Andrew Steel discusses the importance of shifting to a sustainable economy

Ahead of the Sustainable Investment Forum Europe taking place in Paris on the 12th March 2019, we caught up with Andrew Steel, Managing Director and Global Head of Sustainable Finance at Fitch Ratings, to discuss the importance of shifting to a sustainable economy.

What are the key things rating agencies can do to help accelerate the shift to a sustainable economy?

As a global credit rating agency our role is to provide independent opinions and analysis on fundamental credit issues, which can then be used by investors to help inform them when making their credit decisions.   Investor interest in ESG has been increasing rapidly and they have called on the CRAs to develop and disclose systematic methodologies for assessing material ESG considerations at an industry level; provide transparency on how ESG considerations affected the credit rating review of each issuer; and proactively identify and highlight systematic ESG risks that require greater attention by issuers and investors.  By addressing these three asks CRA’s can provide information that can help investors and issuers to better standardise their approach to integrating and understanding the credit aspects of E, S and G risks.  Clearly this is only a part of the overall actions required to drive a more sustainable economy, but it is an important part as so much activity revolves around the availability and cost of funding.  Fitch was the first global CRA to address these issues by launching a standardised, global scoring system on 7th January this year, which is fully integrated into its ratings research.

Last year you created a Global Sustainable Finance group – what was the rationale behind this decision?

The Global Sustainable Finance Group was formed last year in direct response to increased interest from investors in ESG risk assessment and analysis.  The group was tasked with working out how to better articulate the relevance and materiality of ESG risk factors in Fitch’s credit ratings, and then to implement a transparent and globally consistent approach to integrating this into research across all sectors.  The group was also tasked with looking at developments in data and research that fall beyond the scope of ratings, but which may help investors to form a more holistic view of how to analyse ESG risks. 

You recently introduced ESG relevance scores – could you tells us a bit more about this initiative?

Fitch has taken a fully integrated approach to ESG within its credit ratings.  It has devised a unique scoring system to transparently display the relevance and materiality of each environment, social or governance factor to the credit decision made for an individual entity’s rating.  Our approach offers a current, through the cycle approach aligned with our ratings methodologies. Fitch has identified at a sector level the elements of E, S and G that it believes are credit relevant, and then scored them for individual entities within that sector. 

The risk elements are clearly set out in the sector based ESG Relevance Score templates, and include references to where in our current qualitative and quantitative analysis each factor is having an impact. Our ESG Relevance Scores enable investors to see how each element is influencing the rating and for them to make judgements about whether they agree with our assessment of the credit impact on an entity by entity, as well as sector, basis.  Individual ESG relevance score levels range from those currently having a direct impact on the rating (5) to those which have no credit impact or are irrelevant to the sector from a credit perspective (1).

How do you see the sustainable finance market developing in the next 5-10 years? And how will this impact rating agencies?

 We see investor interest in ESG continuing to increase and we believe that this will drive changes in market behaviour over the next 5-10 years.  We anticipate increased transparency and consistency of information emerging, and more detailed and insightful trend analysis surrounding ESG risks.  Eventually we see the market reaching a stage where instead of there being a potential advantage or benefit in disclosing ESG practices and data, it moves to one where there is an active penalty in terms of cost and funding accessibility for entities that are not seen to be taking sufficient action.

You're joining us at our second annual Sustainable Investment Forum Europe on 12 March in Paris. What attracted you to the event and could you explain briefly what you're planning to talk about in the panel discussion you're participating in?

The event attracts key investment market participants from investors and asset owners through to regulators and NGOs, providing a focused forum to discuss the current issues that really matter to the investment community.  Having a robust discussion on the issues currently surrounding ESG is important to help drive forward the agenda across the investment community in Europe.

Our panel session is all about integrating ESG risk factors into decision making, which is a complicated process, and one which many people are still struggling to get to grips with.  We’ll be sharing some of our experiences in our journey so far trying to better articulate the credit aspects of ESG, and I’m looking forward to a lively and interactive debate.  I’m a great believer that the best panels spend more time answering questions than pontificating to the audience, so hopefully people will come prepared with some challenging ones!

Fitch Ratings is a Gold Sponsor at the Sustainable Investment Forum Europe, which is taking place in Paris on the 12th March 2019, find out more here. 

Visit Fitch Ratings website here.