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Fitch new bond ratings provided ESG performance, impact, outcomes scores

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Increasing awareness of climate change and social challenges has spurred increased interest in impact investing. Responding to investor demand for greater clarity and detail in ESG data, Fitch has updated its sustainability-focused analytics product.

  • Sustainable Fitch updates its ESG data, ratings and analytics product with impact, outcome and performance data at the factor level.
  • A lack of clarity on reporting standards, poor quality of data, and accusation of greenwashing has created a backlash against ESG investing. 
  • As impact investing gains in popularity companies will be required to add disclosures relating to the materiality of their impact on the environment and society.

Sustainable Fitch, the ESG data and analysis offering from Fitch, was launched in September 2021, to provide ESG ratings at a debt instrument, entity and framework level. Last month it launched its ratings of sustainability frameworks, which are prerequisite for issuing green and sustainable debt.

Initially focused on the green, social, sustainable, and sustainability-linked bonds issued, Fitch aims to expand this product to cover all rated bonds, and ultimately across the fixed income and debt instrument universe.

Materiality focus becoming increasingly relevant to sustainable investing

While data quality is blamed for some of the problems associated with ESG-ratings inconsistencies among agencies, accurately scoring data for materiality is at the core of any approach to ESG analysis.

But using ESG analysis solely based on financial materiality solely looks at risks to the company being rated, which is being seen by many as incomplete from a sustainability investment perspective.

The concept of double materiality is increasingly being analysed, looking at the financial and non-financial impact a company’s operations have on the environment and society, in addition to their impacts on the company. 

The idea of dynamic materiality is related to this, as it looks at the effect changes over time have on certain business factors. What is financially immaterial today may become business critical in the future, as seen by changes brought on by COVID and the Ukraine war.

Fitch evolves with increasing ESG investing market demands

The launch of the latest iteration of its ESG ratings product is evidence of Fitch’s response to the changing needs of the ESG investment market. The latest change adds impact, outcome, and performance at a granular issue and factor level.

The rising demand for ESG data and analytics from its customers prompted the formation of Sustainable Fitch in September 2021, which provided ESG ratings that ranged from 1 (excellent) to 5 (poor), along with detailed data enabling comparability among peers and sectors, as well as compatibility with standards. 

Prior to this (March 2021), Fitch had launched an ESG sector discovery tool for companies, providing a view of the credit relevance and materiality of ESG issues across all corporate sectors. 

Fitch’s entry into ESG dates back to 2019, when it provided sector templates that provided scores, which were then used by analysts to quantify credit risk from ESG. The questions asked by asset managers of Fitch Ratings when it first began offering ESG data and analysis in 2019 is the same question that is driving the latest evolution of its ESG product – the materiality of the various ESG risks.

At the start of its ESG journey Fitch saw an ESG ratings services industry consisting of 225 entities, providing 326 products with low correlation, and creating confusion on the exact relevance and materiality of issues on credit ratings. 

While the service provider space is in constant flux, with a lot of consolidation, especially among providers of technology-based solutions, Fitch remains one of three major credit ratings agencies providing ESG services, which may give it a wide moat in the market.

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