ESG impact is rarely credit positive
ESG Relevance Scores (ESG.RS) assigned by Fitch Ratings have a negative or neutral impact on credit ratings in the vast majority of cases, Fitch says in a new report. Positive scores have the greatest impact in our rated sovereigns portfolio.
Fitch assigns ESG.RS to capture the impact of environmental (E), social (S) and governance (G) issues to about 10,500 issuers and transactions globally. Of these, only about 310 are positive scores.
ESG issues captured under our methodology vary by analytical group. The proportion of sovereign issuers with at least one positive score is far higher than for any other sector, reflecting the input from the World Bank’s World Governance Indicators in Fitch’s Sovereign Rating Model. The next highest proportion is for supranationals, which often perform social functions.
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Corporates ratings are boosted by the broadest range of ‘E’, ‘S’ and ‘G’ issues covered by our methodology, reflecting the wide range of sectors in which they operate. About half of the 25 corporate ratings with positive ESG.RS have at least one positive environmental score, while there are no positive environmental scores in any other sector.
The majority of positive social scores are assigned to structured finance transactions backed by government-sponsored social housing loans where performance is particularly strong. There are no positive ESG scores of any kind in our rated insurance portfolio.
For financial institutions, more favourable regulatory treatment of exposures supporting environmental or social objectives could trigger further positive scores.
Corporate and project finance issuers operating in renewable energy may see additional positive scores given the sector’s growth. But positive ESG impact is likely to remain marginal to credit ratings in the near term while it is driven by niche rating model or sector-specific factors.
