Cicero and K2A pave the way for a new green-labelled equity market

CICERO[1] is a research center for climate research and environmental science. Its subsidiary "CICERO Shades of Green Ltd" (thereafter CICERO) is one of the leading providers of second party opinions (SPOs) for sustainable financing solutions. It has launched its Shades of Green assessment for companies and equities. This move has the potential to bring a whole new set of companies into the world of green equity funds.

CICERO recently extended its Shades of Green methodology to include equities, assessing the coloration of both a company’s investments and its revenue streams. Both are shaded from green to brown enabling the equity sector to include current climate risk assessment into investment decisions and to track companies’ transition efforts in a forward-looking perspective. This method is focused on avoiding lock-in of greenhouse gas emissions over assets’ lifetime and on promoting transparency in resiliency-planning and strategy.

The extension of environmental coloration assessment into the equity universe is a significant and potentially hugely impactful development. The Shades of Green assessment methodology distinguishes between dark, medium and light green, which can potentially target a much larger scope of companies.  The “pure players” would naturally aim for dark green coloration. However, a whole new category of “partially green players” becomes possible thanks to the intermediary shades of green as they encompass some companies that would not position themselves as green in the sense of strict “green vs non-green” distinction offered for instance by the EU Taxonomy while still being eligible for a weaker green coloration due to the nature of their activity.  

K2A, a Swedish real estate company, has recently launched its Green Equity Framework founded on CICERO’s new methodology. As such, K2A has become the first company to launch what is believed to be the first green-labelled equity framework verified under Cicero’s new methodology which assessed the alignment of the green equity framework with a low-carbon and climate resilient future.

This means that K2A went through the Shades of Green assessment that shows the array of green and brown in the framework (something different from the overall rating provided by CICERO for green bonds). So far, most of the attention of green financing has been given to green debt while the green equity side lagged. However, as the green bonds market expands (please refer to our Green Bonds Review for latest data and analysis), investors explicitly express the need to add to the use of proceeds to eligible green assets dimension, a broader set of considerations related to issuer’s overall strategy and trajectory of future sustainability commitments and improvements; which brings us back to the issuer / company’s overall climate / sustainability strategy. Responsible Equity investment historically worked on the basis of ESG ratings or thematic / impact oriented screening, we find this new analytical proposition – very much inherited from the green bond experience, interesting to follow to see whether these shaded approach will, or not, penetrate the scope of thematic / impact equity investing.