Overview And Scope

This article describes S&P Global Ratings' analytical approach for providing an external review of a European Green Bond (EuGB), namely pre-issuance, post-issuance, and impact report reviews under Regulation (EU) 2023/2631 of the European Parliament and of the Council (EuGBR).

Throughout this analytical approach, we refer to, or take note of, certain articles or provisions contained in the EuGBR. However, for full and detailed requirements, please refer to the EuGBR.

Our pre-issuance, post-issuance, and impact report reviews include a summary of our key analytical conclusions. These are presented as strengths, weaknesses, and areas to watch. This summary is not a separate analytical exercise but a way of presenting findings from key areas of our analysis in one place.

Strengths:   We consider a strength to be a feature that stands out as positive compared with our view of standard practices. For example, we could consider the annual reporting of environmental impacts of a bond's proceeds a strength because this goes beyond regulatory requirements for allocation reporting.

Weaknesses:   We consider a weakness to be a significant limitation, identified in our analysis, that would likely prevent the bond financing from achieving the full benefits of its sustainability objectives. For example, an issuer's capital expenditure (capex) plan may have encountered significant delays since the EuGB's issuance, creating uncertainty about whether the underlying assets will achieve alignment with the EU Taxonomy before the bond matures.

Areas to watch:  We consider an area to watch to be a potential problem or risk related to the bond financing. For example, if issuance proceeds have been partly allocated and more than 15% went to economic activities with no applicable technical screening criteria, we could consider this an area to watch.

We consider a weakness to be more serious than an area to watch.

Disclaimer requirement

The EuGBR requires reviewers to state "this review represents an independent opinion of the external reviewer and is to be relied upon only to a limited degree." Although we do not provide any assurance regarding the information provided to us, we assess whether the issuer has demonstrated how it meets the requirements of the EuGBR. Our EuGB external reviews are not credit ratings, do not assess credit quality, and do not factor into our credit ratings.

Review date and scope

Our pre-issuance, post-issuance, and impact report external reviews are point-in-time analyses and are not surveilled. In addition, they rely on the accuracy, timeliness, and completeness of the information provided by the issuer. Our pre-issuance review of an EuGB factsheet's alignment with the EuGBR does not automatically apply to all transactions under the factsheet. We would need to independently review the transaction documentation to assess the alignment of any given transaction.

A. Pre-Issuance Review

The analysis and assessments in our pre-issuance review partly overlap with those for our use of proceeds Second Party Opinions (SPOs). In cases where we have already conducted an SPO on the same financing framework, our pre-issuance review will draw from our previous analysis, updating for any changes since the time we prepared our SPO.

Our pre-issuance review generates three analytical outputs.

1. Pre-issuance alignment assessment

According to the EuGBR, before issuing an EuGB, issuers are required to complete a factsheet. Issuers also need to ensure that the factsheet has received a positive opinion from an external reviewer before issuance. A positive opinion indicates that the reviewer believes the factsheet is aligned with the EuGBR.

Our overall alignment analysis has two possible outcomes: aligned or not aligned (see table 1).  

Table 1

Alignment with Articles 4-8

We assess whether the factsheet meets the requirements of the following Articles, as applicable:

• Article 4: Use of the proceeds of European Green Bonds,
• Article 5: Flexibility in the use of the proceeds of European Green Bonds,
• Article 6: Financial assets,
• Article 7: Capex plans, and
• Article 8: Application of the technical screening criteria and grandfathering.

Alignment with Article 4: Use of the proceeds of European Green Bonds.   According to Article 4, before the maturity of an EuGB, the proceeds of such a bond shall be allocated in full--in accordance with the EU Taxonomy's requirements--to certain categories of economic activities. A financed activity must fall into one of the categories listed in Article 4, consistent with a "gradual approach" or a "portfolio approach," to be in alignment with that Article.

Also, for certain government issuers, Article 4 section 3 allows allocation of proceeds to additional economic activities, such as tax relief.

We assess whether the financed activity complies with one of the approved approaches.

To determine an activity's alignment with the EU Taxonomy, we apply our "Analytical Approach: EU Taxonomy Assessment". In our EU Taxonomy assessment, we may consider whether:

• The activity meets the TSC of making a substantial contribution to at least one environmental objective, and doing no significant harm (DNSH) to any of the other environmental objectives;
• The issuer has a capex plan to achieve alignment with the EU Taxonomy within the time frames specified by the EuGBR when the economic activity is not aligned with the TSC; and
• The issuer's procedures are aligned with minimum safeguards.

Alignment with Article 5: Flexibility in the use of the proceeds of European Green Bonds.   Article 5 allows issuers to allocate up to 15% of an EuGB's proceeds to economic activities that do not yet have applicable TSC in effect or to activities "in the context of international support," as defined in Article 5.

For this section of the analysis, we use our "Analytical Approach: Shades Of Green Assessments" to assess whether the activity is making a substantial contribution to at least one of the environmental objectives outlined in the EU Taxonomy and its supplemental regulations, without significantly harming any of the other objectives. If we assess an activity as Light green, Medium green, or Dark green--and the issuer's procedures meet minimum safeguards--we consider it aligned with Article 5 of the EuGBR.

Alignment with Article 6: Financial assets.  To be aligned with Article 6, the proceeds of financial assets must be subsequently allocated to activities aligned with Article 4.

Article 6 also allows the proceeds to be reinvested in other financial assets, provided there are "not more than three subsequent financial assets in succession" before reaching final allocation aligned with Article 4. Proceeds that have passed through more than one financial asset cannot be allocated under the portfolio approach.

To assess alignment with Article 6, we review the issuer's commitments regarding the final allocation of proceeds against the requirements set out in Article 4. If applicable, we also examine the use of multiple financial assets in succession to achieve the final allocation of proceeds.

Alignment with Article 7: Capex plans.  Article 7 applies when an EuGB's proceeds are allocated to capex or operating expenditure (opex) related to economic activities that will meet the EU Taxonomy's requirements. This Article requires issuers to publish a capex plan that outlines how the economic activities financed by the capex and opex will achieve alignment with the EU Taxonomy before the EuGB matures.

For example, an issuer may intend to use its EuGB proceeds to fund capex for switching to low-carbon energy sources in a traditional steel manufacturing plant, an activity that is not currently aligned with the EU Taxonomy. To be aligned with Article 7, the issuer must publish a capex plan that outlines how the steel manufactured will achieve EU Taxonomy alignment before the EuGB's maturity date.

In this section of our analysis, we focus on whether the issuer has published a capex plan that specifies a deadline for EU Taxonomy alignment before the EuGB reaches maturity.

Alignment with the Article 8: Application of the technical screening criteria and grandfathering.   The EU Taxonomy regulation allows for updates to the TSC. Article 8 outlines how issuers must respond to any TSC updates. In our analysis, we focus on whether the factsheet includes a commitment to follow the TSC update's requirements outlined in Article 8. The EuGBR gives issuers seven years, from the date of the TSC amendment, to comply with the updated criteria.

There are, however, different "grandfathering" allowances, depending on which allocation category in Article 4 the activity falls into.

Under the gradual approach and government-specific allocation category, if the TSC are updated, the issuer shall, no later than seven years after the amended criteria takes effect:

• Allocate any unallocated proceeds in accordance with the updated TSC.
• Ensure that proceeds covered by a capex plan, that have not yet met the taxonomy requirements, meet the updated TSC.

Under the portfolio approach, issuers can include assets in their portfolio that align with the TSC applicable, at any point in the seven years before the relevant allocation report.

Issuers must publish an allocation report every 12 months. This means that, if the TSC are updated and some assets in the issuer's portfolio are no longer aligned, the issuer can keep those assets in its portfolio for up to seven years. Beyond the seven-year grandfathering period, those assets cannot be included in the pool of EuGB-financed assets unless they're updated to meet the new TSC requirements.

Alignment with Annex I: Factsheet completion

To be aligned with Annex I of the EuGBR, the contents of an issuer's EuGB factsheet must provide the information set out in Annex I.

We review the factsheet and provide our opinion on whether it includes the required contents according to Annex I--such as, a statement on how the financed economic activities will contribute to the issuer's environmental strategy, the intended allocation of the bond proceeds, and information on reporting.

We may also comment on any additional findings from this section of our analysis. For example, we may consider it a strength that a factsheet includes comprehensive disclosure on how bond proceeds are expected to contribute to the issuer's key performance indicators for environmental impact.

2. Shades of Green analysis

The Shades of Green represent our qualitative opinion of how consistent economic activities that can be funded, according to the factsheet, are with a low-carbon climate resilient 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.

In many cases, economic activities that can be financed according to the factsheet are grouped into project categories. To determine a Shade for a project category, we first consider the underlying economic 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 a shading interval to the project category, depending on its characteristics.

To determine an overall Shade for an EuGB factsheet, we take an average of the project categories that can be funded according to the factsheet, weighted by the expected proportion of financing allocated to each project category over the three years following issuance. If there is insufficient information for us to take an informed view, we take a conservative approach to weighting activity allocations.

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 the eligible project categories of such issuers, we focus on the underlying activities that the issuer is facilitating. For example, a financial institution may create 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.

3. Issuer sustainability context

We provide issuer sustainability context to show our opinion on how the financing contributes to addressing what we consider to be the issuer's most material sustainability factors. This context also identifies the issuer's management of additional sustainability factors that we consider relevant to the financing.

We provide context on two components:

• The overlap between sustainability factors we've 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.
• The issuer's strategy for these overlapping sustainability factors. We do so by considering the issuer's related public statements, actions, goals, and policies.

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

B. Post-Issuance Review

Our post-issuance review generates two analytical outputs.

1. Post-issuance alignment assessment

According to the EuGBR, an issuer must publish an EuGB allocation report every year for a set period following issuance. Requirements for the publication and review of annual allocation reports vary depending on the activities financed by the EuGB:

• An issuer that allocates proceeds using the gradual approach or government-specific category must publish an allocation report every year until full allocation of the bond's proceeds. Only the allocation report created after full allocation of the proceeds, or after a correction of the allocation of proceeds, must be reviewed externally.
• An issuer that allocates proceeds using the portfolio approach must publish an allocation report every year during the lifetime of the bond. It must also obtain an external review of every allocation report, unless no change in allocation was made to the portfolio of assets, and no asset in the portfolio was subject to a change in allocation.

The post-issuance review is an assessment of whether the issuer has allocated the bond's proceeds in accordance with its pre-issuance factsheet as well as Articles 4-8 and Annex IV of the EuGBR. Our post-issuance review can apply to any EuGB allocation report, regardless of whether an external review is required by the EuGBR. For example, if according to the factsheet, an EuGB is following the gradual approach, we can review allocation reports for the period before the allocation of proceeds has been completed. These additional reviews are optional and conducted at the issuer's request.

Our post-issuance assessment relies on the analytical conclusions from our pre-issuance assessment. We do not use the conclusions from pre-issuance assessments of other external reviewers. We can still conduct a post-issuance assessment of an EuGB for which we were not the pre-issuance reviewer, but that would require us to carry out many aspects of the pre-issuance assessment.

Our overall alignment analysis has two possible outcomes: aligned, or not aligned (see table 2).  

Table 2

Alignment with Article 4: Use of the proceeds of European Green Bonds.   We assess whether the economic activities financed are aligned with Article 4 of the EuGBR, including the EU Taxonomy requirements.

For elements of this analysis that consider the issuer's policies and procedures, we confirm whether the relevant policies and procedures are still in place and assess any changes since our pre-issuance assessment. For example, if alignment with the EU Taxonomy's DNSH criteria requires a certain recycling rate for waste in a construction project, we would assess this based on information provided by the issuer to support its stated recycling rate. If the threshold recycling rate is not met, or the issuer cannot confirm that the threshold has been met, we would consider the allocated proceeds to be not aligned with the DNSH criteria.

For financing that has been allocated to a capex plan, we consider whether we still expect the financed economic activities to meet the EU Taxonomy requirements. If the initially reported capex plan has not been implemented, or we believe it is not on track to meet the EU Taxonomy's requirements, this would typically lead to an opinion of not aligned. An example is capex that aims to renovate a plant in order to meet a certain activity's TSC. If the issuer's application for a permit to conduct the renovation has been rejected and is unlikely to be approved before the EuGB matures and within the time limits set by the EU Taxonomy, we would no longer expect the financed economic activity to meet the EU Taxonomy requirements. We would therefore consider the use of proceeds to be not aligned.

Alignment with Article 5: Flexibility in the use of the proceeds of European Green Bonds.  When applicable, we assess whether the economic activities financed are aligned with Article 5 of the EuGBR. As in our pre-issuance assessment, we use our Shades of Green analysis to assess whether the use of proceeds makes a substantial contribution to at least one of the EU's environmental objectives and aligns with the DNSH criteria in the EU Taxonomy.

We regularly update the analytical considerations in our Shades of Green analysis to reflect the most recent climate and environmental research, as well as the economy's transition pathway toward a low-carbon climate resilient future. As a result, activities we considered green in our pre-issuance analysis may no longer be consistent with a Green Shade by the time we conduct our post-issuance review. Activities we assessed as green in our pre-issuance review, but have since changed to non-green, may be assessed as not aligned with Article 5.

Alignment with Article 6: Financial assets.   When applicable, we assess whether the issuer has allocated proceeds of financial assets in accordance with Article 6, including the number of subsequent financial transactions and the final allocation's alignment with Article 4.

Alignment with Article 7: Capex plans.  When applicable, we assess whether the issuer has reported progress made in the implementation of the capex plan. When there has been any significant delay or deviation in the capex plan's implementation, we assess whether the issuer has provided the reasons.

Alignment with Article 8: Application of the technical screening criteria and grandfathering.  If the TSC have been amended since issuance, we assess whether the issuer has allocated proceeds in accordance with the grandfathering approach outlined in the EuGBR.

To determine whether the allocation of proceeds is in accordance with the pre-issuance factsheet, we:

• Compare the allocation over the reporting period, and since issuance, to the expected allocation set out in the factsheet.
• Assess whether the financed economic activities meet the eligibility criteria of the activities referred to in the factsheet and whether the actual allocation has deviated from the intended allocation.
• Also assess, in cases where the issuer uses the portfolio approach, whether the total value of assets in the portfolio exceeds the total value of outstanding EuGBs using the portfolio approach.

2. Shades of Green allocation assessment

We provide transparency on the Shade of Green assigned to each economic activity to which proceeds have been allocated. This allocation assessment builds on the analytical conclusions from our pre-issuance review, which includes a Shades of Green assessment.

C. Impact Report Review

According to the EuGBR, issuers are required to publish a European Green Bond impact report on environmental impacts of their EuGBs. Issuers must report at least once during the lifetime of the bonds and after full allocation of the proceeds. The impact report review is optional and not required for the factsheet to be aligned with the EuGBR.

Our impact report review generates two analytical outputs.

1. Assessment of the issuance's alignment with the issuer's broader environmental strategy

According to the EuGBR, issuers must include information on how the bond aligns with its broader environmental strategy in its impact report.

In our review of the impact report, we assess the issuer's own conclusions about the bond's impact, focusing on clarity and the extent to which the issuer draws links between the bonds and its broader environmental strategy. We also assess whether the impact report provides transparency on potential deviations from the issuance's expected contribution to the issuer's overall environmental strategy.

Additionally, we consider the consistency of the issuer's conclusions and the environmental objectives of the activities financed with the issuer's public reports.

These elements will incorporate, where relevant, information in the impact report on how the EuGB contributed to the issuer's EU Taxonomy key performance indicators (for example, capex, opex, assets, and revenue).

Our alignment analysis has two possible outcomes: aligned or not aligned (see table 3). 

Table 3

2. Assessment of the indicated environmental impact of the proceeds

Our assessment considers the relevance and transparency of the indicated environmental impacts reported for each economic activity in the issuer's impact report. This is performed at the level of granularity provided by the impact report.

To assess relevance:  We consider how well impact metrics map to the financed economic activities' environmental objectives and characteristics, including comprehensiveness and comparability. We evaluate the economic activity, sector, and issuer type, including typically:

• Whether impact metrics relate to the environmental objectives pursued; for example, we would expect an issuer to report on adaptation impacts for projects pursuing the environmental objective of climate adaptation.
• How comprehensive the report is and whether the issuer discloses secondary impacts; for example, does the impact report include avoided emissions from adaptation projects?
• Whether the report considers both positive and negative impacts; for example, for hydropower investments, we check whether the issuer reports on water use or lost water.
• Whether impact metrics are commonly used in the market and to what extent the issuer aligns with accepted practice in respect of those metrics.

To assess transparency:  We consider the issuer's disclosure of the methodologies and assumptions it employs in its reporting, and whether these are sufficient and robust enough to understand its approach to reporting. This will vary depending on economic activity, sector, and issuer type, for example because data is more readily available in certain sectors or because certain levels of transparency are already expected in certain jurisdictions (such as under EU Emissions Trading System reporting).

Related Research

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

Regulation

• Regulation (EU) 2023/2631 of the European Parliament and of the Council of 22 November 2023 on European Green Bonds and optional disclosures for bonds marketed as environmentally sustainable and for sustainability-linked bonds, Nov. 30, 2023