Fitch Ratings has introduced a scoring system to show how environmental, social and corporate governance (ESG) factors affect the agency’s individual credit rating decisions.
The ESG “relevance” scores “transparently and consistently display both the relevance and materiality of ESG elements to the rating decision”, Fitch said.
It claimed the move filled a market gap by publicly disclosing how an ESG factor directly affected a company’s current credit rating.
Fitch also declared that it was the first credit rating agency “to systematically publish an opinion about how ESG issues are relevant and material to individual entity credit ratings”.
The rating agency has initially made all of the scores publicly available, with a plan to subsequently maintain and publish the scores on an ongoing basis as an integrated part of its credit research for individual issuers.
The scores – on a scale of 1-5 – were to be introduced across all asset classes, Fitch said, although it has started with non-financial corporates.
A score of ‘1’ or ‘2’ indicates no impact on the credit rating – because a given issue or topic was considered irrelevant either to a sector or to the entity with the sector.
A ‘3’ score either indicates that a particular ESG issue has a minimum risk impact, or that the potential credit impact had been neutralised or diluted because the issuer was actively managing the issue effectively.
“We lumped those two together because we thought, from an investor perspective, if we can highlight things that are potentially a risk but they’re being managed so they’re not a financial risk then there’s value in that,” said Andrew Steel, global head of sustainable finance at Fitch.
According to Richard Hunter, global head of corporate ratings at Fitch, a ‘4’ score indicated that an ESG risk was beginning to affect the discussion about a credit rating, while a ‘5’ score was for “the very rare cases where a rating action was specifically driven by an ESG factor”.
According to the rating agency, the scores would “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”.
Expectations management
Fitch emphasised that the scores “do not make value judgements on whether an entity engages in good or bad ESG practices”.
While “some stakeholders would clearly like views and opinions which extend beyond credit, and address different timeframes and considerations”, Fitch’s focus was “purely on fundamental credit analysis”.
In an FAQ document accompanying the announcement, the rating agency added: “Asset managers and asset owners are in the business of managing and directing funds, whereas our role is to provide rigorous, independent and insightful commentary on the credit risks surrounding an entity with respect to its ability to repay debt.
“Providing this information in a transparent and challengeable manner is a significant step, but remains just a part of the overall considerations that investors are faced with when deciding how to allocate funds.”
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