ESG Framework by Sector

Overview

The following section provides a high-level overview of how we incorporate ESG factors and related considerations in our analytical framework when assigning or maintaining credit ratings.

  • Environmental

    Structured finance transactions are typically delinked from the sponsor’s/originator’s corporate credit risk. Nevertheless, ESG environmental factors can affect the performance of the certain types of collateral that secure structured finance transactions. For example, transactions secured by commercial or residential properties, autos, equipment, and aircraft may experience higher defaults and/ or lower recoveries due to environmental risk, such as weather or climate change risks or equipment emissions. We can assess environmental climate change factors that affect historical collateral default and recovery rates through quantitative analysis when estimating expected portfolio losses. For emergent environmental and climate change factors, qualitative analysis of available data can be used to address the potential effect of these risks on future pool losses.

  • Social

    While structured finance transactions are typically insulated from the originator’s ESG risks, servicers play an important ongoing role in structured finance transactions. Consequently, transactions may be exposed to social factors if these factors adversely affect or could affect the servicer’s operations and ability to service the collateral through the life of the transaction. Other social factors, such as social impact of the securitised assets, product governance, or data security/privacy considerations can affect transaction performance. We can assess social factors that affect historical collateral default and recovery rates through quantitative analysis when estimating pool losses. When social factors are emergent and not yet reflected in historical performance data, the qualitative analysis will estimate the effect of these factors on portfolio credit performance

  • Governance

    Structured finance debt issuers are usually special-purpose vehicles (SPVs) or trusts that are established for the sole purpose of owning the assets and issuing the SPV debt. SPVs are not going concerns and are set up with stringent rules to ensure bankruptcy remoteness; restrictions on active management; and, typically, counterparty replacement mechanisms. Transaction governance considerations related to the independence of the issuer or trust, alignment of interest between transaction parties, and provisions for future events can affect transaction credit performance, whereas ongoing performance reporting affects the ability to monitor credit risk.

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ESG Factors by Sector

The primary ESG factors listed in Exhibit 1 and their implications across the various sectors are discussed in the examples below. In some cases, investors in a given sector (Structured Finance, for example) may be exposed to passed-through ESG factors of guarantors, key counterparties, or the underlying financial obligations of entities in other sectors.

Environmental
Social
Governance

ESG Contacts

Business Development

Media