The use of ESG for credit ratings matters

– Companies with a better ESG score have lower credit risk and higher credit rating.
– Correlation is greatest for poor ESG scored companies, indicating ESG scores are most useful in identifying high-risk companies.

Here’s a note from Marie-Josee Privyk:

Interesting study from Federated Hermes – International showing a positive correlation between ESG scores and credit risk – in other words, companies with a better ESG score have lower credit risk and higher credit rating. I notice that:

– The correlation is greatest for poor ESG scored companies, indicating ESG scores are most useful in identifying high-risk companies
– Outliers – those for which the correlation is negative – may signal mispricing, i.e. companies with a good credit rating but poor ESG score (and maybe even the other way around)

While this is comparing two separate ratings (credit and ESG), the trend is for credit rating agencies to integrate ESG to their credit ratings through their analysis process. Lots of work being done by the Principles for Responsible Investment on this front.