Disconnect Between Credit Rating Agencies and Investors Regarding ESG, PRI Report

09 Jul Disconnect Between Credit Rating Agencies and Investors Regarding ESG, PRI Report

The PRI produced a report published July 5 outlining how investors and credit rating agencies (CRAs) are incorporating environmental, social and governance factors (ESG) in credit risk analysis. 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.  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 incentivized to incorporate ESG factors more systematically in their analysis.

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

The report highlights several disconnects between investors and CRAs, as they consider credit risk from different perspectives. “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.

The report 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. To date, 120 investors have signed the ESG Credit Ratings Statement (representing US$19trn of assets under management), as well as nine CRAs.

Full report available here.