The emergence of ethical and sustainable concerns and the need for environmental investing has come with a wide range of options for fixed income market participants to navigate. One approach has been to rely on evaluation metrics, or ratings that measure the environmental and social impact of companies’ operations. The main challenge of this approach is that currently there is no clear standard of measurement in the market. Researchers at MIT working on the Aggregate Confusion Project found that when they compared “two of the top five ESG rating agencies and compute the rank correlation across firms in a particular year, we are likely to obtain a correlation of the order of 10 to 15 percent. At least the correlation is positive! It is very likely (about 5 to 10 percent of the firms) that the firm that is in the top 5 percent for one rating agency belongs to the bottom 20 percent for the other.”
Consideration of environmental, social and governance (ESG) factors is becoming a key feature of bond pricing and credit-risk assessment – slowly.
Once the sole purview of investors, such consideration is earning a place on the agenda of credit ratings agencies globally. Given the weight ratings agencies carry in fixed-income markets, their heightened interest can give added impetus for ESG investment in different corners of the world, particularly where support for it is weak or where progress has recently stalled. The potential for positive impact is huge, given that global bonds – the largest asset class in capital markets – total nearly $88 trillion, Securities Industry and Financial Markets Association data shows.
wenty banking giants have agreed to support the scandal-hit benchmark the London interbank offered rate (Libor) until an alternative is found in 2021 so that the transition doesn’t rattle markets.