Credit ratings agency Fitch has identified five ESG credit trends to watch in 2021 as it highlights sustainability considerations are increasingly being incorporated into the lending and investment decisions of financial institutions.
In the report titled ESG Credit Trends 2021, which collates research from 1,400 credit analysts in 30 countries, the firm said data, innovation, the path to net zero, social risks and governance will be the most influential factors on debt this year.
This comes as it was reported by Refinitiv that UK sustainable finance issuance topped £10bn in 2020 – an all-time record and an increase of £5.1bn in 2019.
Written by Mervyn Tang, David McNeil and Andrew Steel, the Fitch report breaks the key themes down as follows:
- Data deluge to increase scrutiny.
The trio said the ongoing increase in reporting requirements, and the harmonisation of these requirements to ensure more consistency, will improve the quality and quantity of ESG data.
“This will spur financial institutions to enhance ESG due diligence and exclusionary policies to cover a broader set of ESG issues and entities, further affecting financing conditions for issuers,” the report said.
See also: – Will 2021 be a turning point for ESG data and disclosures?
- Innovation will broaden ESG reach in credit.
The sustainable market will evolve beyond incorporating labels such as ‘green’, ‘social’ and ‘transition’ with the addition of more sustainability-linked bonds enabling access to a broader range of asset classes and sectors.
The report said: “While there is yet to be clear evidence that ESG instruments provide a meaningful difference in financing costs at scale for issuers compared to conventional bonds, greater policy incentives may change this as regulations formalise the market.”
- Path to net-zero brings economic shifts.
Last year, saw a wave of net zero emission pledges from companies with Bloomberg Intelligence reporting a three-fold increase. However, Fitch highlights the policy paths that will be taken to achieve these pledges are unclear and the analysts expect more details on these policy paths to be revealed in 2021.
“The policy paths will provide some insight into potential long-term economic effects. Other important variables that will shape economic impacts, such as the pace of technological progress and the degree of global policy coordination, are harder to predict,” they said.
- Social risks will emerge from ‘new normal’.
The “heavy economic burden” the Covid-19 pandemic has placed on societies is “likely to leave persistent social scars”, the analysts said, such as greater inequality and poverty.
They added: “We expect that the societal tensions that stem from these scars, and the policies designed to alleviate them, will lead to new social risks for issuers, as well as exacerbating existing risks.”
- Sustainable governance to steer strategy.
Lastly, Tang, McNeil and Steel said debate on corporate government frameworks has been “sparked” on the back of the growing interest in sustainability. How these should be reformed to foster long-term responsible corporate behaviour, such as clarification of directors’ duties, is being discussed across the responsible investment community.
See also: How is corporate governance linked to financial performance?
They commented: “Combined with more active ownership from investors and the formalising of sustainability targets into remuneration and sustainability-linked instruments, we expect ESG issues to increasingly influence strategic and management decisions.”
To view the full report, click here.
