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ESG Factors Rarely Influence Ratings of Supranational Issuers – Fitch

Governance factors had the highest impact, while environmental factors generally deemed irrelevant to supranational credit ratings.

ESG factors are not the key driver of ratings of supranational institutions, according to a new report by Fitch Ratings.

While all supranational ratings are influenced by at least one ESG factor, instances of them being the key driver are low. The report noted only three instances where an individual ESG factor played a key role in the supranational rating.

Debt issuance by sovereign, supranational and agency bonds increased to US$671 billion on 2019. Major issuers in the sector include the World Bank, European Investment Bank and the Asian Infrastructure Investment Bank.

Fitch’s Environmental, Social and Governance Relevance Scores for supranational entities were assigned to 26 multilateral development banks (MDBs), accounting for the bulk of supranational institutions.

Factors that have a high impact on the credit rating are given a score of ‘5’. Factors that are relevant to the rating, but not a key driver for it, are given a score of ‘4’, low impact being given ‘3’ and factors irrelevant to the ratings are given ‘1’ or ‘2’.

Governance was noted as a material factor for all supranationals, with the ratings of all MDBs being influenced by one governance factor. Every MDB received a score of ‘4’ or more for ‘rule of law, institutional and regulatory quality’.

The main governance issues influencing MDBs were risks associated with the management strategy, including difficulties in predicting strategy changes; an absence of regulatory oversight; governance structure and operational constraints.

Fifteen issuers have a high score of ‘4’ or more for at least one social factor. These typically reflected constraints relating to the public missions of MDBs, such as providing funding to poor and insolvent countries.

Environmental factors were found to be generally irrelevant to the ratings of MDBs. The only environmental risk element to receive a score of ‘2’ or more was ‘exposure to environmental impacts’, reflecting the exposure of some institutions to countries facing climate change and extreme weather conditions. Only one MDB had a score of ‘3’ for EIM.

Fitch’s ESG Relevance Scores were created to increase market transparency and provide investors with an insight on how ESG affects credit risk. They apply only to those entities that have been assigned an intrinsic rating; this excludes supranational administrative bodies, whose ratings are driven by support from members states.

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