[PODCAST] Diving into the world of ratings, ESG for fixed income and more
Updated: Mar 30, 2022
SFi Managing Partner Katy Yung had the pleasure of interviewing Mervyn Tang, Global Head of ESG Research at Fitch Ratings, in our first Practitioner Insights podcast. Listen here, or via Spotify, Apple podcasts or your preferred app:
In this podcast, we discuss latest developments in ESG for fixed income, from its role as part of a broader toolkit, to topical issues such as product innovation and engagement. A summary is provided below, followed by the full transcript.
There’s a huge demand from investors and others to understand these issues, and the research and the data providers that come out are just becoming increasingly sophisticated in their approaches to these risks.
Summary:
ESG issues are complex and the sustainable finance solutions should directly address idiosyncratic bottlenecks. Fixed income, therefore, is a necessary part of an investor’s holistic toolkit.
ESG practices in equities have influenced the development of those in fixed income; key differences lie in:
the potential for use of proceeds ringfencing;
the wider market, with recent attention spreading to sovereigns and leverage loans, allowing ESG investors more broad-based access
Fitch Ratings has introduced the ESG Relevance Scores, an entity-by-entity scoring system designed to deliver transparency around how ESG issues affect credit ratings.
Dedicated ESG fixed income funds are growing rapidly, but the size of the market remains very small. This means that most green and social bonds are currently held by “mainstream” investors who may be indifferent to ESG labels.
COVID is topical in ESG, but it may be overly simplistic to view it as a singular ESG issue. The impact of COVID is multi-faceted with direct and indirect consequences. For example, it has brought a lot of governance issues to light.
Although the flurry of COVID bond issuance was met with scepticism, the speed of this development highlights the agility of the sustainable finance system, and testament to the significant strides we have made.
Similarly, the development of sustainability-linked bonds offer investors different channels to make an impact outside of use of proceeds, which is necessary in part because the gap to achieve SDG and climate change goals is large and complex.
Standardisation is happening, and there is emerging consensus around e.g. green issues, but the challenge is that sustainable finance as a whole is evolving quicker than the process of standardisation, which is quite often what happens in an evolving financial market.