This further hits home that “while there is a positive correlation between QESG scores and credit risk, credit rating is not sufficient to capture the entire spectrum of ESG risk,” explained Hermes EOS manager Dr Michael Viehs.
That’s why investors should be compelled to consider ESG factors when deciding whether or not to invest in a prospective company.
“Credit investors must use a more precise measure of ESG risk if they aim to accurately capture its influence on spreads,” Reznick emphasised.
“By plotting spreads against QESG scores, we have been able to develop a pricing model that quantifies compensation we should receive for a given level of ESG risk.
“As such, the model helps us identify opportunities in lower-rated companies with higher ESG scores, and to spot issuers at risk because their spreads are too tight relative to their ESG scores.”
