Rating agencies are ‘not adequately taking ESG into account’

Channels: Markets, Corporate

Companies: Principles for Responsible Investment, Russell Investments, Union Investment, Mercer, AXA Investment Managers, Moody’s

People: Michael Clarke, Florian Sommer, Lise Moret, Andreas Hoepner, Henry Shilling

Credit rating agencies are currently failing to adequately take account of environmental, social and governance (ESG) issues, a conference heard, with some market participants rating their performance as just three out of 10.

Environmental and social issues do not figure prominently enough in the research of the agencies, although they pay more attention to governance issues, it was claimed at a fixed income conference run by the Principles for Responsible Investment (PRI).

Panellists were asked to rate the agencies’ performance on ESG by Michael Clarke a managing director at Russell Investments.

Florian Sommer, senior strategist at Union Investment, said he gave rating agencies a score of two or three out of 10.

“They hardly look at environmental and social factors,” he said. “I think a Mercer report saying that fixed income is like the forgotten child of ESG is quite right. There’s a lot more academic research on equities than bonds – three quarters, if not more. The sell-side research teams are also all focused on equities – there’s one or two looking at bonds.”

Lise Moret, a senior responsible investment analyst at AXA Investment Managers, said: “Currently, it’s mostly governance from the rating agencies. Probably, the materiality is seen as being more direct with equity than regarding corporate bonds.”

Andreas Hoepner, social academic fellow at the PRI, gave the agencies a score of four out of 10, although he pointed out that part of the problem is that the agencies don’t market their work on ESG that publicly, suggesting that some of it is taken into account behind the scenes.

Speaking after the event, Henry Shilling, senior vice-president at Moody’s, defended the way the rating agencies' approach to ESG.

“In our quantitative and qualitative assessments of a company's or issuer's capacity to repay principal and interest in full and on time, we take into consideration relevant and material risks,” he said. “These will include governance, environmental and social risks, as appropriate, even though they may be defined differently and are not be specifically labeled as such.”

Peter Cripps