(Editor's Note: S&P Global Ratings is no longer publishing or updating ESG credit indicators. See https://www.spglobal.com/_assets/documents/ratings/esg_credit_indicators_mr.pdf for more information.)

S&P Global Ratings' ESG credit indicators provide additional disclosure and transparency by reflecting its opinion of how material the influence of environmental, social, and governance (ESG) factors is on its credit rating analysis. The extent of the influence of these factors is reflected on an alphanumerical 1-5 scale where '1' is positive, '2' neutral, '3' moderately negative, '4' negative, and '5' very negative (see table 1).

Table 1

Overview

Collateralized loan obligations (CLOs) typically benefit from portfolio diversification in the form of obligors across many countries and industries. The credit rating on each obligor is one of the key inputs used in our CDO Evaluator model to generate a probability distribution of potential default rates for the given portfolio of assets in aggregate (see our CLO criteria in "Related Criteria And Research"). Therefore, if the influence of ESG factors in our credit rating analysis of the underlying obligors is material enough for our credit ratings to be affected, they can also, albeit indirectly, influence our credit rating analysis of CLOs.

For each obligor, where assigned, we will use its ESG credit indicators and notional exposure to analyze the influence of ESG factors in CLOs asset pools. To the extent a specific obligor has not been assigned an ESG credit indicator, for the purposes of this analysis, we have used ESG credit indicators for the parent or super parent under the hierarchy of the obligor as a proxy, where available. ESG credit indicators relate to an obligor's standalone analysis or, in the case of a parent company, the group credit profile. An obligor's ESG credit indicator does not reflect the influence of ESG factors on the related parent. As such, the ESG credit indicator could diverge from that of its related parent where assigned (see "ESG Credit Indicator Definitions And Application," published Oct 13, 2021"). Where no ESG credit indicator is available we do not include this obligor in our analysis of the underlying obligor in CLOs.

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The environmental credit indicators across CLO obligors are concentrated in category 2. We consider that these credit indicators are, on a net basis, a neutral consideration in our credit rating analysis of the underlying obligors. The credit factors that most affect the environmental credit indicators are climate transition risk and waste and pollution, but they could also be affected by physical risk, natural capital, and other environmental factors.

The social credit indicators across CLO obligors are concentrated in category 2. We consider that these credit indicators are, on a net basis, a neutral consideration in our credit rating analysis of the underlying obligors. The credit factors that most affect the social credit indicators are health and safety and social capital, but they could also be affected by human capital and other social factors.

Most of the governance credit indicators are concentrated in the 3 category. We consider that these credit indicators are, on a net basis, a moderately negative consideration in our credit rating analysis of the underlying obligors. We see higher dispersion within the governance credit indicators. The credit indicators are most often influenced by the governance structure, but could also be affected by risk management, culture, and oversight, transparency and reporting, or other governance factors. Many of the credit indicators affected by the governance structure have a management and governance modifier of fair or weak.

In our ESG credit ratings criteria we articulate the principles that we apply to ESG factors in our credit ratings analysis (see "Environmental, Social, And Governance Principles In Credit Ratings," published Oct. 10, 2021). In those criteria, we define ESG factors as those that can materially influence the creditworthiness of a rated entity or issue and for which we have sufficient visibility and certainty to include in our credit rating analysis. We note that when sufficiently material to affect our view of creditworthiness, ESG factors can influence credit ratings.

The following are examples of key ESG credit factors that have affected creditworthiness or that, in our opinion, may influence future creditworthiness.

With growing investor interest in ESG in CLOs, we are publishing a regularly updated list of CLOs with key ESG benchmarks as shown in tables 2 and 3.

Table 2  |  View Expanded Table