ISS ESG introduces new Sustainability Bond Rating

ISS ESG launched a new Sustainability Bond Rating to give investors a sustainability impact and risk assessment at the issuance level of ESG or sustainability-linked bonds.

It can be applied across bonds issued by both corporate and sovereign entities and comes as the volume and complexity of labelled bond issuance has increased significantly, ISS ESG said, adding that it has occurred against a backdrop of regulatory challenges and disparate market reporting standards.

Our new, differentiated offering addresses investors' key need for comparative insights on the material sustainability risks and opportunities of a labeled bond at issuance level," said Till Jung, head of ESG at ISS STOXX.

"This is significant as it is not just building an assessment based purely on general elements from the issuer's activities and performance."

ISS said the new rating "supports a multitude of investor use cases ranging from risk management related reviews such as verifying labeled bonds' external framework certification or SPOs, through to helping investors fulfil reporting requirements such as EU Taxonomy alignment of securities in a portfolio or fund."

Security selection use cases are also supported, it said, including identifying labeled bonds that carry the highest relevance to the stated sustainability strategies of their issuers, as well as impact investment related use cases such as working out where labeled bonds' proceeds are actually going and whether impact targets are being met.

"These use cases were identified as crucial to investors through extensive market consultations with market participants, global focus groups, and careful methodological reviews of the evolving reporting landscape for labeled debt," ISS said.

The rating assesses alignment with international standards and guidelines on labeled bonds, such as those by the International Capital Market Association (ICMA), as well as alignment with the United Nations (UN) Sustainable Development Goals (SDGs).

The ratings measure absolute performance using a 12-point grading scale from A+ (excellent performance) to D- (poor performance).

"Supplemental data such as alignment with the EU Taxonomy and the estimated greenhouse gas emissions intensity of financed projects can be leveraged to support tailored applications at the discretion of subscribing investors," ISS added.

ISS explained that the rating is applied across issuance types, Use of Proceeds Bonds (UoP) and Sustainability-Linked Bonds (SLB) and made up of three dimensions - Alignment with International Standards, Environmental and Social Impact Assessment and the Issuer's Sustainability Strategy.

Each dimension is then subdivided into topics and further broken down into indicators. For all layers of the rating hierarchy - the overall rating, dimensions, and topics - there are aggregated scores based on the underlying indicator assessments. Drawing on about 400 indicators, roughly 150 indicators per bond are evaluated based on the specific rating structures for each issuance type.

FS Sustainability is owned by ISS STOXX.