Fitch Ratings has revealed that nearly 20% of global financial institutional ratings are currently influenced by governance risk, according to an analysis of new Environmental, Social & Governance (ESG) Relevance Scores. The scores cover over 900 banks, non-bank financial institutions and insurance companies around the globe.
Governance risk factors have the highest influence, reflecting the fact that corporate governance, management strategy and financial transparency are important considerations in the credit rating process for financial institutions. There are some regional differences that are apparent from the initial scoring exercise. For example in developed markets, governance issues clustered around ‘complex group structure’, ‘key person risk’ and ‘transparency’. In emerging markets they tended to be concentrated around management strategy.
“Some of the most visible credit rating actions over the past couple of years have focused on governance or conduct issues, including heightened regulatory focus on anti-money laundering efforts,” said Kevin Duignan, Managing Director and Global Head of Financial Institutions, Fitch. “Unsurprisingly, those same institutions saw higher governance relevance scores in our new ESG analysis.”
The initial results show that environmental risks are having a minimal impact on financial institutions’ credit ratings given service- oriented business models and secondary exposure. Where environmental risk appears in the sector, it is typically associated with insurance company issuers who have high exposure to a variety of catastrophic risks. Social risks are more varied, ranging from social or political disapproval of high interest rate lending, through customer welfare concerns caused by aggressive debt collection practices to exposure to the economic and social crises in places such as Venezuela.
For banks, governance structure and group structure account for the vast majority of higher relevance scores. While also impacted by governance factors, non-bank financial institutions also saw a wide range of impact from social risks. For insurance issuers on the other hand, virtually all of the higher scores were associated with environmental impact.
The new ESG Relevance Scores, which have been produced by Fitch’s analytical teams, transparently and consistently display both the relevance and materiality of ESG elements to the rating decisions that have been made on individual entities. They are both sector-based and entity-specific, and form an integral part of Fitch’s core ratings research.
Using a standardised and transparent scoring system, Fitch first introduced ESG Relevance Scores for a range of non-financial corporate ratings and has now published a selection of ESG Relevance Scores for banks, non-bank financial institutions, and insurance companies. In the coming weeks Fitch will be publishing scores for sovereigns, public finance, global infrastructure, supra-nationals, and structured finance. The ESG Relevance Scores for Fitch’s financial institution ratings are now available at www.fitchratings.com/site/esg.
In September 2018, Fitch Group announced it had signed the United Nations-supported Principles for Responsible Investment (UN PRI), underlining its commitment to incorporating ESG issues into investment practice and developing a more sustainable global financial system. The Global Sustainable Finance group at Fitch Ratings is responsible for reviewing how ESG factors are incorporated into the credit rating process, for increasing the level of transparency around ESG analysis and more broadly for the development of products and services beyond credit ratings to support and meet the growing needs of investors in this sector.