Fitch Ratings today announced the launch of a new integrated scoring system that shows how environmental, social and governance (ESG) factors impact individual credit rating decisions. On one side, the Main Street Investors Coalition believe investors must focus on maximizing financial return and management knows best. On the other side are those who want to broaden the focus of investors to include environmental, social and governance (ESG) issues, with everyone participating in the debate.
Perhaps the new ESG Relevance Scores from Fitch Ratings will help bridge the gap. Unlike ESG ratings developed by others, Fitch displays both the relevance and materiality of ESG elements to the rating decision. They are sector-based and entity-specific.
Using a standardised and transparent scoring system, Fitch is introducing ESG Relevance Scores across all asset classes, starting with over 1,500 non-financial corporate ratings. This will be followed by banks, non-bank financial institutions, insurance, sovereigns, public finance, global infrastructure and structured finance. The ESG Relevance Scores for Fitch’s non-financial corporate ratings are now available.
Fitch’s ESG approach fills a market gap by publicly disclosing how an ESG issue directly affects a company’s current credit rating. Fitch is the first credit rating agency (CRA) to systematically publish an opinion about how ESG issues are relevant and material to individual entity credit ratings. Fitch is initially making all of its ESG Relevance Scores available in the public domain, and will then maintain and publish the scores on an ongoing basis as an integrated part of its entity credit research.
Fitch’s primary mandate is to provide insightful and timely credit opinions for investors that are transparent and capable of being both challenged and defended. Fitch views the introduction of ESG Relevance Scores as a substantial step forward in enhancing transparency for investors, and for the broader discussion around ESG and credit. Fitch’s approach provides investors with the opportunity to examine, discuss and challenge opinions about how ESG factors have impacted rating decisions.
Andrew Steel, Global Head of Sustainable Finance at Fitch Ratings said:
We actively engaged with investors and other market participants to understand what they want to see from CRAs before devising the new relevance scores. Our focus is purely on fundamental credit analysis and so our ESG Relevance Scores are solely aimed at addressing ESG in that context. The scores do not make value judgements on whether an entity engages in good or bad ESG practices, but draw out which E, S, and G risk elements are influencing the credit rating decision. We have taken a fully integrated approach to ESG, which will see the scores being done by our existing analytical teams rather than centrally.
Our scores will enable investors to agree or disagree with the way in which we have treated ESG at both an entity and a sector level, assist them in making their own judgements about credit rating impact, and enable them to fully discuss all aspects of the credit with our analytical teams. No other CRA currently offers this level of granularity or transparency with respect to the impact of ESG on fundamental credit.
The initial analysis of our corporate portfolio has generated over 22,000 individual E, S and G scores for our publicly rated entities. Initial results show that 22% of our current corporate ratings are being influenced by E, S or G factors, with just under 3% currently having a single E, S or G sub-factor that by itself led to a change in the rating. There are significant variances by market classification (developed markets vs emerging markets) as well as by geography and sector, and our analysts are looking forward to discussing the detail with both issuers and investors.
For rated entities with Fitch Ratings Navigators*, ESG Relevance Scores will be published during 1Q19, as well as a selection of standalone ESG Relevance Scores for entities in asset classes that currently do not have the Ratings Navigator product.
In September 2018, Fitch Group announced it had signed the United Nations-supported Principles for Responsible Investment (UN PRI), underlining its commitment to incorporating ESG issues into investment practice and developing a more sustainable global financial system. This followed the recent establishment of a Global Sustainable Finance group at Fitch. This newly-formed group is responsible for reviewing how ESG factors are incorporated into the credit rating process, for increasing the level of transparency around ESG analysis and more broadly for the development of products and services beyond credit ratings to support and meet the growing needs of investors in this sector.