Good governance has long been hailed as a prerequisite for identifying sustainable companies, and highly relevant to credit analysts. But they are now looking at it through new lenses - such as board diversity and corporate culture, spurred by social movements like the Black Lives Matter protests of 2020.

This was one of the principal findings of a workshop held with investors, credit rating agencies, and four Swiss companies active in the chemicals, financials and food industries, in December of that year. Attendees included 17 investor or investment bank representatives from 13 organisations; representatives from seven credit ratings agencies; as well as from the Association of Corporate Treasurers, the Centre for Climate Finance and Investment at Imperial College Business School, and the World Business Council for Sustainable Development. See box below for the full list of participants. 

The workshop was the fifth of the series Bringing credit analysts and issuers together, which forms part of the PRI’s ESG in credit risk and ratings initiative. Talks were held under the Chatham House Rule, and were structured around a set of guidelines that were criculated to participants prior to the event, and tailored by sector.[1]

Workshop participants

After hosting workshops exploring whether having an investment grade (IG) or high-yield (HY) credit rating mattered when it comes to ESG consideration, this workshop focused again on corporate bond issuers of mixed credit quality and from different sectors.

Switzerland is known for good management of its natural resources, and is comparatively more advanced than other countries in the implementation of the United Nations sustainable development goals (SDGs). It also hosts a variety of companies for which the sustainability agenda is becoming increasingly important, including the food industry; the chemicals and pharmaceuticals industry; several industrial manufacturers and high tech companies; and the financial sector.

Several observations in this workshop echoed those highlighted in previous workshops. In the remainder of this summary, we only highlight new or sector-specific themes, whilst remaining focused on credit-relevant ESG issues. These include the ESG factors that can impact a company’s cashflow, and over what time horizon; the cost of transiting to more a sustainable business model, and the cost of not doing so; how to measure and compare ESG metrics for peer assessments; and so on.

The detailed findings of the workshop are presented below.

Evolving governance assessment

Good governance continued to be hailed as a fundamental prerequisite for sustainable developments. Echoing previous discussions, participants stressed that it remains the most credit-relevant of the ESG categories and a key feature of traditional risk assessment. It is also important to assess the oversight of environmental and social issues, highlighting the interdependencies of the three.

However, in addition to typical metrics (such as the board composition, the independence of its members, the frequency of its meetings and the track record of a company strategy), analysts are now considering some new key performance indicators (KPIs). These include board diversity; company accountability for sustainability strategies (including clear management functions and responsibilities, checks and controls); transparency (for instance on procurements); and corporate culture.

One issuer representative noted that whilst the scrutiny on gender diversity had clearly increased in the past few years, questions about the board’s ethnic and racial diversity had started emerging after the revival of the Black Lives Matter movement in 2020. As a result, the company had started thinking about how to better reflect its global footprint at the board level. Another company representative added that they had recently recruited staff to focus on sustainability and ESG, adding to evidence from other workshops that new dedicated roles are being created.

“Enhancing board diversity has no cost implications but it requires more imaginative hiring solutions. Career progression may also take years of mentoring and investment in human capital.” — Corporate borrower

Emerging solutions

It may be some time before firms link executive pay to ESG targets, but this was mooted as a possible solution to make the board and senior management more accountable for sustainable developments. However, the debate is still open on which ESG targets would be appropriate, as some may be more suitable than others (depending on time horizons).


Data and communication still in focus

Echoing previous workshops, participants noted the importance of data in assessing ESG risks, and the problems that can arise from a lack of clear disclosure requirements.

Participants also discussed the use of third-party data by investors and CRAs. While they agreed this can be a useful tool, they also noted it should not replace analysis by internal credit analysts. One investor observed, however, that reliance on third-party vendors for technical assessments is likely to increase when assessing environmental risks, given neither investors nor issuers have expertise in this area. Another added that investors would struggle to conduct stress tests on holdings internally, unless they had a dedicated team to do so.

It was agreed that setting an ESG strategy was an iterative process, and that until an external ESG data standard is created, issuers will have to define their strategies and then look to substantiate or adjust them using available data. To this extent, communication with analysts is crucial to make future plans clearer and enable analysts to make a forward-looking, rather than a static, analysis.

“The key is to have a discussion with company management and engage with materiality frameworks, even though we may not always arrive at the same judgment on ESG consideration.” — Investor

Emerging solutions

It was suggested that companies start disclosing sustainability targets via their websites, like financial information. Furthermore, participants agreed that issuers hosting specific conferences or webinars targeting bondholders, like some companies already do, would be useful. Unlike in the case of equity investors, a register of bondholders does not exist. However, should these events become regular practice, they could become a feature of credit risk assessment over time.


Several participants focused on the potential credit risks posed by litigation, although there was divergence in whether they considered it an environmental, social or governance risk. Specifically, in the chemicals sector, it was noted that the potential for regulation to forbid the production, sale or use of certain products or chemicals was harmful to the credit risk of companies as it could trigger future litigation, directed at them or within their supply chains.

One CRA representative pointed out that the materiality of litigation depended on the jurisdiction involved, as well as whether the litigation was public and reported in a company’s financial results.

Speakers observed that the financial and reputational risks posed by litigation were difficult to assess and price due to the fact that they often relate to historic events or controversies, and may not represent an issuer’s current management or business approach. Nevertheless, the fines related to such litigation can be financially material, and can be considered when looking at how a company mitigates losses. For the same reason, analysts may find it difficult to determine the true extent to which an issuer’s management or business strategy has changed, if litigation related to past wrongdoing is ongoing.

“Consumer preferences have changed a lot over the past few years and so has the scrutiny on companies’ supply chains and sourcing, boosting the risks of litigation.” — CRA

Emerging solutions

Litigation can be a material financial risk. However, it can also be a legacy of the past that weighs negatively on ESG scores, and does not reflect current management practices. Engagement can help credit analysts establish to what extent the underlying causes have been addressed, and what remedial action has been taken, beyond the payment of any fines.

Targets and time horizons

Participants highlighted that the long-term nature of many ESG issues, particularly environmental risks, makes it difficult to set appropriate targets – or to make lending conditional on meeting ESG criteria.

Still, especially on environmental issues, some participating companies noted that they had begun to set targets for carbon emissions (including, in one case, for Scope 3), waste and water. Two corporate representatives noted they had started reporting information according to the recommendations of the Task Force for Climate-related Financial Disclosures, and stress-testing the resilience of their business against the transition to a low-carbon economy. But one representative added that certain calculations are limited in projecting future actions and their results.

Participants noted that while the use of covenants has been rare, because quantitative easing has made funding relatively cheap, they could play a greater role in the future – encouraging companies to consider ESG targets and key performance indicators (KPIs). There was broad agreement that, at least for now, this type of conditionality has little impact on the cost of capital, but it does carry potential reputational benefits. One investor argued that there could be a risk of greenwashing if financing was conditional on meeting short or medium-term targets that are not credible.

CRAs are also starting to address the gap between long-term ESG issues and shorter-term financial metrics, with one participant indicating that they assess and differentiate companies based on the vulnerability risks they could be exposed to between 2025 and 2050. Another described combining two tiers of analysis: one focusing on the megatrends (such as ecological transition, demographic shifts) that will potentially impact issuers’ credit quality and another looking at shorter-term forecasts which tend to inform credit rating opinions. Finally, one CRA started calculating ESG scores along with credit ratings to capture this long-term dimension.

“We are not sure whether the transition to a low carbon economy will be slow or rapid…the key is to have a discussion with the company’s management to understand its strategy and planning.” — Investor

Emerging solutions

A company’s willingness to tie its cost of capital to ESG parameters may add credibility to its sustainability approach. It was noted that issuers in the finance sector are beginning to use ESG targets or more conditions, such as reducing carbon emissions, to inform their own lending activities. Tracking companies’ compliance and performance against these is difficult, however.

Sector-specific considerations

The discussions highlighted several considerations specific, but not unique, to the industries of the companies represented – debt repurchasing (iQera), retail (Casino), shipping (CMA-CGM), rental equipment (Loxam) and facility management (Atalian). These are outlined below:



Sourcing of raw materials Governance factor is predominant
Innovation Environmental and social factors are more difficult to assess
Product safety Calculation of financed emissions is challenging; could be backward-looking
Waste / water / carbon emissions management Litigation risks are material
Supply chain risks Increasing scrutiny of board representation and diversity
Responsible procurement More regulatory scrutiny
  Cyber-security risks


Environmental, social and governance factors are relevant and interrelated
Health and wellness are in focus
Consumer preferences and demographic trends
Innovation (e.g. plant-based products and reducing plastic packaging) weighed against cost/benefit analysis
Sourcing of raw materials
Certifications becoming an industry standard (e.g. B-Corp, RSPO)
Waste reduction