Simple and Effective: DBRS Morningstar’s Approach to Incorporating ESG in Credit Ratings

This commentary examines how DBRS Morningstar evaluates and incorporates 17 key environmental, social, and governance (ESG) risks in the assessment of its credit ratings across the governments, financial institutions, corporate finance, and structured finance sectors.

Key summary highlights include:
-- A brief recap of the 17 ESG factors that we consider in our analysis, which are generally consistent with those that global ESG stakeholders use to assess ESG factors for sustainable investing and financial risks, and how these factors affect issuers and transaction-specific ratings during the life of a transaction/rating.
-- An overview of how DBRS Morningstar does not assess ESG factors from the viewpoint of how sustainable, ethical, or responsible an issuer’s operations or policies are, but focuses on how ESG factors can affect an issuer’s credit profile.
-- DBRS Morningstar’s approach to incorporating ESG risk factors with a material impact on credit ratings, including the determination of such factors as relevant or significant.

“Although a relevant factor may not be impactful enough in and of itself to change a rating or trend, it is possible that several relevant factors, when present in a particular issuer’s credit risk profile, may have the combined effect of a significant factor or may be impactful enough to change a rating or trend”, said Ross Abercromby, Managing Director of Global Fundamental Ratings at DBRS Morningstar.