29 September 2022

Insights from Fitch ESG Ratings

Entity and framework score gap means 'brown' companies can still meet green standards for bonds

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Author: Nneka Chike-Obi, ESG Research, Sustainable Fitch

Sustainable Fitch has undertaken a study on the introductory cohort of 220 ESG Entity Ratings it assigned. ESG Ratings derive from an analysis of actions, outcomes, impacts and activities, in addition to policies and broader commitments.

The introductory cohort has an average framework score of 74 and an average entity score of 58 on a scale of 0-100. This means that issuers are doing a good job aligning their ESG labelled bonds to international best practices, but their business activities only have average sustainability performance.

Green bonds are the largest subset of labelled bonds in our dataset (476) and have the highest framework scores, achieving an average of 76, while sustainability-linked bonds rank at the bottom (62).

'Our data indicate that ESG labelled bond frameworks have a better sustainability profile and are more aligned to international best practices than the issuing entities do themselves' Nneka Chike-Obi, ESG Research, Sustainable Fitch

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On a regional level, entities from EMEA have an average ESG score of 60, showing slightly better sustainability profiles than those in Asia-Pacific and the Americas.

On a sector level, water and wastewater utilities have the highest average entity scores. At the same time, airports have the lowest due to their customers consuming fossil-based aviation fuel.

The food and beverage sector has the lowest business activities score (39) and the lowest 'E' sub-score (31) due to GHG emissions, deforestation, land use change and water source pressures.

Sustainable Fitch's ESG Ratings are in-depth analyses of individual entities and bond frameworks against a common methodology. Aggregating results and considering insights on a higher level – either by sector or geography – does, therefore, inevitably include some generalisations that may not apply to each individual case. However, we believe that looking at ESG Ratings on an aggregate level that enable a cross-comparison of the sector and regional trends as they pertain to environmental or social impacts yields valuable, contextual insights for investors.

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