Ratings agency Kroll unveils ESG approach

Adding ESG elements to its bond analysis comes on the back of investor interest

Kroll Bond Rating Agency (KBRA) has revealed how ESG factors will affect how its rates companies in an update on its evaluation approach.

KBRA’s sector-by-sector report of ESG risks is a response to what the ratings agency calls a “rising importance of ESG factors among investors”.

The sectors outlined in its report include corporates and financials, insurance, project finance and structured finance, public finance, and sovereigns.

When ESG factors are a key positive or negative driver in the rating process, KBRA will explicitly detail those factors in its rating reports. If it is relevant to credit, the ESG factor will be incorporated into the analysis in the same manner as all other credit relevant factors, KBRA said.

As ESG risks become more prevalent, KBRA’s ongoing research may contribute to rating methodology revisions over time, it added.

For corporates and financial institutions, KBRA said governance will be a critical ESG factor in analysing the potential credit risks a company might face as the policies and procedures management have in place will likely dictate the issuer’s financial stability.

Factors it will assess include an issuer’s business operations, reputation, policies, growth strategy, and branding, which may include consideration of environmental and social factors if impactful to the creditworthiness of the issuer.

For insurance, KBRA will assess a number of risks, including catastrophe modelling parameters and data quality, reinsurance program structure, and stress scenarios.

“KBRA is actively monitoring evolving ESG trends to provide investors with insightful credit analyses to aid in their decision-making,” the ratings agency said. “Investor preferences are changing and investments in well-governed entities that create a positive social and environmental impact are growing in prominence.

“Major institutional investors are considering ESG factors in their investment decisions. Studies show that women and millennials are particularly interested in environmentally and socially responsible investments. As these demographic groups continue to accrue wealth, ESG-driven investments will likely continue to grow,” KBRA added.

KBRA is recognised as the first credit rating agency to rate securities in both the property assessed clean energy (PACE) and distributed power bond markets, and has published over 32,200 ratings since it launched in 2010.