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S&P to rate carbon funds
17 April, 2007
Standard & Poor’s is to begin rating carbon funds, following “unsolicited demand” from carbon fund managers. The credit rating agency hopes to publish later this year its first ratings, which would most likely examine the likelihood of the funds defaulting, Mike Wilkins, head of infrastructure finance, told Carbon Finance.
“We’re seeing people come to us for views on how carbon caps and carbon trading are affecting companies’ credit quality,” Wilkins said. “Over the past couple of months, we’ve had some unsolicited enquiries from carbon funds for ratings.”
Wilkins added that the company is currently devising a methodology for rating funds. However, he expects that S&P will look at the underlying emissions reduction projects in which the funds are investing and possibly at the creditworthiness of companies developing the projects.
While S&P rates some investment funds on their financial performance, carbon funds would instead most likely be assessed on their creditworthiness, combining their probability of default with likely loss recovery to generate an expected loss figure, said Wilkins.
The rating could be used by investors for benchmarking, allowing them to compare the funds’ returns with other investments of a similar credit risk, and by banks to help them assess how much capital to set aside against fund investments, he added.
The ratings would be paid for by the fund managers themselves, said Wilkins, noting thatthey could be used to help market the fund. He added that S&P does not carry out unsolicited ratings, but “we would look at whoever asked us”. “There is a growing amount of appetite for views on this sector,” said Wilkins, noting that the company has significant demand for such a service, “and we haven’t even marketed it yet.”
An alternative credit rating system for the carbon market is being developed by IDEAcarbon, a provider of ratings, research and strategic advice on carbon finance. A spokesman for the company declined to give any details of how the methodology would work but said it hoped to launch the service in the next few weeks.
