The municipal green bond market has taken another modest step towards solidifying recognized "green" standards in the market. Moody's previously published a proposed Green Bonds Assessment (GBA) methodology—a forward-looking assessment of an issuer’s approach to green bond financing that closely follows the voluntary guidelines for issuing green bonds set forth in the Green Bond Principles. After inviting the market community to comment on the proposed methodology, Moody’s issued its final GBA methodology. Moody’s final GBA methodology differs in several ways from its proposed GBA methodology:

  • Scoring Reversal and Inclusion of Descriptive Assessment. The final methodology reverses the scale numbering originally proposed, assessing GBAs on a scale from GB1 (excellent) to GB5 (poor), and now includes a descriptive definition of each “GB” grade in terms of the issuer’s prospects for achieving stated environmental objectives. For example, a GB1 designation is defined as: “an excellent approach to manage, administer, allocate proceeds and report on environmental projects financed with proceeds derived from green bond offerings. Prospects for achieving stated environmental objectives are excellent.” A GB2 grade is defined as having “very good” prospects for achieving the stated environmental objectives, a GB3 as “good,” a GB4 as “fair” and a GB5 as “poor” prospects.
  • Weighted Percentage Change. The final GBA methodology changed the scoring system’s weighted percentage of the Organization factor from 10 percent to 15 percent and the weighted percentage of the Disclosure on Use of Proceeds from 15 percent to 10 percent. The weighted percentage for the other three factors, Use of Proceeds at 40 percent, Ongoing Reporting and Disclosure at 20 percent, and Management of Proceeds at 15 percent, remained the same.
  • Addition of a Weighted Score Legend. The final GBA methodology incorporates a “scorecard” or “weighted score legend”, as a reference tool for approximating a GBA. The weighted score legend illustrates that scores of 4 or 5 in the Use of Proceeds section, which counts towards 40 percent of the overall score, will be indicative of the final GBA score. The scorecard is an important reference tool that can be used to approximate the GBA in most cases, but doesn't include every potential consideration, including certain limitations, assumptions and other considerations discussed below.
  • Additional Qualitative Assessments Added to Sub-factors. The final GBA methodology incorporates more expansive discussions of certain sub-factors and adds qualitative assessments for sub-factors, including reporting on environmental impacts realized to date and comparison to how impacts compare to projections at the time the bonds were issued.
  • Incorporation of Assumptions, Limitations and Assessment Considerations Not Covered in the Scorecard. Moody’s has added this section to address certain considerations that may not be specifically enumerated in the scoring, including, but not limited to, confidential information Moody’s may have access to but the market does not; whether funds will be used in the future in the way they are intended to be used at the time of the GBA; limitations associated with market condition changes and legal and regulatory actions; level of confidence in an issuer, and the rapid evolution of the new green investing sector.
  • Acknowledgment of Green Bond Criteria Continuously Evolving. In its description of key considerations under Use of Proceeds factor, Moody’s acknowledged that the green bond criteria are likely to continue to evolve over time, as the market is just developing, and as a result, the definitions and parameters used to evaluate this factor could change. Importantly, the Use of Proceeds score and the overall GBA of a particular bond issue may be revised solely due to changes over time in the standards of what constitutes an environmentally sustainable project. To illustrate this point, Moody’s provides an example of a GBA being assigned to a 30-year bond issued in the 1980s to finance a power plant that utilized waste coal (which pollutes land and waterways). Even though this might have been considered a green investment in the 1980s and the initial GBA score could have been as high as 1, years later when the green eligibility focus changed to carbon dioxide emissions, the same taxonomy might have excluded any coal-fired projects, resulting in a Use of Proceeds and overall GBA score of 5.

Given that GBAs may be refreshed periodically, the fact that Moody’s will reassess a bond issue based on the taxonomy in place at the time of the reassessment, and not at the time of the initial bond issuance is significant. It is unclear what ramifications a downward (or upward) GBA revision would have on the secondary marketability of a bond issue, but it is worth considering because obtaining a GBA is voluntary, and issuers can now choose among several different avenues for certifying that their bonds are indeed green.

With the muni green market continuing to grow, it will be interesting to see to what extent issuers request a GBA, and if this new scoring approach leads to more certainty in development of green bond standards.

Attorneys in Ballard Spahr’s Public Finance Group have participated in every kind of tax-exempt bond financing and have extensive experience with the rules and regulations set by the IRS and U.S. Treasury.

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