ESG Opinion Provider: Sustainalytics

IFR Awards 2020
5 min read
Tessa Walsh

Safe pair of hands:
For providing a record number of second-party opinions as the pandemic boosted appetite for sustainable debt to new highs and for supporting the explosion of social issuance while continuing to launch innovative new services, Sustainalytics is IFR’s ESG Opinion Provider of the Year.

ESG Opinion Provider

The world responded to the Covid-19 crisis with a flood of social debt issuance and promises of a green recovery that put ESG issuance front and centre in 2020, creating a heavy workload for Sustainalytics in difficult circumstances as volume soared.

As the world’s leading global external reviewer of green, social and sustainability (a mix of green and social) bonds, Sustainalytics was called on to provide second-party opinions on a slew of new frameworks to speed critical issuance.

Sustainable debt soared 80.4% to just under US$700bn for bonds and loans, from US$387bn in 2019, which pushed the company past a major milestone in October as it completed its 500th opinion of a sustainable bond framework, up from only 100 in 2017.

“The number of second-party opinions we worked on has been really strong despite an uncertain and tumultuous year. We’ve managed to be at the forefront of developments and deliver a high number of SPOs,” said Heather Lang, executive director of sustainable finance solutions at Sustainalytics.

The numbers are impressive. Sustainalytics completed 205 unique SPOs and 12 SPO updates in 2020, along with 80 annual reviews of SPOs and worked on 40 pre-issuance and post-issuance verifications of climate bonds for the Climate Bond Initiative, as well as sustainability eligibility guides for banks.

Sustainalytics also gave opinions on 11 sustainability-linked loans, mostly relating to KPI targets, for companies and also completed 23 ESG ratings linked to SLLs, bringing the total completed since 2018 to 57.

Most of the firm’s SPOs are for corporate issuers – 39% financial institutions and 50% other sectors including technology, telecoms, shipping, pharmaceuticals and luxury apparel – while the remainder are SSA issuers.

The US is the company’s biggest market followed by Japan, the Netherlands, South Korea and the UK. Maintaining a market-leading position was a huge achievement in a highly competitive and rapidly evolving market for ESG data, which was also being reshaped by huge acquisitions of rival firms largely by ratings agencies, and the entry of new players and artificial intelligence technology.

With a 25-year track record, data on 40,000 companies worldwide and ratings on 20,000 companies in 172 countries, and annual growth of 120% since 2014, Sustainalytics was also a target.

Investment research firm Morningstar said in April that it would buy the remaining 60% of the company that it did not already own in a move that valued Sustainalytics at around €170m. The acquisition was completed in July.

Pivot to social

Few saw the Covid-19 crisis coming, but Sustainalytics pivoted quickly to help the market and clients despite soaring demand for its other services, including its flagship ESG risk ratings product.

The firm recognised the role of social and sustainability bonds in reducing the impact of the pandemic and swiftly expanded its own internal taxonomy to include Covid-19-related use of proceeds, such as healthcare and socioeconomic impact mitigation.

The expanded taxonomy, along with ICMA’s updated Covid-19 guidelines, allowed Sustainalytics to provide SPOs for Covid-19-response social bonds, which helped to increase issuance and pump money to where it was needed, and included an SPO for the EU’s Sure social bond framework in September.

“To really focus on the most timely and pressing social and environmental challenges has been very exciting. I would say it’s been our best year yet,” Lang said.

Product development

In a demanding and unpredictable year, Sustainalytics launched several new services, including opinions for sustainability-linked bonds. It issued its first in September, relating to the €1.85bn SLB from Swiss drugmaker Novartis, as issuance in the new asset class accelerated.

The company also saw the results of ambitious product development when it published a SPO service for transition bonds, with a new methodology that included an overarching framework as well as transition pathways for specific industries.

Sustainalytics was also early in offering clients a supplement to their SPO that assessed frameworks’ alignment to the EU’s groundbreaking Taxonomy guidelines. Luxembourg was first in September, when it revealed its sustainability bond framework.

“We were able to position ourselves as a reviewer of the EU Taxonomy and alignment,” Lang said.

Sustainalytics expects to continue to shape the sustainable debt markets in 2021 by delivering more first SPOs for industries and sectors as the transition to net-zero emissions accelerates, and plans to double the team in the first six months to meet increased volume.

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