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Fitch: Banks increasingly considering ESG factors in underwriting processes

Global banks are increasingly considering environmental, social and governance factors in their underwriting processes, Fitch Ratings said in a report.

The rating agency said about half of the lending assets covered by the 182 banks that participated in its ESG survey during the third quarter of 2019 were screened by the banks for ESG risks. While rating impacts on companies because of ESG-related bank funding decisions are rare, the survey found that those affected by emissions regulations and the rising cost of carbon may find it harder to secure bank financing in the longer term.

Companies committed to mitigating their climate-change risk while managing the transition to a low-carbon and more sustainable economy are likely to make use of transition financing to obtain bank loans, according to Fitch. Those with higher ESG risks are expected to be supported by local and state-controlled banks, particularly for high-profile national projects. They may also find banks with fewer ESG constraints or turn to the capital markets for additional funding.

Fitch said the extractive metals and mining sector was most likely to be scrutinized by banks for environmental risks, followed by chemicals and fertilizers. The agency also highlighted the gaming and leisure sector for its social risks such as addiction, crime and money laundering, which could lead to reputational risks.

Although rare, transactions with a high risk of human rights violations were the main "no-go" area for banks. Several banks, especially in western Europe, reject financing for new thermal coal mining and coal-fired power stations, while several European banks refuse to finance weapon manufacturers.