PRI Report: ESG Factors in Credit Risk Analysis

Stockholm (NordSIP) – The PRI has published a new report outlining how investors and credit rating agencies (CRAs) are paying heed to ESG factors in credit risk analysis. The report, which builds on the launch of the PRI ESG in Credit Ratings Statement last year, has received funding from the Rockefeller Foundation and highlights the disconnects between investors and CRAs.

Shifting Perceptions: ESG, Credit Risk and Ratings – Part 1: The State of Play evaluates why ESG factors matter to credit risk analysis, the current activities of CRAs and investors on this front, and what their expectations are. Divergences are highlighted, especially on the issue of time horizons. Questions are also raised in relation to the role of regulators, complementary products to traditional credit rating tools, and incentivising the systematic incorporation of ESG into investment analysis. The report plants the seeds for future initiatives, including forums to be organised by the PRI to facilitate dialogue between investors and CRAs over the coming year.

120 investors have signed the ESG Credit Ratings Statement to date, representing USD 19 trillion in AUM. 9 CRAs have also signed. The Statement remains open to new investors and CRA signatories, all of whom are welcome to participate in rating forums and dedicated working groups to be organised by the PRI over the course of the next year.

“The dial is definitely beginning to move in the right direction, but we are not at a stage yet where ESG factors are systematically included in credit risk analysis,” said Carmen Nuzzo, PRI Senior Consultant with the Credit Ratings initiative. “ESG integration is still perceived as a ‘nice-to-have’ rather than a ‘must-have’.”

Summary highlights include:

  • With investors and CRAs stepping up efforts to consider ESG factors in credit risk analysis and resource allocation increasing with research on environmental issues, ESG integration, however, is still not systemic enough;
  • Because investors and CRAs look at credit risk from different perspectives, their views on the visibility and materiality of ESG factors can be at variance;
  • While CRAs already consider a range of ESG factors in their credit rating analysis, they have yet to learn to communicate this more effectively. It is still hard to demonstrate that ESG consideration is prompting changes to credit rating outcomes despite emerging evidence.
  • ESG analysis is not consistently taken into account in credit risk assessment on the investor side, remaining sidelined as advisory in nature, meaning that securing internal investment buy-in for ESG consideration remains a work in progress.

“Considering EDG factors in credit risk analysis – in addition to traditional financial drivers – is critical to inform fixed income investment decisions,” PRI Advisory Committee on Credit Ratings co-chairs My-Linh Ngo of BlueBay AM and Ole Hagen Jørgensen of Global Evolution said in a statement. “Investors start to appreciate that it is not only growth that matters, but sustainable growth, and that’s what ESG consideration is about.”

“S&P Global Ratings has long incorporated ESG factors into our processes, and to further complement these efforts we are establishing new ESG teams and are participating in industry-wide working groups that research, analyse and engage on ESG topics,” said Yann Le Pallec, Head of S&P Global Ratings Services. “We believe our relationship with PRI and the development of new evaluation tools will lead to more substantial insights on emerging ESG issues over the medium and long term.”

Read the report here.