The SPO selection conundrum – what drives firms’ decisions?

09 July 2021

Dr Arthur KrebbersHead of Sustainable Finance, Corporates

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Niceasia Mc PerryCorporate Financing & Risk Solutions

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Various segments of the bond markets rely on critical third parties to validate the structural robustness of their product. For the sukuk market these are Islamic scholars, the hybrid market goes with rating agencies (amongst others), and for the sustainable debt market it’s the second party opinion (SPO) providers.

As most market participants will know, this role is fulfilled by a raft of organisations: rating agencies, ESG data providers, consultancies, university departments, auditors – to name but a few. And, their numbers are continuing to steadily rise, with a recent entrant being MSCI.

While 69% of ESG investors consider ‘having a well-recognised SPO provider’ as of (at least) some importance (source: NWM 2021 survey), it is unclear which factors determine the issuers’ SPO selection.  

So, what tends to move the needle towards one (out of many) SPO providers? To start to shed more light on this process, we have been running initial statistical analysis on a sample of inaugural Green, Social and Sustainability (GSS) “use of proceeds”-labelled debt instruments, issued between 2014 and 2021. The sample includes 75 corporate transactions opined on by two leading SPO providers with a global footprint.

The regression is in the form of a probit model, which is used to predict a binary outcome (SPO provider X or SPO provider Y) given a set of independent variables. The model summary suggests a significant relationship (p=0.034) between the outcome (SPO selection) and predictor variables we have identified. It also has a reasonable model fit for making this prediction (The McFadden’s R2 is 0.343).

While many of the factors we modelled appeared inconclusive (credit rating, sector, number of sustainable project categories), a few were statistically significant*:

  1. Firms from Asia were more likely to select SPO provider X. This suggests, as has been noted anecdotally, that there is a degree of geographic segmentation in SPO providers – with several having strong home market presence.
  2. Equally, firms issuing larger inaugural GSS bonds were more likely to select this provider. This could reflect that some of the more established SPO providers have been successful in winning business from larger bluechip names, while smaller SPO providers are potentially able to offer more tailored and/or cost-effective solutions that are appealing to less sizeable firms.
  3. Trades issued in 2021 were also more likely to have been led by SPO provider X. This suggests that the market share in this space is far from constant, and that it remains highly competitive. The recent hiring spree amongst several SPO providers would back this up.

As the sample size grows, we hope to be able to provide more clarity on the factors that affect the decision-making, which is important for issuers, investors and SPO providers alike to understand.

An SPO provider tends to be a partner for life – once you have a framework in situ, you don’t tend to switch provider. It therefore pays to choose your “green referee” wisely.

*At the 10% significance level

High level results, including regression coefficients and p value

Model Summary: 1= SPO provider X, 0 = SPO provider Y

Source: NatWest

Coefficients – If estimate is positive, more likely to select SPO provider X

Source: NatWest

2020-2021ytd SPO GSS market share

Source: NatWest

ESG


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