ESMA (European Securities & Markets Authority) declined to amend applicable credit rating agency (CRA) regulations to mandate CRAs' consideration of ESG factors in the ratings process, and instead published this Technical Advice to the European Commission on Sustainability Considerations in the credit rating market and these Guidelines on Disclosure Requirements Applicable to Credit Ratings.
The technical advice provides an overview of the level of consideration of ESG factors in select credit ratings, but specifically cautions that while ESG factors "may be considered as part of a credit rating, their consideration does not infer that the credit rating can be construed as providing an opinion on the sustainability or otherwise of an issuer or entity."
The disclosure guidelines provide guidance on information CRAs should reveal in connection with their issuance of a credit rating, and require greater transparency around whether and to what extent ESG factors were considered in a credit rating action. Where ESG factors are a key driver of a credit rating or rating outlook change, the guidelines require a CRA release or report to:
- Outline whether any of the key drivers behind the change to the credit rating or rating outlook correspond to that CRA’s categorization of ESG factors
- Identify the key driving factors that were considered by that CRA to be ESG factors
- Explain why these ESG factors were material to the credit rating or rating outlook
- Include a link to either the section of that CRA’s website that includes guidance explaining how ESG factors are considered as part of that CRA’s credit ratings or a document that explains how ESG factors are considered within that CRA’s methodologies or associated models
See also these articles from Minerva Analytics and Pensions & Investments, and additional information & resources on our Sustainability/ESG page. This post first appeared in the weekly Society Alert!