From a credit perspective, it’s crucial to incorporate ESG factors into the analysis of credit risk—and to do so consistently across sectors and time. That’s why at CreditSights we have refined our process of including ESG issues.
Embedding ESG into Credit Risk Assessments
Our ESG Credit Risk Core Beliefs
E, S and G issues are potential sources of material credit risk (current or nascent and unrealized).
The priority claim and limited upside that bonds enjoy make downside risks more important.
Truly material ESG factors affecting credit risk are not always the same as those that dominate the headlines; controversy does not always equate to materiality.
Factors within E, S, and G affect different companies in different sectors can vary enormously; a one-size-fits-all approach is not possible.
Measures & Materiality
With so many factors that relate to E, S and G currently capturing the headlines, it is easy to lose sight of which ones are truly important when it comes to credit risk.
For us to include a measure within our analysis, it needs to have the capacity to materially affect credit risk (MACR). Therefore, even if a measure is often cited with reference to E, S, or G, it is excluded from our approach if it does not have the capacity to materially affect credit risk.
An existing controversy around an issue is not enough by itself to warrant inclusion as a measure. To be incorporated in our scoring process, the issue must present an actual credit risk with the potential to have a material impact.
Once we have determined the appropriate measures and peer group, we score the companies. First, we ensure that we are normalizing the data by an appropriate comparator. Second, we consider whether any two selected measures are in fact capturing the same underlying risk and therefore duplicative. The normalized measures are then converted into a 1 to 5 score (1 being the greatest risk, 5 the least) by considering them along a spectrum of risk:
CreditSights ESG Disclosure Scores
Vast variation exists in the quality and quantity of ESG-related disclosure across issuers, sectors and regions. To highlight areas where we feel a more complete assessment of E, S and G risks requires more information, we offer CreditSights ESG Disclosure scores. We hope that publishing these scores might also encourage better disclosure in these areas.
Award-Winning, Completely Unbiased Research
Our fixed-income ESG approach is designed to inform and elevate your own research efforts while seamlessly integrating into your fundamental research processes. Dive into our latest insights and analysis on the key trends shaping ESG. Select an article to download a free piece of research.
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