Now is the time to act on ESG in credit ratings
April 07, 2016
Investors across our signatory network were asked to support a call for credit rating agencies to incorporate ESG into their credit analysis in a more systematic and transparent way.
The Statement on ESG in credit ratings launched on 26 May, with 100 investors and six credit ratings sending a clear signal that this is an issue of increasing importance.
In May last year responses to a PRI survey showed strong support for an initiative on credit ratings, with 78% wanting to see ESG more explicitly in ratings.
The statement represents the beginning of a journey. Throughout 2016 and 2017 a major focus of the Investment Practice team’s fixed income work is to make this vision a reality. We are asking investors and credit rating agencies to participate in a series of ‘Ratings Forums’ around the globe to discuss links between ESG and creditworthiness. Thereafter, we will bring investors, credit rating agencies and other stakeholders together to:
- develop better understanding of ESG issues as they relate to creditworthiness;
- craft practical solutions for more systematic and transparent incorporation of ESG in credit ratings and analysis.
You can still join the forefront of ESG in credit ratings
Please contact FI@unpri.org to find out more.
Participating signatories will be welcome to participate in the Ratings Forums and dedicated working groups which will start later this year and run to the end of 2017.
Why is this such an important issue?
Credit rating agencies are an integral part of the world’s US$100 trillion debt capital markets. With over 400 PRI signatories invested in corporate or sovereign debt, it is vital that investors and rating agencies are aligned on the implications of ESG to issuer creditworthiness. Integrating ESG into credit analysis provides more granular insight into issuer creditworthiness.
The ESG issues that affect issuers’ bottom lines include:
- stranding of assets linked to climate change;
- litigation and regulatory pressure linked to corruption;
- inefficiencies and reputational issues relating to poor labour relations.
Other ESG issues can affect government’s tax revenues, trade balance and foreign investment, including:
- natural resource management;
- public health and education standards;
- fraud and corruption.
It is important that rating agencies and investors are aligned and speaking a common language when it comes to ESG. This is why the PRI is bringing stakeholders together to develop better understanding on ESG and practical solutions for more systematic and transparent incorporation of ESG in credit ratings and analysis. Please download our Statement on ESG in credit ratings - English and Chinese versions - today to begin placing your organisation, whether a fixed income investor or credit rating agency, at the forefront of this initiative.
ESG in the credit ratings industry – what’s next
September 2016 – A panel at the PRI in Person conference in Singapore will kick off a series of ratings forums around the globe to facilitate dialogue between investors and rating agencies on ESG.
October 2016 – The PRI will publish a paper framing the issues and current ESG integration practices as part of a series of reports on this subject.