ESG Relevant Scoring System to Assist Investors

Banking CIO Outlook | Wednesday, April 03, 2019

Fitch Ratings announced the launch of an integrated scoring system which will take into account an individual’s environmental, social and governance (ESG) factors to provide scores and rating decisions. The Fitch’s analytical teams will produce the New ESG relevant scores. The scores will be transparent and consistent in showing the relevance and significance of ESG elements to the rating decisions. The analysis will differ according to the sectors and the positionS of the employees.

The rating system was used in 1,500 non-financial corporate rating, and the method is expected to be followed by banks, non-banking financial institutions, sovereigns, insurance, global infrastructure, public finance, and structured finance. The approach by Fitch fills a market gap by publicly revealing how an ESG issue directly affects the company’s credit rating. It is the first credit rating agency to publish systematically an opinion on how ESG issues are relevant and how it will affect the individual entity’s credit ratings. Initially, Fitch is making all the ESG relevance score available in the public domain, and it is expected to update the scores regularly as a part of its entity credit research. Fitch’s primary order is to provide opinions and credit insights for investors who can be challenged and defended. Fitch aims to provide transparency to investors and to discuss the ESG and credit. Investors get an opportunity to check, debate and challenge opinions on how ESG factors have changed the rating decisions.

Andrew steel, Global head of Sustainable Finance, Fitch ratings, stated that they actively engage with investors and other participants to learn about their requirement from credit rating agencies before conceiving a new relevance score. The scores don’t indicate value judgment about good or bad ESG practices by entities, but instead, it will point out the factors that are affecting the company’s credit rating decision. The scores are given to assist the investor in making decisions and will allow them to discuss with the analytical teams. In September 2018, the Fitch group announced that it had signed the United Nations-supported Principles for Responsible Investment (UN PRI) to incorporate ESG issues with investment practice to develop a sustainable global financing system. Global sustainable finance group at Fitch was formed to review how ESG factors will be included in credit practices and to increase the transparency of the credit rating process.

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