Assessing ESG Factors in Credit Risk Analysis
Environmental, social and governance (ESG) risks have historically been perceived as taking place over the long term, so not materially impact an issuer’s cash flow and funding ability. There is increasing evidence, however, that ESG factors can affect credit risk and investment performance in the shorter term. ESG factors have often been intangible and building a more quantitative ESG framework can be a complex process for credit analysts. Accessibility and reliability of data and the modeling of relatively new risks are important to enhance the dependability of ESG factors in credit assessment. In addition, consistent disclosure of information by companies could assist analysts in performing credible peer analysis on ESG credit factors.