Now is the time to act on ESG in credit ratings

July 5, 2017

Building on the successful launch of the ESG in Credit Ratings Statement in May 2016, the Principles for Responsible Investment (PRI) has produced a report outlining how investors and credit rating agencies (CRAs) are paying heed to environmental, social and governance factors (ESG) in credit risk analysis. 

With funding from the Rockefeller Foundation, Shifting Perceptions: ESG, credit risk and ratings – Part 1: The state of play looks at why ESG factors matter in credit risk analysis, what investors and CRAs are currently doing on this front, and what their expectations are. It is the first report of a three-part series. 

The report concludes that investors and CRAs are ramping up efforts to consider ESG factors in credit risk analysis. Resource allocation is clearly increasing with research mostly focused on environmental issues. However, ESG integration is not yet systematic.

It also highlights several disconnects between investors and CRAs, particularly regarding views on which time horizons to consider. Finally, it raises questions related to the role of regulators, products that complement traditional credit rating tools, and how credit analysts can be incentivised to incorporate ESG factors more systematically in their analysis.    

The report’s findings plant the seeds for more work ahead, including forums that the PRI will organise over the coming year to facilitate investor-CRA dialogue.  We are asking investors and CRAs to participate in a series of ‘Ratings Forums’ around the globe 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 

To date, 120 investors have signed the ESG Credit Ratings Statement (representing US$19trn of assets under management) as well as nine CRAs. The statement remains open to new investor and CRA signatories – click her to access the English and Chinese versions.

It is not too late to put your organisation, whether a fixed income investor or credit rating agency, at the forefront of this initiative.

Please contact FI@unpri.org to find out more.

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. 

We hope you will consider joining the initiative and we look forward to welcoming you among its signatories.

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