BIS Report Proposes Carbon Intensity-based Rating System

A new report proposes a system for labelling issuers for firm-level greenness based on carbon intensity, the ratio of carbon emissions to revenue.

There is no strong evidence that green bond issuance is associated with any reduction in carbon intensities over time at the firm level, says a new report from the BIS (Bank for International Settlements).

Green bonds have a green label or rating that certifies that the proceeds are financing projects that benefit the environment. The market for green bonds grew to more than USD 250 billion in global issuance in 2019 – about 3.5 percent of total global bond issuance.

Research published as part of the BIS Quarterly Review has found that not all green bond issuers are firms with lower carbon intensities, and that there is no clear evidence green bond issuers have reduced intensities more than other firms in some sectors.

“This result isn’t completely surprising, because existing green bond labels certified projects, not firm level activity,” says Frank Packer, Regional Adviser at the BIS Representative Office for Asia and the Pacific, and a co-author of the new report.

“This is why we explore the case for supplementing the green bond label with a green rating based on firm’s carbon emissions.”

The report suggests that ratings firms, rather than the bonds they issue, on their carbon emissions would provide more useful information to investors, while also encouraging companies to increase their carbon efficiency at the firm level.

Under such a system, firms would be rated on carbon intensity, the ratio of carbon emissions to revenue, where firms that use greener technologies and energy to achieve lower carbon emissions – relative to their level of economic activity and size – could be rewarded with a better rating.

The report proposes a 10-bucket rating grid, including five buckets for the 10 percent of firms with the highest carbon intensity. The labels start from GGGGG for the greenest firms, and go down to PPPPP for firms with the highest carbon intensity (i.e. the worst polluters).

Based on initial analysis, even though the PPPPP rating bucket contains only the 1 percent of firms with the highest carbon intensities, these firms are responsible for close to 40 percent of total emissions in a sample of 16,000 firms.

Under this system, additional incentives in the form of rating uplifts could be awarded to firms that fulfil or exceed carbon intensity reduction targets.

The proposed system is intended to complement rather than replace the current ‘project-based’ green bond certification system, which has served to promote the development of the green bond market and raise awareness of sustainable growth among all market players.

The full report is available here.


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