Investors demand finer detail on ESG credit ratings

    Institutional investors are now demanding more transparency and granular information on how environmental, social, and governance (ESG) factors impact the credit rating of specific bond issues as part of their risk analysis.

    At present the closest thing most credit rating agencies (CRAs) offer are green bond scores which are not part of their credit rating processes.

    “Essentially investors have asked for more transparency on how ESG is affecting the credit rating of each issuer. Until recently, all the three main CRAs argued that if something is material it’s contained within the credit rating. But if you are ESG focused, you want to identify those specific risks,” says Andrew Steel, managing director & global head of sustainable finance at Fitch Ratings.

    The challenge is that the existing credit rating methodologies are too general and not entity specific to be able to draw ESG-related information which will be useful to ESG-focused investors, Steel says.

    In response to this investor demand, Fitch Ratings has launched a new integrated scoring system that shows how ESG factors impact individual credit rating decisions made by its analysts.

    Known as the “ESG Relevance Scores”, the scoring system produced by Fitch Ratings’ analytical teams transparently and consistently display both the relevance and materiality of ESG elements to the rating decision. They are sector-based and entity-specific.

    For example, among 77 issuers in Asia-developed markets, governance ranks as the highest among the ESG elements driving the highest credit impact, followed by social and environmental.