ESG Data Guide 2023

Taking the measure of the ESG landscape

Across regulation, leveraged finance and now climate transition analysis, Sustainable Fitch is aiming to bring clarity to fixed income ESG investing, says global head of ESG analytics Gianluca Spinetti.

For more information, see: www.sustainablefitch.com

Environmental Finance: Sustainable Fitch has recently launched its ESG Regulations and Reporting Standards tracker. What is this tool and how are clients using it?

Gianluca SpinettiGianluca Spinetti: The ESG Regulation Tracker is a dynamic digest, in Excel format, of significant regulatory developments in the ESG space, focused on sustainable taxonomies, ESG and climate disclosure regulations and ESG fund requirements. It shows how regulation around ESG issues is developing around the world and aims to bring some clarity to the alphabet soup.

The research generated some interesting findings. First, the assumption is often that regulation in Europe is much more significant than elsewhere. But in reality, a great deal is happening around the world – we’re seeing many examples of advances in ESG regulation, such as from Japan and India in Asia, and some actions also taken in the US.

The other takeaway is the continuing speed of regulatory development. In Europe, we’ve recently seen the release of the EU Taxonomy, including the extension of the environmental objectives that it captures. The other big piece of regulation we’ve seen from Europe is on ESG ratings from the European Securities and Markets Authority. Europe may be pushing the boundaries here, but beyond Europe, many other regulators are moving as well.

EF: Last year, Fitch introduced ESG scores for leveraged finance products. What challenges did you face developing ESG scores for that part of the fixed income market?

GS: There are a number of challenges here, given that the typical entities within leveraged finance portfolios are small or medium-sized entities, not publicly listed, and sometimes owned by private equity funds. So, the challenges here are related to transparency, disclosure and the granularity of information provided – these companies tend to produce very limited sustainability reporting, if they provide any.

That means we have to leverage our analytical capabilities – and this is where Sustainable Fitch benefits from having invested in a significant analytical team. Our analysts analyse every single entity and every single financial transaction, on an individual basis, without making simplifications based on their sector, for example.

The reception we have had on the product has been very positive, and it’s being widely used. We’re seeing the ESG scores used in building portfolios, monitoring their performance, and reporting by users to their clients regarding how they are handling sustainability issues. The reason for its success, we believe, is that this part of the market has been lacking a high-quality product up until now.

EF: It’s now a year since Fitch launched its ESG Ratings. How has the product been received?

GS: We’ve had very positive feedback from market participants. The feedback has centred on the high analytical quality and depth of the ratings compared to what else is available in the market. In contrast to the ESG Scores, the ESG Ratings focus on the parts of the market where there is plenty of information, and where the analytical skill lies in gathering and synthesising information – regulatory data, use of proceeds and KPI data, to name just a few. Crucially, our ratings provide detailed commentary about the impact of labelled bond instruments and the business activities of the issuing entity, with a specific focus on impact and outcomes.

Another important element is the analytical ownership of each assessment. In every report we publish, we include the name and phone number of the analyst responsible, as in the credit space. Users can ask analysts for more information, or what was behind certain analytical decisions made when coming up with the rating.

Fixed income is in our DNA at Fitch. We look at every specific transaction, because not all sustainable bond frameworks are built the same. We don’t apply a blanket entity analysis to every transaction an entity does: we analyse entities and transactions on a standalone basis as well as having the ability to combine those ratings. For instance, we will analyse a green bond differently to a conventional instrument or a structured finance transaction backed by green or sustainable assets.

We see investors use our ESG ratings for portfolio construction, monitoring and marketing, and data for regulatory purposes – a critical part of the analysis is a technical assessment of the instrument’s EU Taxonomy alignment, as well as alignment with the Sustainable Development Goals and the International Capital Markets Association principles.

EF: Investors are keen to understand which companies are best positioned to prosper as the net-zero transition progresses. How do you look at this issue?

GS: This is a very topical question. Last year at COP27, we announced we are working on such a transition assessment. We worked with a framework developed by the Sustainable Market Initiative to create our own methodology, initially focused on the energy transition.

What we’re trying to do is to focus on what companies need to do to transition, and where they are in that process. It will use certain key performance indicators, such as emissions targets, what they have actually done in terms of reducing emissions, and where they are putting their money – what financial action they are taking today. We will monitor and update the methodology to reflect changing requirements over time.

Now that the methodology is launched, we are seeking feedback from our users, and getting their views as to which sectors we should focus on next – transportation, or chemicals, for example. It will depend upon where we see most interest from our clients, and from companies themselves.

Guide entries by Sustainable Fitch