Vivek kumar sehrawat’s Post

Can Credit Ratings and Sustainability Coexist? The Complex Relationship Between ESG and Creditworthiness I just finished reading a fascinating report on the relationship between ESG factors and credit ratings. It's a topic that's gaining a lot of traction, and for good reason. As investors increasingly prioritize sustainability, it's crucial to understand how credit rating agencies are incorporating ESG into their assessments. My observation highlights a key challenge: while ESG factors are increasingly recognized as material to a company's long-term financial health, they often don't have an immediate impact on creditworthiness. This can lead to a disconnect where companies with poor ESG performance still receive high credit ratings, while those leading the charge on sustainability may not see their efforts fully reflected in their ratings. This raises some important questions: Are credit rating agencies doing enough to integrate long-term ESG risks, particularly climate-related risks, into their assessments? Should companies with strong ESG performance be incentivized with higher credit ratings, even if the financial impact isn't immediately apparent? How can we ensure that credit ratings accurately reflect a company's true long-term value, including its commitment to sustainability? I believe that credit rating agencies have a crucial role to play in driving the transition to a more sustainable economy. By incorporating ESG factors more comprehensively into their assessments, they can incentivize companies to prioritize sustainability and provide investors with the information they need to make informed decisions. But it's not just about the rating agencies. Investors also need to demand greater transparency and accountability from the companies they invest in. We need to move beyond short-term thinking and recognize that ESG factors are not just "nice to haves," but essential components of long-term financial performance. I'm curious to hear your thoughts on this. How do you think ESG factors should be incorporated into credit ratings? What role can investors play in driving this change? Let's start a conversation! Credit to Zsuzsanna for the report and her post on it. #ESG #sustainability #creditratings #investing #finance

Thanks Zsuzsanna Tajti PhD, CFA, FRM, PRM, CIA, SCR 🌱" for sharing this highly relevant report. “𝐂𝐚𝐧 𝐂𝐫𝐞𝐝𝐢𝐭 𝐑𝐚𝐭𝐢𝐧𝐠 𝐀𝐬𝐬𝐞𝐬𝐬𝐦𝐞𝐧𝐭𝐬 𝐚𝐧𝐝 𝐒𝐮𝐬𝐭𝐚𝐢𝐧𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐂𝐨𝐞𝐱𝐢𝐬𝐭? – ESG integration in the credit world: moving beyond short-term horizons”

Exploring the intersection of credit ratings and sustainability, the Institute for Energy Economics and Financial Analysis' latest report delves into whether ESG considerations truly impact credit assessments in a meaningful way. With key insights on the current limitations and potential for a more integrated approach, this study challenges us to rethink how environmental, social, and governance factors can shape financial futures. #ESG #Sustainability #Finance #CreditRatings

𝐄𝐒𝐆 𝐈𝐍𝐓𝐄𝐆𝐑𝐀𝐓𝐈𝐎𝐍 𝐈𝐍 𝐂𝐑𝐄𝐃𝐈𝐓 𝐀𝐒𝐒𝐄𝐒𝐒𝐌𝐄𝐍𝐓𝐒 Institute for Energy Economics and Financial Analysis has published the “𝐂𝐚𝐧 𝐂𝐫𝐞𝐝𝐢𝐭 𝐑𝐚𝐭𝐢𝐧𝐠 𝐀𝐬𝐬𝐞𝐬𝐬𝐦𝐞𝐧𝐭𝐬 𝐚𝐧𝐝 𝐒𝐮𝐬𝐭𝐚𝐢𝐧𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐂𝐨𝐞𝐱𝐢𝐬𝐭? – ESG integration in the credit world: moving beyond short-term horizons” report:  ◾️ stating that “The current “ESG-enhanced” rating framework is simply a repackaged concept of an already established credit assessment principle”, and  ◾️ asking “If ESG considerations are deemed to have a credit risk or benefit but do not result in a tangible and timely credit rating change, what is the purpose of ESG considerations in credit ratings (or ESG credit score)?” 𝑾𝑯𝑨𝑻 𝑰𝑺 𝑬𝑺𝑮 𝑪𝑹𝑬𝑫𝑰𝑻 𝑺𝑪𝑶𝑹𝑬 𝑨𝑵𝑫 𝑻𝑯𝑬 𝑹𝑬𝑷𝑶𝑹𝑻’𝑺 𝑲𝑬𝒀 𝑭𝑰𝑵𝑫𝑰𝑵𝑮𝑺? ESG (#environmental, #social, #governance) credit score is a tool developed to improve ESG impact transparency:  ➡️ aiming to articulate or quantify ESG factors in credit rating analysis,  ➡️ measuring how credit relevant ESG risk can ultimately impact the ability of debt repayment. Key findings:  1️⃣ Credit rating agencies do not make value judgement, but rather how #ESG factors impact creditworthiness. Companies that are negatively impacting the environment are highly rated, while #sustainable companies do not benefit despite decarbonization.  2️⃣ Disclosing or providing detailed ESG diagnosis is not the same as integrating ESG factors into credit ratings, since the former does not trigger a credit rating action.  3️⃣ Conventional Corporate Credit Assessment + ESG #Risk system would provide transparency and calibrate ESG risks for debt investors.  4️⃣ The current credit rating model is short-sighted and not intuitive enough to provide an early warning signal of a #climate crisis. 𝑾𝑯𝑨𝑻 𝑨𝑹𝑬 𝑻𝑯𝑬 𝑪𝑶𝑵𝑪𝑳𝑼𝑺𝑰𝑶𝑵𝑺? Currently only credit relevant ESG factors that are visible, likely to materialize, and have a significant short-term (3-5 years) impact on creditworthiness are considered in the credit assessment, hence  ➡️ ESG risks will likely continue to build up, affecting debt repayment capacities as e.g. the low-carbon transition accelerates and the effects of physical #climatechange become more apparent. As a result, bond portfolios are faced with increased downside risk.  ➡️ The current methodology is a disadvantage for companies that are pursuing a sustainable transition, instead of incentivizing them by enhancing low-cost financing to accelerate the clean #energy transition. Should creditworthiness & #sustainability be combined in one assessment? Just as businesses & risk managers are expected to think beyond short-termism, so should credit rating agencies. -- Follow me on LinkedIn for a daily post about interesting reports on #sustainability: Zsuzsanna Tajti PhD, CFA, FRM, PRM, CIA, SCR 🌱 -- To download the report, click on the document’s bottom right corner 👇

𝐄𝐒𝐆 𝐈𝐍𝐓𝐄𝐆𝐑𝐀𝐓𝐈𝐎𝐍 𝐈𝐍 𝐓𝐇𝐄 𝐂𝐑𝐄𝐃𝐈𝐓 𝐖𝐎𝐑𝐋𝐃 The Institute for Energy Economics and Financial Analysis recently published the “Can Credit Rating Assessments and Sustainability Coexist? – ESG integration in the credit world: moving beyond short-term horizons” report:  ◾️ stating that “The current “ESG-enhanced” rating framework is simply a repackaged concept of an already established credit assessment principle”, and  ◾️ asking “If ESG considerations are deemed to have a credit risk or benefit but do not result in a tangible and timely credit rating change, what is the purpose of ESG considerations in credit ratings (or ESG credit score)?” 𝑾𝑯𝑨𝑻 𝑰𝑺 𝑬𝑺𝑮 𝑪𝑹𝑬𝑫𝑰𝑻 𝑺𝑪𝑶𝑹𝑬 𝑨𝑵𝑫 𝑻𝑯𝑬 𝑹𝑬𝑷𝑶𝑹𝑻’𝑺 𝑲𝑬𝒀 𝑭𝑰𝑵𝑫𝑰𝑵𝑮𝑺? ESG (#environmental, #social & #governance) credit score is a tool developed to improve ESG impact transparency:  ➡️ aiming to articulate or quantify ESG factors in credit rating analysis,  ➡️ measuring how credit relevant ESG risk can ultimately impact the ability of debt repayment. Key findings:  1️⃣ Credit rating agencies do not make value judgement, but rather how #ESG factors impact creditworthiness. Companies that are negatively impacting the environment will continue to be highly rated, while #sustainable companies will not receive a rating uplift despite decarbonization.  2️⃣ Disclosing or providing detailed ESG diagnosis is not the same as integrating ESG factors into credit ratings, since the former does not trigger a credit rating action.  3️⃣ Conventional Corporate Credit Assessment + ESG #Risk system would provide transparency and calibrate ESG risks for debt investors.  4️⃣ The current credit rating model is short-sighted and not intuitive enough to provide an early warning signal of a #climate crisis. 𝑾𝑯𝑨𝑻 𝑨𝑹𝑬 𝑻𝑯𝑬 𝑪𝑶𝑵𝑪𝑳𝑼𝑺𝑰𝑶𝑵𝑺? Currently only credit relevant ESG factors that are visible, likely to materialize, and have a significant short-term (3-5 years) impact on creditworthiness are considered in the credit assessment, hence:  ➡️ ESG risks will likely continue to build up, affecting debt repayment capacities as e.g. the transition to a low-carbon economy accelerates and the effects of physical #climatechange become more apparent. As a result, bond portfolios are faced with increased downside risk over time.  ➡️ The current credit rating methodology is a disadvantage for companies that are pursuing a sustainable transition, instead of incentivizing them by enhancing low-cost financing to accelerate the clean #energy transition. The models which are suggested in the report aim to explore the possibility of combining creditworthiness and #sustainability in a credit rating assessment. Just as businesses & risk managers are expected to think beyond short-termism, so should credit rating agencies. -- Follow me on LinkedIn: Zsuzsanna Tajti PhD, certified CFA, FRM, PRM, CIA, SCR 🌱 -- To download the report, click on the document’s bottom right corner 👇

Great post from my colleague Zsuzsanna Tajti PhD, CFA, FRM, PRM, CIA, SCR 🌱. Insightful as usual. The next question to cover is as follows: Do credit assessment need to consider #doublemateriality or only the financial side of it? And if so, is this enough? In other words, do borrowers need to be considered on how: 1. they increase the ESG risks of a bank (financial side of a double materiality assessment) 2. they impact environment/ Society which can further increase the risk of a bank (impact side of a double materiality assessment) But also: 3. they transition and adapt to emerging ESG risks (forward looking assessment) and/or 4. they contribute to the greeness of the bank’s lending portfolio (as per EUT KPIs and Pillar 3)

Re-posting this insightful summary blog from Institute for Energy Economics and Financial Analysis (IEEFA) on ESG integration in credit assessments. The key takeaway? The current system is short-sighted, focusing only on short-term ESG factors impacting creditworthiness within 3-5 years. This approach: Disadvantageously overlooks long-term ESG risks, which are likely to build up and impact debt repayment as climate change worsens. Fails to incentivize sustainable companies pursuing the clean energy transition, hindering access to affordable financing. ❌ The report proposes a new framework: combining conventional credit assessment with a long-term ESG risk system. This would: Increase transparency for debt investors by calibrating ESG risks. ✅ Provide early warning signals of climate-related risks, crucial for informed investment decisions. The question remains: Should creditworthiness and sustainability be combined in one assessment?As businesses and risk managers are increasingly expected to take a long-term view, so should credit rating agencies. By incorporating long-term ESG considerations, credit ratings can become a more valuable tool for investors seeking to make informed decisions that align with both financial and sustainability goals. #ESG #sustainability #creditrating #investing #climatechange

𝐄𝐒𝐆 𝐈𝐍𝐓𝐄𝐆𝐑𝐀𝐓𝐈𝐎𝐍 𝐈𝐍 𝐓𝐇𝐄 𝐂𝐑𝐄𝐃𝐈𝐓 𝐖𝐎𝐑𝐋𝐃 The Institute for Energy Economics and Financial Analysis recently published the “Can Credit Rating Assessments and Sustainability Coexist? – ESG integration in the credit world: moving beyond short-term horizons” report:  ◾️ stating that “The current “ESG-enhanced” rating framework is simply a repackaged concept of an already established credit assessment principle”, and  ◾️ asking “If ESG considerations are deemed to have a credit risk or benefit but do not result in a tangible and timely credit rating change, what is the purpose of ESG considerations in credit ratings (or ESG credit score)?” 𝑾𝑯𝑨𝑻 𝑰𝑺 𝑬𝑺𝑮 𝑪𝑹𝑬𝑫𝑰𝑻 𝑺𝑪𝑶𝑹𝑬 𝑨𝑵𝑫 𝑻𝑯𝑬 𝑹𝑬𝑷𝑶𝑹𝑻’𝑺 𝑲𝑬𝒀 𝑭𝑰𝑵𝑫𝑰𝑵𝑮𝑺? ESG (#environmental, #social & #governance) credit score is a tool developed to improve ESG impact transparency:  ➡️ aiming to articulate or quantify ESG factors in credit rating analysis,  ➡️ measuring how credit relevant ESG risk can ultimately impact the ability of debt repayment. Key findings:  1️⃣ Credit rating agencies do not make value judgement, but rather how #ESG factors impact creditworthiness. Companies that are negatively impacting the environment will continue to be highly rated, while #sustainable companies will not receive a rating uplift despite decarbonization.  2️⃣ Disclosing or providing detailed ESG diagnosis is not the same as integrating ESG factors into credit ratings, since the former does not trigger a credit rating action.  3️⃣ Conventional Corporate Credit Assessment + ESG #Risk system would provide transparency and calibrate ESG risks for debt investors.  4️⃣ The current credit rating model is short-sighted and not intuitive enough to provide an early warning signal of a #climate crisis. 𝑾𝑯𝑨𝑻 𝑨𝑹𝑬 𝑻𝑯𝑬 𝑪𝑶𝑵𝑪𝑳𝑼𝑺𝑰𝑶𝑵𝑺? Currently only credit relevant ESG factors that are visible, likely to materialize, and have a significant short-term (3-5 years) impact on creditworthiness are considered in the credit assessment, hence:  ➡️ ESG risks will likely continue to build up, affecting debt repayment capacities as e.g. the transition to a low-carbon economy accelerates and the effects of physical #climatechange become more apparent. As a result, bond portfolios are faced with increased downside risk over time.  ➡️ The current credit rating methodology is a disadvantage for companies that are pursuing a sustainable transition, instead of incentivizing them by enhancing low-cost financing to accelerate the clean #energy transition. The models which are suggested in the report aim to explore the possibility of combining creditworthiness and #sustainability in a credit rating assessment. Just as businesses & risk managers are expected to think beyond short-termism, so should credit rating agencies. -- Follow me on LinkedIn: Zsuzsanna Tajti PhD, certified CFA, FRM, PRM, CIA, SCR 🌱 -- To download the report, click on the document’s bottom right corner 👇

‘If ESG considerations are deemed to have a credit risk or benefit but do not result in a tangible and timely credit rating change, what is the purpose of ESG considerations in credit ratings (or ESG credit risk score)’. Please make time and read this report from The Institute for Energy Economics & Financial Analysis if you have not done so! ESG considerations must look beyond short-term financial gains. A lot to ponder! Thank you for your report…it is a ‘must read’!

𝐄𝐒𝐆 𝐈𝐍𝐓𝐄𝐆𝐑𝐀𝐓𝐈𝐎𝐍 𝐈𝐍 𝐂𝐑𝐄𝐃𝐈𝐓 𝐀𝐒𝐒𝐄𝐒𝐒𝐌𝐄𝐍𝐓𝐒 Institute for Energy Economics and Financial Analysis has published the “𝐂𝐚𝐧 𝐂𝐫𝐞𝐝𝐢𝐭 𝐑𝐚𝐭𝐢𝐧𝐠 𝐀𝐬𝐬𝐞𝐬𝐬𝐦𝐞𝐧𝐭𝐬 𝐚𝐧𝐝 𝐒𝐮𝐬𝐭𝐚𝐢𝐧𝐚𝐛𝐢𝐥𝐢𝐭𝐲 𝐂𝐨𝐞𝐱𝐢𝐬𝐭? – ESG integration in the credit world: moving beyond short-term horizons” report:  ◾️ stating that “The current “ESG-enhanced” rating framework is simply a repackaged concept of an already established credit assessment principle”,  ◾️ asking “If ESG considerations are deemed to have a credit risk or benefit but do not result in a tangible and timely credit rating change, what is the purpose of ESG considerations in credit ratings (or ESG credit score)?” 𝑾𝑯𝑨𝑻 𝑰𝑺 𝑬𝑺𝑮 𝑪𝑹𝑬𝑫𝑰𝑻 𝑺𝑪𝑶𝑹𝑬? ESG (#environmental, #social, #governance) credit score is a tool developed to improve ESG impact transparency:  ➡️ aiming to articulate or quantify ESG factors in credit rating analysis,  ➡️ measuring how credit relevant ESG risk can ultimately impact the ability of debt repayment. 𝑻𝑯𝑬 𝑹𝑬𝑷𝑶𝑹𝑻’𝑺 𝑲𝑬𝒀 𝑭𝑰𝑵𝑫𝑰𝑵𝑮𝑺  1️⃣ Credit rating agencies do not make value judgement, but rather how #ESG factors impact creditworthiness. Companies that are negatively impacting the environment are highly rated, while #sustainable companies do not benefit despite decarbonization.  2️⃣ Disclosing or providing detailed ESG diagnosis is not the same as integrating ESG factors into credit ratings, since the former does not trigger a credit rating action.  3️⃣ Conventional Corporate Credit Assessment + ESG #Risk system would provide transparency and calibrate ESG risks for debt investors.  4️⃣ The current credit rating model is short-sighted and not intuitive enough to provide an early warning signal of a #climate crisis. 𝑾𝑯𝑨𝑻 𝑨𝑹𝑬 𝑻𝑯𝑬 𝑪𝑶𝑵𝑪𝑳𝑼𝑺𝑰𝑶𝑵𝑺? Currently only credit relevant ESG factors that are visible, likely to materialize, and have a significant short-term (3-5 years) impact on creditworthiness are considered in the credit assessment, hence  ➡️ ESG risks will likely continue to build up, affecting debt repayment capacities as e.g. the low-carbon transition accelerates and the effects of physical #climatechange become more apparent. As a result, bond portfolios are faced with increased downside risk.  ➡️ The current methodology is a disadvantage for companies that are pursuing a sustainable transition, instead of incentivizing them by enhancing low-cost financing to accelerate the clean #energy transition. Should creditworthiness & #sustainability be combined in one assessment? Just as businesses & risk managers are expected to 𝐭𝐡𝐢𝐧𝐤 𝐛𝐞𝐲𝐨𝐧𝐝 𝐬𝐡𝐨𝐫𝐭-𝐭𝐞𝐫𝐦𝐢𝐬𝐦, so should credit rating agencies. -- Follow me on LinkedIn for a daily post about interesting reports on #sustainability: Zsuzsanna Tajti PhD, CFA, FRM, PRM, CIA, SCR 🌱 -- To download the report, click on the document’s bottom right corner 👇