institution may issue a residential mortgage-backed security (RMBS) program for which the underlying portfolio comprises pools of loans that finance energy-efficient buildings. To determine a Shade for this program, we would assess the characteristics of the underlying properties, or the minimum requirements they must meet for inclusion in an RMBS pool.

Determining Relevance & Ambition For Sustainability-Linked Financings

Our relevance and ambition assessment represents our opinion of whether an issuer's KPIs and SPTs are consistent with its progress toward a sustainable future.

A. Determining relevance

Our relevance assessment is our view of how closely a KPI is linked to what we consider the issuer's most material sustainability factors. Our analysis considers how effectively the selected KPI reflects performance against a sustainability factor and how material that sustainability factor is to the entity. Our relevance assessment has three possible outcomes, shown below:

When considering how closely a KPI is linked to performance against a material sustainability factor, we assess a variety of characteristics (see table 1). Our analysis considers the definition and scope of the KPI, as well as the issuer's individual characteristics. For example, an oil and gas company could select a decarbonization KPI for its Scope 1 and 2 emissions. This KPI is related to climate transition, which we generally view as one of the most material sustainability factors for the sector. However, because scope 3 emissions represent the bulk of emissions in the sector, the inclusion of comprehensive scope 3 targets is often considered more relevant.

Table 1

The final element of our relevance assessment is to consider whether any of the KPI's characteristics are not adequately captured by the scoring table above. This analysis can cause us to raise or lower our relevance assessment by one notch compared with the outcome indicated by the scoring table. In this analysis, we may compare the KPI with similar KPIs we have previously assessed.

If we conclude that relevance is not aligned, we will not assess ambition of the related SPT.

B. Determining ambition

Our ambition assessment considers whether achieving the SPT represents a significant improvement in the issuer's sustainability performance and is consistent with the transition to a sustainable future.   We consider the trajectory of progress the SPT represents as well as the entity's implementation plan. This is based on our opinion that an aggressive SPT does not reflect ambitious action to change sustainability outcomes in the absence of a comprehensive implementation plan. Similarly, in our analysis a well-constructed strategy is not ambitious if it does not strive to change outcomes at a pace beyond business as usual. Our ambition assessment has three possible outcomes, shown below:

We assess the trajectory of progress on a particular sustainability factor relative to at least one benchmark, including: historical performance, peer benchmarks, industry standards, or scientific pathways. Our assessment considers the evolving regulatory and legal contexts which could alter projected performance to appear ambitious but not necessarily represent activity beyond business as usual. Generally, SPTs aimed strictly at bringing an entity into legal compliance are not considered beyond business as usual unless they aim to do so considerably faster than mandated.

When considering the ambition of an SPT we assess a variety of characteristics (see table 2).

Table 2

The final element of our ambition assessment is to consider whether any of the SPT's characteristics are not adequately captured by the scoring table above. This analysis can cause us to raise or lower our ambition assessment compared to the outcome indicated by the scoring table. In this analysis, we may compare the SPT with similar SPTs we have previously assessed.

Issuer Sustainability Context

We provide issuer sustainability context to identify what we consider to be the issuer's most material sustainability factors, as well as the overlap between sustainability factors we have identified as relevant to the financing and those we consider to be most material for the issuer. We do so by considering the issuer's sector, geography, and operating activities, as well as the scope of the financing.

For UoP financing, we identify the sustainability factors that we consider relevant to the financing and how the issuer manages these factors. We review the issuer's strategy for these sustainability factors by considering related public statements, actions, goals, and policies.

For sustainability-linked financing, we assess the issuer's overall investment plans, as issuers use the proceeds for general corporate purposes. We comment on whether we view the issuer's investment plans as consistent with a sustainable future. When the financing includes at least one environmental target and the issuer's capital expenditure is a leading indicator of its future environmental outcomes, we typically apply a Shade of Green to the issuer's capital expenditure mix by applying our "Analytical Approach: Shades Of Green Assessments". We include this shading in our report at the option of the issuer. If we have limited information on the issuer's capital expenditure, we can assign a Shade that represents the general impact of such activities within the relevant sector. We do not generally allocate a Shade of Green to the capital expenditure of financial corporates, sovereigns, or local governments issuing sustainability-linked financing.

In this part of our analysis, we may consider the context of other entities related to the legal issuer, when relevant.

The EU Taxonomy Assessment

In our EU Taxonomy assessment, we give our opinion on whether an eligible project to be financed aligns with the EU Taxonomy in cases when the economic activity is covered by technical screening criteria that is incorporated into European law via delegated acts. We do so by applying our "Analytical Approach: EU Taxonomy Assessment," published Oct. 31, 2024.

Revisions And Updates

We republished our Analytical Approach on March 6, 2025, to include sustainability-linked SPOs. Previously, we republished this Analytical Approach on Oct. 31, 2024, to remove the content outlining how we conduct our EU Taxonomy assessments. This is because we have moved this content to a stand-alone Analytical Approach document: "Analytical Approach: EU taxonomy Assessment," which was published the same day.

Related Research

• FAQ: Applying Our Integrated Analytical Approach For Second Party Opinions, March 6, 2025
• Analytical Approach: European Green Bond External Reviews, Oct. 31, 2024
• FAQ: Applying Our Analytical Approach For European Green Bond External Reviews, Oct. 31, 2024
• Analytical Approach: EU Taxonomy Assessment, Oct. 31, 2024
• Analytical Approach: Shades Of Green Assessments, July 27, 2023