LONDON, Nov 18 (LPC) – Credit rating agencies are increasing their efforts to identify environmental, social and governance risks for leveraged companies as investor interest in sustainable investments surges amid competition from independent ESG ratings firms.
Sustainability risks have long been incorporated in traditional credit ratings, but agencies are now flagging relevant ESG risks for leveraged borrowers and capitalising on their access to information about privately owned companies, unlike independent ESG ratings firms, which tend to take information from public sources.
Fitch Ratings launched its ESG approach for corporate and leveraged credits in January and shows relevant E, S, or G risks that can impact credit quality in a separate section of its credit reports. The firm aims to include the ESG approach in all published credit reports by mid-2020.
“Our ESG approach doesn’t change the fundamentals of our credit methodology,” said Andrew Steel, global head of sustainable finance at Fitch.
“What it does is add transparency around the ESG elements. To use the analogy of baking a cake, the new format allows the end-consumer to see the balance of ingredients that went into the recipe.”
Ratings changes relating to ESG risks will also be shown.
“The extent to which ESG factors have made a difference to the eventual rating is clearly indicated by the relevance score,” Steel said.
Other credit rating agencies are also ramping up their responses to leveraged credit investors’ growing focus on ESG, with Moody’s increasing the prominence of ESG analysis in its leveraged credit reports in September.
“Our ratings capture ESG considerations with material credit implications,” said Lucia Lopez, a senior analyst at Moody’s. “We are expanding our capability and range of tools available to market participants, such as corporate governance and carbon transition assessments, to address the growing market interest in ESG.”
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.
Traditional ratings agencies have access to companies’ management and non-published numbers, unlike independent ESG ratings firms such as MSCI, which tend to analyse publicly available information.
“We score customers against their peers on E, S and G factors. And we also look into how prepared they are to adapt to long-term disruption to their business strategy from an ESG perspective,” said Lynn Maxwell, head of sales for EMEA at S&P.