ESG and Credit: Serving the Underserved—An ABS Perspective

Morningstar DBRS published a commentary discussing the potential social factors of lending to underserved borrowers in the financial industry and how they could affect Morningstar DBRS’ structured finance credit analysis in global asset-backed securities (ABS).

Key highlights include:
-- A look at different borrowing options available to underserved borrowers in the ABS sector.
-- The potential impact of artificial intelligence when it comes to lending to the underserved.
-- Whether lending to underserved borrowers could be considered a social factor when assessing environmental, social, and governance (ESG) factors in the credit analysis.
-- Operational risks of lending to the underserved.

“Lending to underserved borrowers is an inherently riskier practice. If all claimed lending to underserved borrowers was determined to be an ESG factor in itself, for most ABS transactions, this would be considered a credit-negative social factor,” said Simon Murphy, Vice President of Operational Risk. “This is because such lending is often associated with low income, limited-to-no credit/income track record, and high interest rates.”