Fitch Ratings: Credit Scoring Systems
Fitch Ratings is one of the ‘big three’ credit rating agencies (CRAs). Fitch recently launched a new integrated scoring system that shows how ESG factors infuence individual credit rating decisions. To see the ESG Relevance scores go to: https://www.fitchratings.com/site/esg
What?
The new ESG Relevance Scores, which are being produced by Fitch’s analytical teams, transparently display both the relevance and materiality of ESG elements to Fitch’s rating decisions. They are sector based and entity specific. Using a standardized approach, Fitch is introducing ESG Relevance Scores across all its asset classes. It has already published over 35,000 scores for non-financial corporates, banks, insurance companies, non-bank financial institutions and sovereigns, and will shortly publish scores for public finance, global infrastructure and structured finance.
These ESG scores are currently freely available and are being applied to all rated companies. In future they will become an integral part of Fitch’s research reports, which are published on rated entities.
Why?
The relevance scores were developed in response to the growing need from investors for information on ESG factors within portfolios. The focus is on fundamental credit analysis and so the ESG Relevance Scores are aimed at addressing ESG specifically within that credit context.
The scores will enable investors to agree or disagree with the way in which Fitch has treated ESG at both an entity and a sector level, assist them in making their own judgements about credit rating impact, and enable them to discuss fully all aspects of the credit with the analytical teams.
How?
Fitch engaged with investors and other market participants, to understand what they wanted to see from CRAs, before devising the new relevance scores. The scores draw out from existing ratings criteria those ESG risk elements that influence the credit rating decision. The credit-relevant sector-specific E, S and G factors are displayed in industry- specific templates and then scored by the ratings analysts. The scores focus purely on displaying how the E, S and G risks have influenced the credit rating decision, rather than making value judgements on whether an entity engages in good or bad ESG practices.
