Already used for loan and investment portfolios, MSCI’s Total Portfolio Footprinting tool can also “transform” how investors gauge individual green bonds’ environmental impact, the data and index firm said in recent research.
“Having seen the green bond market and loan market grow, they've always missed a metric for green,” said Michael Ridley, head of fixed income ESG and climate research.
This is despite the point of the instrument being to commit to using its proceeds exclusively on defined green projects. While issuers disclose what proportion they allocate to each type of project, their individual and collective impact is not quantified.
Ridley sees TPF’s application to green bonds in nine sectors as filling the gap. “We now have financed emission estimates at the security level.”
This “powerful tool” offers significant potential. “Ultimately, it could become one of the metrics that people look at in the bond market alongside yield, duration and credit quality.”
Ridley, who “always thought that a metric would come to the fore”, acknowledged that Hannon Armstrong – a US investment firm that issues green bonds, commercial paper and convertibles – calculates a figure for tonnes of CO2 emission reduction achieved per million dollars outstanding.
S&P also offers green transaction evaluation that it compares to pre-issuance impact assessments, though these appear targeted to issuers.
Investors have had to rely mostly on second-party opinions that issuers commission from a small group of providers. These affirm that deals align with the Green Bond Principles and, more recently, the European Union’s Taxonomy of sustainable activities.
Although useful tools, SPOs are qualitative and descriptive, Ridley said. This makes it difficult to compare individual green bonds, either of the same issuer or those of sector peers. Analysing issuers’ conventional bonds against their green offerings is similarly challenging.
Variable impact
MSCI has yet to calculate the greenest green bond across its nine sectors. But it highlights how the instrument’s impact (measured as tonnes of CO2-equivalent Scope 1 and 2 emissions per US$1m invested) varies substantially due to funding different types and combinations of project – even from the same issuer.
It gives the example of Engie. Applying standard emissions factors for each of seven project categories (weighted according to the Bloomberg MSCI Green Bond Index where bonds finance several project types), the energy firm’s 2024 green bond achieves 16.5 tCO2e/US$1m compared with its 2032 issue’s 10.2 and its conventional bonds’ 434.2. The latter figure is derived through a different methodology.
Equally, it found that Engie's 2024 issue fell within a range when compared with green bonds of Orsted (10.24), UPM-Kymmene (24.94) and Verbund (10.24).
This type of security-level analysis could also be aggregated at issuer and index levels to show average impact. Moreover, TPF analysis could be combined with MSCI’s forward-looking Implied Temperature Rise calculation for companies and funds.
A next step could be to apply TPF to the increasingly important sustainability-linked bond and loan category. While Ridley could not confirm plans for this, “we're keen to do quite a lot of detailed thinking on SLBs”.