NEW YORK--(BUSINESS WIRE)--KBRA releases research that details its approach to environmental, social, and governance (ESG) topics that affect credit markets and individual issuers. As a credit rating agency, KBRA has judiciously avoided the inclusion of a distinct ESG scoring system into its credit rating methodologies and reports. This approach is backed by extensive issuer and investor feedback which found the merging of ESG scores—often including factors that do not impact the credit analysis—is confusing. In fact, KBRA believes ESG scores are a disservice to market participants.
Credit ratings have a well-understood purpose, namely, they provide an opinion of the creditworthiness and risk of default of an issuer or transaction. Conversely, an ESG rating is not as precise because it considers a variety of ESG factors—many of which are not tied to financial performance, creditworthiness, or provide objective standards of comparison. Instead, they assess wider impacts on society and the environment, which often rely on value-based judgments. In our view, ESG scores that have no impact on a credit rating should be kept separate from credit ratings.
Key Takeaways
- Rating agencies have rushed to deliver ESG ratings or scores. KBRA has taken a more disciplined approach, providing credit ratings only while striving to become an important source of ESG analysis for the credit markets.
- ESG ratings are often value-based without objective criteria. The ESG rating can simply reflect a preference for one set of outcomes over another.
- Credit ratings are established and well understood. When they are commingled with poorly defined ESG scores, it confuses market participants.
- KBRA incorporates ESG factors into our rating analysis only when they effect credit risks. ESG factors more frequently relevant to credit include but are not limited to costs and risks related to climate, cybersecurity, and the management of differing stakeholder interests.
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About KBRA
KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.
