At the end of 2019, we undertook a survey of 194 credit risk professionals working in financial services firms around the world to see how their portfolio management processes have been evolving to account for environmental, social, and governance factors (ESG). The results were very interesting, reflecting the incredible surge that is being reported in global sustainable investments, which reached a new peak of $30.683 trillion USD at the beginning of 2018.
ESG covers a wide range of issues, including how corporations take steps to help manage climate change, provide for their workers, protect relationships with business partners, and build a culture of innovation. Heightened investor demand is making it critical to consider these factors more fully in credit risk analysis, according to 86% of our survey respondents. Given this, 83% say ESG factors are integral to what they do today, or are playing a growing role in the credit risk area.
Financial services firms seem to be formalizing their approach to ESG issues, with most (89%) respondents saying their organization has an explicit ESG policy in place. In addition, almost half (46%) have a dedicated ESG resource in the Credit Risk team, with plans to beef up this talent going forward. This includes creating dedicated ESG-responsible positions, training incumbent professionals in ESG principles and best practices, and hiring new ESG talent from non-financial backgrounds, such as sustainability consultancies and non-governmental organizations.
So what is driving this change? Improved long-term returns leads the list as one of the top three motivators for incorporating ESG into the portfolio management process, with growing evidence that ESG investing can, in fact, have a positive impact on financial performance. Brand image/reputation was also mentioned by over half (55%) of the respondents, thinking that negative press about ESG issues may damage their company’s reputation and profitability.
A large number of respondents (76%) have ESG tools and models in place today, with APAC leading the charge (86% of respondents). More needs to be done, however, as firms strive to find broader data sources, more robust analytical capabilities, and experienced personnel. This includes looking at new machine-learning/Artificial Intelligence (AI) systems in support of ESG credit risk management, which may enable investors to collect and analyze more information than ever before when accounting for ESG risks and opportunities, according to S&P Global.
Download the full report to gain insights on the state of ESG credit risk management within financial organizations today.
 The Global Sustainable Investment Alliance's 2018 biennial report, released April 1, 2019.
 “The PRI ESG and alpha study”, the PRI, March 2018.
 “How can AI help ESG investing?”, S&P Global, as of January 28, 2020, www.spglobal.com/en/research-insights/articles/how-can-ai-help-esg-investing.