Green and sustainable finance has grown into a large part of the bond market, and rating agencies now discuss environmental, social, and governance (ESG) factors in their credit analysis. That has led to a common misunderstanding: that ESG performance or a green label can make a bond investment grade. It cannot. A credit rating measures the likelihood that an issuer pays its debts on time, and ESG factors matter to that rating only to the extent they affect the issuer’s capacity or willingness to pay. This page explains how agencies treat ESG, how green bonds work, what several well-known cases show, and the main criticisms of the market. For the rating scale itself, see the investment grade guide.
Credit Ratings, ESG Scores, and Green Labels Are Different Things
| Assessment | What it measures | Who provides it |
|---|---|---|
| Credit rating | Likelihood of timely payment of debt; investment grade is BBB‑/Baa3 or higher | S&P, Moody’s, Fitch, and other credit rating agencies |
| ESG or impact evaluation | A company’s exposure to and management of ESG issues, or the social and environmental effects of its activities | ESG data providers and research firms |
| Use-of-proceeds label (green, social, sustainability bond) | Whether bond proceeds go to eligible projects under a framework | The issuer, often with a second-party opinion; frameworks such as the ICMA Green Bond Principles |
A green bond from an issuer is usually rated the same as that issuer’s other debt of the same seniority, because investors are paid from the issuer’s overall cash flows, not from the green projects. A green label does not establish investment grade, and a strong ESG profile does not change the BBB‑/Baa3 threshold.
How the Agencies Treat ESG
- Moody’s publishes ESG issuer profile scores and credit impact scores that show how much ESG considerations affect a rating.
- Fitch publishes ESG relevance scores that show which ESG factors are relevant to a given rating and how much.
- S&P Global Ratings includes ESG factors in its credit analysis where they affect creditworthiness. It previously offered separate ESG Evaluations and Green Evaluations, which it has discontinued; S&P Global now provides second-party opinions on sustainable financing frameworks.
A clear example of an environmental risk becoming a credit risk is PG&E. As liabilities from California wildfires mounted, the agencies cut PG&E to speculative grade, and the company filed for bankruptcy in January 2019, emerging on July 1, 2020. The ratings moved because the liabilities threatened the company’s ability to pay its debts, not because of an ESG score.
How Green Bonds Work
A green bond is an ordinary bond whose proceeds are committed to eligible environmental projects, such as renewable energy, energy efficiency, or clean transportation. Most issuers follow the voluntary ICMA Green Bond Principles: describe the use of proceeds, the project selection process, how proceeds are managed, and how allocation and impact are reported. Many obtain a second-party opinion or certification under standards such as the Climate Bonds Standard. In the European Union, the voluntary European Green Bond Standard has applied since December 21, 2024 and requires closer alignment with the EU taxonomy and external review.
Case Studies
Apple
Apple has issued $4.7 billion of green bonds since 2016, with proceeds allocated to renewable energy, energy efficiency, and lower-carbon materials, according to its green bond impact reports. Projects have included a 180-acre solar project outside Reno, Nevada. Apple’s bonds are investment grade because of Apple’s financial strength (AA+ at S&P, Aaa at Moody’s); the green label did not create that rating.
European Investment Bank
The European Investment Bank issued its first Climate Awareness Bond in 2007, widely regarded as the first green bond. The EIB’s top-tier ratings rest on its ownership by European Union member states and its financial structure.
Ørsted
Ørsted, formerly DONG Energy, shifted from a coal- and oil-heavy business to one focused on offshore wind and renamed itself in 2017. The transition has not insulated it from financial stress: setbacks on U.S. offshore wind projects led to rating downgrades, and in 2025 it raised about DKK 60 billion through a rights issue to strengthen its balance sheet. It remained investment grade. The case shows that a sustainability strategy carries execution, regulatory, funding, and project risks like any other strategy.
Criticisms and Challenges
- Greenwashing. Labels and marketing can overstate environmental benefits. Regulators have acted against misleading claims; for example, the SEC charged asset manager DWS in 2023 over misstatements about its ESG investment process, which the firm settled.
- Inconsistent frameworks. ESG ratings from different providers often disagree because they measure different things with different methods.
- Data quality. Reporting depends on measurement, controls, and verification. Technologies such as distributed ledgers can preserve and share submitted records, but they do not make off-chain environmental data accurate or complete; that still requires trustworthy measurement and independent assurance.
What It Means for Real Estate Investors
In net lease real estate, the tenant usually pays utilities and operating costs, so energy efficiency mainly benefits the tenant during the lease, though it can affect a property’s appeal at renewal or resale. Some tenants and lenders ask for green lease clauses or energy data. Commercial property assessed clean energy (C-PACE) financing, available in many states, lets owners fund energy improvements repaid through a property tax assessment; review how it interacts with existing loans and leases. The credit question for a net lease property remains the tenant’s ability to pay rent; see the tenant credit ratings database.
Frequently Asked Questions
Does issuing green bonds make a company investment grade?
No. Investment grade depends on the issuer’s ability to pay its debts. A green bond is usually rated the same as the issuer’s other debt of the same seniority.
Do credit rating agencies consider ESG?
Yes, to the extent ESG factors affect creditworthiness. Moody’s publishes ESG credit impact scores and Fitch publishes ESG relevance scores. S&P includes material ESG factors in its credit analysis and has discontinued its separate ESG Evaluation product.
What is the difference between an ESG score and a credit rating?
A credit rating addresses the likelihood of timely debt payment. An ESG score addresses exposure to and management of ESG issues, which may or may not affect credit.
What was the first green bond?
The European Investment Bank’s Climate Awareness Bond, issued in 2007, is widely regarded as the first.
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