(Editor's Note: This report was updated April 27, 2022.)
Key Takeaways
- We expect to publish ESG credit indicators for individual covered bond programs starting in first-quarter 2022.
- ESG credit indicators do not affect existing credit ratings. Rather, they reflect how influential ESG factors are to our credit analysis.
- ESG credit indicators are not a sustainability rating or measure of how entities are positioned in terms of ESG performance. In our assessment of ESG credit indicators, we only consider exposure to ESG factors that could influence creditworthiness.
S&P Global Ratings recognizes external stakeholders' increasing desire for more information about how environmental, social, and governance (ESG) factors influence our credit rating analysis. We've underscored these efforts in various ways, including publication of Environmental, Social, And Governance Principles In Credit Ratings criteria, ESG industry report cards for covered bonds, and a monthly ESG in Credit Ratings Newsletter. Also, our credit rating reports for covered bonds include dedicated ESG paragraphs that describe in a narrative format our opinion of the influence that ESG factors have on credit rating analysis. We also aim to provide information on ESG factors when they are key drivers of our credit rating actions.
S&P Global Ratings remains committed to providing additional transparency as to how it incorporates ESG factors into its credit ratings methodology and analytics. We have already enhanced our communication to the market with implementation of ESG credit indicators in our corporates and infrastructure, banks, and insurance ratings practices, and announced that U.S. public finance will follow a similar approach. Our ESG credit indicators provide additional disclosure and transparency at the entity level and reflect our opinion of the influence that ESG factors have on our credit rating analysis. ESG credit indicators are intended to communicate, similar to our current narrative format, how ESG factors affect the credit rating analysis but in a supplementary format that may be more easily digestible and readily comparable, as shown in table 1. Our current narrative (descriptive) format and the ESG credit indicators combine to communicate how--for a specific entity--ESG factors influence our credit rating analysis.
Importantly, ESG credit indicators do not affect our existing credit ratings. Rather, they reflect how influential ESG factors are to our credit rating analysis. We incorporate in our credit rating analysis those ESG factors that materially influence creditworthiness and for which we have sufficient visibility and certainty. ESG credit indicators do not affect a rating committee's decision nor change our approach to credit ratings. They are not a sustainability rating or an S&P Global Ratings ESG evaluation.
We expect to implement ESG credit indicators for individual covered bond programs starting in first-quarter 2022. Further information regarding how we assess ESG factors through our criteria and the implementation of ESG credit indicators for covered bond programs can be found in ESG Credit Indicator Definitions And Application.
We disclose separate credit indicators for E, S, and G that range from E-1 to E-5, S-1 to S-5, and G-1 to G-5, depending on the magnitude and direction of the influence on our credit rating analysis. ESG credit indicators are not intended be used as a measure of how entities are positioned in terms of ESG performance. Instead, they reflect our qualitative assessment about whether ESG factors have a neutral, positive, or negative influence on the key components of our credit rating analysis identified within our sector-specific criteria. The scale below has a negative skew, which reflects our view that ESG considerations often have a more negative than positive influence within our credit rating analysis when they are not considered neutral. A neutral ESG credit indicator does not necessarily mean that ESG factors are irrelevant, it just means that currently they do not materially influence our credit rating analysis.
Table 1
| Range Of ESG Credit Indicators | |||
|---|---|---|---|
| Influence on credit rating analysis | Environmental indicator | Social indicator | Governance indicator |
| Positive | E-1 | S-1 | G-1 |
| Neutral | E-2 | S-2 | G-2 |
| Moderately negative | E-3 | S-3 | G-3 |
| Negative | E-4 | S-4 | G-4 |
| Very negative | E-5 | S-5 | G-5 |
Table 2 shows an example of how ESG credit indicators are disclosed through an example for an entity where environmental and governance factors negatively influence our credit rating analysis. E-4 indicates that environmental factors (physical risk, in this case) have a negative influence on our credit rating analysis for that entity, while G-3 shows that governance factors (transparency and reporting, in this case) have a moderately negative influence. S-2 indicates that social factors are neutral for our credit rating analysis.
This report does not constitute a rating action.
| Primary Credit Analysts: | Antonio Farina, Milan + 34 91 788 7226; antonio.farina@spglobal.com |
| Matthew S Mitchell, CFA, Paris +33 (0)6 17 23 72 88; matthew.mitchell@spglobal.com |
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