The emerging market forums completed the global series that gathered credit practitioners from investors and CRAs to discuss ESG topics.
The first global ESG initiative focused on credit risk
Considering environmental, social and governance (ESG) factors in credit risk analysis transparently and systematically is relatively nascent in emerging markets (EMs). However, mindsets are shifting rapidly within the investment community.
While integration practices are more advanced in developed markets (DMs), awareness of the need for augmented risk assessments – beyond traditional financial metrics – when evaluating issuers’ creditworthiness is increasing in EMs.
In 2019, the PRI organised roundtables in Mainland China and Latin America, completing the global series that gathered credit practitioners from investors and credit rating agencies (CRAs) to discuss ESG topics. The series is the first of its kind because of its credit focus and scale, with 21 forums held in 15 countries (see pages six and seven).
This note is based on the latest forum discussions, adding to the results documented in the trilogy, Shifting perceptions: ESG, credit risk and ratings as part of the PRI’s ESG in Credit Risk and Ratings Initiative (see Figure 1).
Figure 1. Milestones of the PRI’s ESG in Credit Risk and Ratings Initiative
The DM roundtable discussions were covered in part 2: exploring the disconnects, and part 3: from disconnects to action areas.1 Their main areas of focus were: 1) the materiality of ESG factors from a credit risk perspective; 2) credit-relevant time horizons; 3) organisational approaches to ESG, and 4) transparency and communication.
The DM forums revealed regional differences on three levels:2
- awareness and advancement of ESG consideration in a credit risk context;
- varying country sensitivities to ESG factors; and
- rising local regulatory pressures and different attitudes towards regulatory changes.3
These differences are also seen in EMs,4 with some discussion points common across DMs and EMs. Others were specific to or more prominent in EMs. However, one clear theme emerged: the scale of ESG issues that EMs face is much higher than in DMs. This makes the case for ESG consideration in credit analysis in EMs even more compelling than in other countries – from a risk perspective and to identify investment opportunities.
Ahead are the main EM roundtable highlights.
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1 The second and third reports of the series covered the discussions held from September 2017 to September 2018. They were all in DM countries, bar the roundtable in Cape Town (South Africa) in June 2018.
2 For more details, see ‘Regional colour from the forums’ in Shifting perceptions: ESG, credit risk and ratings: part three: from disconnects to action areas.
3 In certain countries, regulatory intervention is perceived more as a threat (which may trigger pre-emptive action in the right direction). In others, notably some Asian countries, regulation is welcomed as a propeller of change.
4 EM is a broad conventional categorisation which comprises a heterogenous group of countries. In the rest of this note, the EM abbreviation refers to the five EM countries where the PRI organised events around the ESG in Credit Risk and Ratings Initiative: Brazil, Chile, Mainland China, Mexico and South Africa.