Credit Rating Agencies Turn Attention to ESG Risk [Europe]

Credit rating agencies increasingly view risks through an environmental, social and governance principles lens when they assess if corporate bond issuers will be able to pay back their obligations and stay in business. Many investors believe that these type of principles limit costly societal crises and expensive scandals.

The three largest credit agencies are now attempting to explain how these types of issues inform their decision making on how bonds are priced. Fitch Ratings announced that it plans to publish ESG “relevance scores”, which will show how ESG factors affect individual credit-rating decisions. Earlier, Standard & Poor’s Global Ratings had said it would include information on how ESG factors influenced credit ratings as well. Moody’s Investor Services currently does not have a full ESG scoring system, but the company does factor in certain issue in its decisions, such as governance. The company is began to build an ESG team a year and a half ago with a dozen analysts.

Sustainability concerns encourage analysts to consider longer-term issues relevant to credit risk, says Moody’s senior vice-president, Swami Venkataraman, and that there is a larger demand for transparency.

The European Commission, which has called for legislative action on responsible investing, has said it is unclear to what extent sustainability factors are being considered by credit rating agencies. The Commission has requested that the European Securities and Markets Authority, or ESMA, will review the issues and publish guidance by the middle of this year.

See Jennifer Thompson, Credit Rating Agencies Turn Attention to ESG Risk, Financial Times, February 22, 2019.

Special thanks to Joel C. Dobris (Professor of Law, UC Davis School of Law) for bringing this article to my attention.