ESG—Not All About (Credit) Risk

DBRS Morningstar published a commentary entitled “ESG—Not All About (Credit) Risk”, which reviews examples of environmental, social, and governance (ESG) factors across our four business lines—governments, financial institutions, structured finance, and corporate finance—that can, in our view, theoretically have a positive credit impact.

Key highlights include:
-- The extent to which ESG factors can theoretically have a positive credit impact differs from sector to sector.
-- By design, securitisation can specifically target assets with certain ESG credentials to be held within the transaction.
-- In governments, environmental or social policies can potentially create long-term benefits to an economy that positively affect credit analysis, but the same policies can sometimes incur costs in the short term.

Often, ESG considerations are deemed to be an additional risk dimension (ESG risk) that needs to be managed and that may or may not affect the assessment of an issuer's credit risk. However, an ESG consideration in itself is not always negative and there are financial assets and issuers with positive ESG credentials such as, for example, green mortgages (environmental) or the provision of community banking services (social). Positive or negative ESG credentials are not always correlated with credit risk. Positive ESG credentials can be credit negative and vice versa.