How Fitch is enhancing the relevance of ESG factors to credit ratings
Fitch's new 'heat map' shows ESG risks covering 51 different industries and the effect on credit ratings
Fitch Ratings has launched what it described as a heat map on environmental, social and governance (ESG) risks covering 51 different industry sectors for corporate issuers to provide further insight on the relevance of ESG factors to credit ratings.
The map is designed to help users understand how relevant individual ESG topics are to credit ratings across different sectors. For each ESG topic, the map shows the highest ESG score applied to a defined percentage of issuers in each sector. Interactive functionality also displays which individual entities are being impacted by the ESG topic identified within the sector.
Fitch describes ESG risks as generally having a minimal direct effect on credit ratings, but ESG topics are relevant for credit rating analysis. Fitch has scored each ESG risk element against its rated corporate coverage for its relevance to the ultimate rating decision
Many sector trends identified in Fitch's report “Connecting ESG Risks with Credit” are evident from the map. Elements that have a relevance score of 4 or higher across 50% or more of entities in a sector generally relate to broad social trends, such as pressures on drug pricing for the pharmaceutical sector or shifting consumer attitudes to tobacco.
Elements affecting 20% or more of entities in a sector include topics such as tighter emissions standards, which has impacted ratings of certain global manufacturers in the automotive sector, in combination with other factors, or exposure to operational disruptions from extreme weather events, which has had a bearing on the ratings of some issuers in the oil refining & marketing sector. The 1% or more threshold highlights that ESG factors are credit relevant to at least one issuer in 45 out of 51 sectors. Governance has the broadest reach, relevant for issuers across 39 sectors. Social risks are relevant to credit ratings for issuers in 27 sectors, and environmental risks in 19 sectors.
Fitch assigns a score of 5 on social risks related to exposure to social impacts in the healthcare, consumer and retail sector. A similar score was assigned on governance risks related to exposure to protein in the food, beverage and tobacco sector, as well as to exposure to governance structure in real estate, construction and building materials sector. Other sectors covered in the Fitch heat map are industrial and transport, natural resources, services and communications, and utilities, power and gas.
In addition to governance structure, the governance risks in the Fitch heat map cover management strategy, group structure and financial transparency. The social risks, in addition to exposure to social impacts, cover human rights, community relations, access and affordability, customer welfare – fair messaging, private and data security, and labour relations and practices.
For environmental risks, they include greenhouse gas (GHG) emissions and air quality, energy management, water and waste water management, and waste and hazardous materials management and ecological impacts, as well as exposure to environmental impacts. Fitch will update and distribute the map regularly, although the underlying relevance score for each issuer is updated whenever its rating is reviewed. Subsequent iterations of the map will provide a useful visual guide to any changes in the relative significance of ESG topics for each sector. The heat map is the latest initiative in Fitch’s ongoing efforts to meet investor requests for increased transparency regarding the impact of ESG factors on credit ratings.
Social Media Links (This section can be seen in office only):
Twitter : https://www.theasset.com/article-single.php?id=38442&social=twitter
Linkedin : https://www.theasset.com/article-single.php?id=38442&social=linkedin
Facebook : https://www.theasset.com/article-single.php?id=38442&social=facebook