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Environmental, social and governance risks moves centre stage

Investor interest in sustainable investments is surging, the credit rating agencies are increasing their efforts to identify environmental, social and governance risks for leveraged borrowers and also because of competition from the independent ESG rating firms.

Sustainability risks have long been incorporated in traditional credit ratings, but agencies are now flagging relevant ESG risks for leveraged borrowers and trying to capitalise on their access to information about privately-owned companies, unlike independent ESG rating firms, which tend to take information from public sources.

Fitch aims to include the ESG approach in all published credit reports by mid-2020.

What will be reported

Fitch is not planning to change their credit methodology, but they are going to add transparency on the ESG elements of their reports, so investors will be able to see all the elements of the credit risk assessment. The extent to which ESG factors impact the full rating will be indicated by the relevance score. Also, the rating changes relating to ESG risks will be shown too.

Other agencies

Other agencies are also revamping their approach to ESG reporting:

  • Moody’s are increasing the prominence of ESG analysis in its leveraged credit reports in September
  • S&P Global Ratings has developed a separate ESG Evaluation product that takes a broader look at such risks, in addition to publishing reports that include relevant ESG risks for some sectors and companies, including some leveraged firms.
  • independent ESG rating firms such as MSCI, analyse publicly available information and score how companies’ ESG rating compares to their peers.

Green investment is booming

LOANLYPLANET reports in their November newsletter that: “Over US$103bn in global green and sustainability-linked loan volume has been announced this year. An additional US$2.3bn in ESG-linked schuldschein financing has come to market.”

Not only this, central banks are increasing their use of ESG investment criteria which could further increase the general issuance of green debt.

CTMfile take: For corporate treasury departments, an increasingly important question is: “How ESG compliant is our borrowing?” Non-compliance is expensive for both companies and the planet.

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