Neuberger Berman slams credit agencies on ESG failings

“Much more needs to be done” by the big three credit ratings agencies to incorporate environmental, social and governance (ESG) concerns into their issuer ratings, according to Neuberger Berman.

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The investment manager said that Moody’s, Standard & Poor’s (S&P) and Fitch must create a standardised method for analysing ethical topics and push for greater transparency in order to better integrate ESG factors into their credit rating assessments.

Neuberger Berman’s criticisms come after a roundtable discussion held at its global headquarters in New York alongside the Principles for Responsible Investment (PRI), attended by a dozen asset managers and representatives from S&P and Moody’s. Fitch did not send a company representative to the feedback session.

The investment manager has been collaborating with the PRI since 2015 to encourage credit agencies to better systematically incorporate ESG characteristics into their issuer ratings.

One of the major shortcomings identified in the panel discussion was the absence of a systematic methodology for evaluating ESG concerns and risks within the credit analysis process.

While S&P and Moody’s have taken steps to integrate ESG concerns into their assessments of credit risk, with S&P referencing management of issues like the environment and climate as far back as 2012, Jonathan Bailey, head of ESG investing at Neuberger Berman, argued these measures are not enough.

“We have yet to see a credit rating agency publish a transparent and detailed methodology for analysing ESG considerations as part of their credit analysis methodology across industries,” said Bailey.

“Investors and issuers need clarity on what factors credit analysts specifically review for each industry and we believe that analysts should use a common investor-oriented framework like the Sustainability Accounting Standards Board (SASB) as the starting point for their work.”

Fitch, meanwhile, has not yet provided any kind of quantitative review of ratings decisions involving ESG comparable to S&P’s and has not signed on to the PRI’s credit rating initiative.

Although it has stated in recent weeks that it considers ESG risk in its credit ratings, by its own admission “it is rare for ESG risk to be the main driver of credit risk or a rating action”.

A long way to go

Other highlighted areas of concern were a lack of transparency on how ESG considerations impact credit ratings, and a failure on the part of the credit agencies to name and shame issuers who are not providing sufficient disclosure of material ESG topics.

The trio of firms were also called out for not being proactive enough when it comes to flagging ESG risks that require greater attention from issuers and investors.

Involvement from the big three credit rating agencies is paramount in pushing the ESG agenda forward because these firms are crucial in “establishing de facto standards for disclosure by issuers,” according to Bailey.

“By taking these steps, credit rating agencies can help well-managed issuers with strong ESG performance differentiate themselves from their less well-managed industry peers. Academic research suggests this may be associated with lower direct borrowing costs as well as lower stock price synchronicity, which is associated with lower cost of capital for issuers overall.

“More importantly, this sort of action will also help support the effective, efficient and reliable operations of the capital markets as a whole by reducing systematic risk and improving capital allocation,” he continued. “We look forward to continuing to work with our partners at the PRI to engage with credit rating agencies on this important issue.”

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