Organizational shift at Moody’s brings ESG analysis to fore

After taking over its second party opinion business from Moody’s ESG Solutions, Moody’s Investors Service is assigning scores and issuing analysis of the environmental, social and governance component of municipal bond deals.

The company transferred its second party opinion business and analytical staff to the rating agency in October, saying the move “enhances Moody’s capacity to provide SPOs to meet growing global market demand for independent and comparable assessments of labeled green, social, sustainability and sustainability-linked debt issuance.”

As part of the transfer, Moody’s published a new assessment framework for providing SPOs on sustainable debt.

Second party opinions provide an assessment of the issuer’s bond framework, analyzing the “greenness,” in the case of green bonds, of eligible projects/assets, according to the Climate Bonds Initiative.

“What we’re looking at when we’re giving second party opinions is just what’s in our assessment framework,” Matt Kuchtyak, vice president of sustainable finance at Moody’s Investors Service, told The Bond Buyer this month.

“It’s an independent opinion on the alignment of a framework or instrument that an issuer brings to us with market principles, such as green bond principles, green loan principles, etc., as well as an opinion on the contribution to sustainability that the instruments have,” he said.

“So the extent to which the projects to be financed or the targets that issuers have in sustainability linked structures will ultimately contribute to long-term sustainable development,” Kuchtyak said.

He said Moody’s has what it calls a sustainability quality score that brings together the alignment with principles and contribution to sustainability elements to provide a holistic view on the overall sustainability quality of a framework or instrument.

A top score of SQS1 is rated as excellent, SQS2 is very good, SQS3 is good, SQS4 is intermediate and SQS5 is weak.

“We’re trying to give the market an independent view on the overall sustainability quality of instruments and do that in a globally rigorous, consistent and transparent kind of way,” Kuchtyak said.

He noted there were a lot of good reasons for the recent move.

“It gives us the chance to bring together the really deep domain expertise that we have in the SPO and sustainability space with our scale and track record in global debt capital markets,” Kuchtyak said.

“It really allows us to bring together that analytic expertise, meet our customers’ needs and reflects our broader firm-wide commitment to help with market transparency and efficient capital formation. Ultimately, it gives us greater capacity to provide SPOs,” he said.

One of the first actions Moody’s took was to assign an SQS2 sustainability quality score to the District of Columbia Water & Sewer Authority’s $80.10 million of Series 2022B public utility subordinate lien green revenue bonds.

“The issuance is aligned with the four core components of the International Capital Market Association’s Green Bond Principles 2021 and demonstrates a high contribution to sustainability,” Moody’s said in its report issued in December.

Goldman Sachs & Co. priced the bonds last February as part of an overall issuance of $288.655 million that DC Water brought to market. The green bonds were rated Aa2 by Moody’s, AA-plus by S&P Global Ratings and AA by Fitch Ratings. All three rating agencies maintain stable outlooks on the green bonds.

DC Water is an independent authority operating one of the largest water and wastewater utilities in the United States. It provides retail drinking water and wastewater treatment services to the District of Columbia. It also provides wholesale wastewater treatment services for Montgomery and Prince George’s counties in Maryland and Fairfax, Loudon and some of Arlington counties in Virginia, a 2.3 million customer base across 725 square miles.

“The authority’s main sustainability challenges are primarily related to climate change risks and its impact on water management and quality,” Moody’s said in its SPO. “U.S. municipal utilities have moderately negative exposure to water management considerations, given the risks of regulatory violations associated with water quality and wastewater disposal.”

Nationally, there has been a rise in the tension and the discussion around the role of ESG in the municipal marketplace, said Rob Fernandez, Director of ESG Research at Breckinridge Capital Advisors.

“We’ve been very focused on what we’ve been doing for 10 years,” he told The Bond Buyer. “Our focus on ESG integration is that we view ESG analysis as a way to supplement our fundamental credit research. We think that it’s important to consider these additional factors when we’re looking at the long-term credit quality of a municipal issuer or corporate issuer.”

Fernandez said the firm didn’t view ESG as being values-laden or having a particular political slant but said he was watching the various pushbacks on these issues. He said his was firm was trying to draw that line and stay focused on how to find real investment value in ESG securities.

“We’re trying to just keep that focus [on credit implications], but we are well aware of the rising skepticism and scrutiny coming from some areas of the market,” he said. “We’re also aware that ESG is being scrutinized not just from red state politicians, but also from environmentalists as well who are concerned that maybe ESG is not going far enough on environmental or social issues.”

BlackRock has come under fire from both conservative Republican Treasury Riley Moore of West Virginia and progressive Democrat New York City Comptroller Brad Lander.

Last January, Moore said the state Board of Treasury Investments, which manages roughly $8 billion of operating funds, would no longer use a BlackRock investment fund as part of its banking transactions.

Moore followed this up in July by putting five companies including BlackRock on a state-mandated list of restricted financial institutions, which he deemed engage in a “boycott of energy companies.” The other firms which are all now ineligible for state banking contracts are Goldman Sachs, J.P. Morgan Chase, Morgan Stanley and Wells Fargo.

Conversely, Lander sent a letter to BlackRock CEO Larry Fink in September voicing concern that BlackRock’s investment actions didn’t go far enough and match up with its stated ESG policy commitments.

“BlackRock cannot simultaneously declare that climate risk is a systemic financial risk and argue that BlackRock has no role in mitigating the risks that climate change poses to its investments by supporting decarbonization in the real economy,” Lander wrote.

Fink became a high-profile symbol target after publishing his widely heralded 2020 annual letter to CEOs, in which he declared that “climate risk is investment risk” and required a “fundamental reshaping of finance.”

Fernandez said another piece of the picture was that the term ESG “has become a catch-all for a variety of sustainable or socially responsible investing strategies and so when a particular state is concerned that an investment firm is screening out the oil/gas sector you can see why they want to be protective of a local industry to some degree.

“There’s a strong argument to be made that the energy sector needs to be productive for our economy and the global economy for a number of years as we transition to more renewable sources of energy,” he said.

“I feel that’s part of the confusion — that these different terms are being conflated and there needs to be greater education and understanding that there’s a variety of ways to pursue sustainable investing and ESG integration and it’s wise not to lump them all together.”

Fernandez said Breckinridge has signed on to the Net Zero Asset Managers Initiative and has spent a lot of time building out its internal capabilities in an ongoing effort to develop systems and a process that it can better understand a company’s climate transition risk.

He added that the firm supported the Securities and Exchange Commission’s effort to bring standardized climate disclosure guidance for corporations.

“We’re waiting to see what comes out of that rule,” he said. “Because it does sound like what was proposed — which was very sensible and comprehensive and had a lot of really good points, worthwhile disclosure guidance — it looks like it’s probably going to change a little bit … but we really welcome that kind of standardized ESG disclosure on the climate side.”