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Credit Assessment Scorecards with ESG Credit Metrics


Five Ways Sustainability is Transitioning Traditional Credit Analysis.

  1. Sustainability matters more now.
  2. ESG factors are directly impacting credit quality across all sectors.
  3. Systemic ESG country and sector/industry risk factors take on added importance.
  4. Entity-specific competitive analysis will further differentiate ESG credit risk.
  5. Isolating the main ESG factors' is key to understanding the impact on credit quality.

  • The Challenge
  • The Solution

Assessing ESG Factors in Credit Risk Analysis

ESG risks have historically been perceived as taking place over the long term, so they will not materially impact an issuer’s cash flow and funding ability. There is increasing evidence, however, that ESG factors can affect credit risk[1] and investment performance[2] 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 risk factors.

[1] Regular ESG Industry Report Cards published by S&P Global Ratings.
[2] “ESG funds outperform S&P 500 amid COVID-19, helped by tech stock boom”, S&P Global Market Intelligence, August 13, 2020.

Assessing ESG Factors in Credit Risk Analysis

S&P Global Market Intelligence’s Credit Assessment Scorecards provide a structured framework for assessing credit risk, generating credit scores that are designed to broadly align with credit ratings from S&P Global Ratings.[3]  Our Scorecards enable ESG factors to be considered in credit risk analysis in a transparent and structured way, while working through the regular credit assessment process.

[3]  S&P Global Ratings does not contribute to or participate in the creation of credit scores generated by S&P Global Market Intelligence. Lowercase nomenclature is used to differentiate S&P Global Market Intelligence PD credit model scores from the credit ratings issued by S&P Global Ratings.

  • ESG Credit Risk Factors in Areas Within the Corporate Scorecards
  • ESG Credit Metrics

A Transparent and Systematic Framework for Considering ESG

Scorecards with ESG Credit Metrics are enhanced Scorecards that explicitly include ESG credit risk factors. These factors are considered in detail alongside the traditional credit analysis formalized in the Scorecards, enabling users to reflect the impact of material ESG factors on credit risk while working through the regular credit assessment process.

For each of the three ESG dimensions (environmental, social and governance), key ESG credit risk factors are those that can materially influence the creditworthiness of an entity and for which there is sufficient visibility and certainty. Key ESG credit risk factors can have a negative or positive impact on credit risk, however, not all ESG factors correlate to ESG credit risk factors. For example, cement producers’ negative environmental impact is not generally considered credit negative.

ESG credit risk factors can be considered in several areas within the Bank and Corporate Scorecard framework, including management and governance, country and industry risk, competitive position and cash flow/leverage, as shown in Figure 1.

Figure 1: ESG Credit Risk Factors in Areas Within the Corporate Scorecards

A Transparent and Systematic Framework for Considering ESG

These Scorecards generate ESG credit metrics that quantify the impact on the final credit score of the ESG credit risk factors. The metrics are alpha-numeric quantifications of the expected impact and are shown on a scale from 1 to 5, with 1 being positive and 5 very negative. They are proving to be critical for addressing internal and external requirements.

Figure 2: ESG Credit Metrics

Factor ESG in Credit Risk Analysis

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