The Principles for Responsible Investment (PRI) today launched a new report, Shifting perceptions: ESG, credit risk and ratings – part 3: from disconnects to action areas.

The report focuses on the emerging solutions discussed via a series of global forums organised by the PRI to address four apparent disconnects - i.e. areas where fixed income (FI) investors and credit rating agencies (CRAs) had different views on how to consider environmental, governance and social (ESG) factors in credit risk analysis at the start of the ESG in Credit Ratings Initiative in 2016.

The disconnects were originally identified in part one, describing the state of play of ESG consideration in credit risk analysis. Part two focused on roundtable discussions around those disconnects, including the materiality of ESG factors to credit risk, the relevant time horizons and differences between a “built-in” and an “add-on” approach.

The report found the following:

  • some of these disconnects were misconceptions linked to FI investors’ and credit rating agencies’ different objectives;
  • some disconnects were the result of a lack of investor awareness of the improved CRA focus and analytical resources on ESG topics; and
  • some disconnects are in fact shared challenges that credit practitioners face as both sides build a more systematic framework.

With these issues in mind, the PRI compiled a list of action areas to improve the process and output of ESG consideration in credit risk analysis. Some target both CRAs and investors, others either stakeholder. Below are some highlights:

  • Both sides need to categorise ESG factors by type, relevance and urgency; conduct regular retrospective analysis to assess how their relevance evolves; use sector, scenario, sensitivity and stress-testing analysis to monitor long-term risks, incorporate uncertainty and focus on drivers of potential outcomes; provide ongoing training to analysts; and engage with issuers on ESG topics to improve awareness, disclosure and transparency.
  • CRAs should improve further the signposting of ESG factors and be more explicit in the commentaries of changes in ratings or outlooks; map ESG factors that are credit-relevant and flag the triggers that can alter long-term assessments, as well as increase outreach on ESG topics.
  • Investors should set up internal frameworks to make ESG consideration more systematic; discern ESG implications at the issuer, single issue or portfolio level; not confuse the purpose of credit ratings and ESG assessment services; and be more proactive with issuers, service providers and in public consultations.

“Since the launch of the initiative, many investors and CRAs have made progress on some aspects of the recommendations; the largest CRAs in particular have embarked on a race to the top,” said Carmen Nuzzo, PRI Senior Consultant, ESG in Credit Ratings Initiative. “However, they should not rest on their laurels; more work is needed to assess the link between sustainability and credit quality.”

The list should be treated as best-in-class practice and does not suggest a one-size-fits-all approach to ESG consideration in credit risk analysis.

“This PRI-led initiative has been instrumental in advancing thinking and practice in terms of incorporating ESG into debt investing,” said My-Linh Ngo, Head of ESG Investment Risk at BlueBay Asset Management, and chair of the PRI Advisory Committee on Credit Ratings. “With the growing momentum and engagement from the industry, we are very excited about the next phase.”

The full PDF can be downloaded here


Notes to editors

The report also contains new evidence of CRA rating opinions that reference ESG factors explicitly, when material to changes in ratings or rating outlooks. It features 15 additional case studies showcasing how investors that have already implemented a framework to systematically assess ESG factors in credit risk analysis have used it to address one or more of the action areas before reaching an investment conclusion, including some case studies on sovereign credit risk. Finally, colour on the regional roundtables highlight that ESG awareness, or the call for ESG integration in credit analysis, differs across jurisdictions and regions.

Going forward, the initiative intends to focus on broadening the dialogue between CRAs and FI investors to bond issuers to advance understanding of the materiality of ESG factors to credit risk, and promote engagement, the development of common terminology and enhanced data disclosure.

To date, 146 investors have signed the ESG in Credit Ratings Statement (with US$29 trillion of assets under management), and 18 CRAs – including Moody’s Investors Service, S&P Global Ratings, and recently Fitch Ratings. The statement remains open to new investor and CRA signatories.

This work has received financial support from the Rockefeller Foundation.

For more information, contact:

Joy Frascinella

Head of PR

Principles for Responsible Investment (PRI)

44 (0) 20 3714 3143

[email protected]


About the Principles for Responsible Investment (PRI)

The PRI is the world’s leading proponent of responsible investment.

It works to understand the investment implications of environmental, social and governance (ESG) factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions. The PRI acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole. Visit the PRI website for more details: