Rating agencies strengthen ESG risk analysis


LONDON, Nov. 18 (LPC) — Credit rating agencies are stepping up efforts to identify environmental, social and governance risks for leveraged companies as investor interest in sustainable investing increases amid the competition from independent ESG rating agencies.

Sustainability risks have long been embedded in traditional credit ratings, but agencies now flag ESG risks relevant to indebted borrowers and leverage their access to private company information, unlike independent ESG rating firms, which tend to get information from public sources.

Fitch Ratings launched its ESG approach for corporate and leveraged credits in January and reports relevant E, S or G risks that may impact credit quality in a separate section of its credit reports. The company aims to include the ESG approach in all published credit reports by mid-2020.

“Our ESG approach does not change the fundamentals of our credit methodology,” said Andrew Steel, global head of sustainable finance at Fitch.

“What it does is add transparency around the ESG elements. To use the analogy of baking a cake, the new format allows the end consumer to see the balance of ingredients that go into the recipe.

Rating changes related to ESG risks will also be disclosed.

“The extent to which ESG factors made a difference in the final rating is clearly indicated by the materiality score,” Steel said.

Other credit rating agencies are also stepping up their responses to leveraged credit investors’ growing focus on ESG, with Moody’s increasing the prominence of ESG analysis in its leveraged credit reports by september.

“Our ratings take into account ESG considerations with material credit implications,” said Lucia Lopez, senior analyst at Moody’s. “We are expanding our capabilities and range of tools available to market participants, such as corporate governance and carbon transition assessments, to respond to growing market interest in ESG.”

S&P Global Ratings has developed a separate ESG assessment product that examines these risks more broadly, in addition to publishing reports that include ESG risks relevant to certain sectors and companies, including certain leveraged companies.


Traditional rating agencies have access to company management and unpublished figures, unlike independent ESG rating agencies such as MSCI, which tend to analyze publicly available information.

“We assess clients against their peers on the E, S and G factors. And we also look at how ready they are to adapt to a long-term disruption to their business strategy from an ESG perspective. said Lynn Maxwell, head of sales for the EMEA region at S&P.

“We gain access to an entity’s board members to understand how they are positioning themselves for the future versus what they are doing now.”

S&P assigned an ESG score in July to Spanish telecommunications company Masmovil, which was the first borrower to incorporate ESG criteria as part of its leveraged loan. The agreement included an ESG-linked pricing mechanism on undrawn investments and revolving credit facilities which was signed in May.

The €250 million total of undrawn facilities included a ratchet that can increase or decrease by 15 basis points if Mosmovil’s ESG assessment score improves or deteriorates.

S&P’s ESG assessment goes beyond what is typically included in a credit rating analysis, as it takes a longer-term view of a company’s prospects.

“You could say it looks at issues similar to credit ratings, but an ESG assessment is meant to give you an indication of a company’s long-term survivability rather than a view of its default risk. immediately,” said Michael Wilkins, sustainability manager. financial analysis and research at S&P.


Leveraged investors welcome more detailed ESG information that will allow them to produce more transparent credit reports and monitor portfolios on an ongoing basis, which is currently proving difficult.

“It’s useful. By entering into a deal, you can get insights and you can formulate your own ESG judgement. It’s just control and monitoring, how do you do that later? It’s the one of the hardest things for us,” said a CLO official.

As ESG factors increasingly guide institutions’ decisions to enter into transactions, bankers must also do more to identify and explain any ESG factors that could impact investor perception and demand for transactions. .

For example, banks have been repeatedly questioned by investors over animal welfare concerns during the €970m takeover financing by Madrid-based theme park operator Parques Reunidos in September. , due to its use of killer whales and zoo animals, which generate a relatively small share of the company’s revenue.

“We had addressed the concern before investors asked us about it. And I spent 80% of my time in investor meetings explaining this – more than the 50% I originally expected,” said a banker involved in the deal. (Editing by Tessa Walsh)


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