Shifting Perceptions: ESG, Credit Risk and Ratings – part 1: the State of Play
This report looks at why ESG factors matter in credit risk analysis, what investors and credit-rating agencies (CRAs) are currently doing on this front, and what their expectations are.
The report highlights several disconnects between investors and CRAs, particularly regarding views on which time horizons to consider. It also 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.
Highlights from the report include:
- 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.
- Investors’ and CRAs’ views on the visibility and materiality of ESG factors vary, partly because they look at credit risk from different perspectives.
- CRAs already consider many ESG factors in credit rating analysis, but must communicate this better. Expertise in this field is improving but it is still hard to demonstrate that ESG consideration is prompting changes to credit rating outcomes; while some evidence is emerging, it is still patchy.
- On the investor side, ESG analysis is not consistently taken into account in credit risk assessment; often it is advisory in nature and securing internal investment buy-in for ESG consideration is still a work in progress.
Related Inquiry Publications
- Fiduciary Duty in the 21st Century
- The Case for Investor Engagement in Public Policy
- Financial Reform, Institutional Investors and Sustainable Development
- Green Tagging: Mobilising Bank Finance for Energy Efficiency in Real Estate
- Green Foreign Direct Investment in Developing Countries