November 18, 2019 / 10:30 AM / a month ago

Rating agencies boost ESG risk analysis

LONDON, Nov 18 (LPC) - Credit rating agencies are increasing their efforts to identify environmental, social and governance risks for leveraged companies as investor interest in sustainable investments surges amid competition from independent ESG ratings firms.

Sustainability risks have long been incorporated in traditional credit ratings, but agencies are now flagging relevant ESG risks for leveraged borrowers and capitalising on their access to information about privately owned companies, unlike independent ESG ratings firms, which tend to take information from public sources.

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

“Our ESG approach doesn’t 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 went into the recipe.”

Ratings changes relating to ESG risks will also be shown.

“The extent to which ESG factors have made a difference to the eventual rating is clearly indicated by the relevance score,” Steel said.

Other credit rating agencies are also ramping 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 in September.

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

S&P Global Ratings has developed a separate ESG Evaluation product that takes a broader look at such risks, in addition to publishing reports that include relevant ESG risks for some sectors and companies, including some leveraged firms.


Traditional ratings agencies have access to companies’ management and non-published numbers, unlike independent ESG ratings firms such as MSCI, which tend to analyse publicly available information.

“We score customers against their peers on E, S and G factors. And we also look into how prepared they are to adapt to long-term disruption to their business strategy from an ESG perspective,” said Lynn Maxwell, head of sales for EMEA at S&P.

“We are provided with access to an entity’s board member to understand how they are positioning themselves for the future compared to what they currently do.”

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

The total €250m of undrawn facilities included a ratchet that can step up or down by 15bp if Mosmovil’s ESG Evaluation score improves or deteriorates.

S&P’s ESG Evaluation 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 argue it’s looking at similar issues as credit ratings, but an ESG Evaluation aims to give you an indication of the long-term survivability of a company rather than a view on its immediate default risk,” said Michael Wilkins, head of sustainable finance analytics 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 helpful. Going into a deal, you can get information and you can come up with your own ESG judgment. It’s just monitoring and surveillance, how do you do that later on? That’s one of the hardest things for us.” a CLO manager said.

As ESG factors increasingly guide institutions’ decisions to participate in deals, bankers are also having to work harder to identify and explain any ESG factors that could impact investors’ perception and demand for deals.

For example, banks faced repeated questioning from investors about concerns over animal welfare on the €970m buyout financing by Madrid-based theme park operator Parques Reunidos in September, due to its use of orca whales and zoo animals, which generate a relatively small part of the company’s revenues.

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

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