DBRS Morningstar: ESG Factors for Financial Institutions; Part One: Environmental Factors

This commentary addresses the environmental risk factors that could have a bearing on DBRS Morningstar’s credit ratings for banks. It follows on from the publication on February 3, 2021 of DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings. The Criteria identifies 17 ESG risk factors, of which 12 factors (three environmental, six social, and three governance) can be applied to banks. The social and governance factors relevant for banks will be discussed in separate commentaries.

Key Highlights include:

• Banks are exposed to a number of ESG risk factors, however, environmental risk factors have been less relevant to date for most banks currently rated by DBRS Morningstar.

• Nonetheless, we expect the impact of environmental risks on credit ratings to become more significant over time as they could have a negative impact on credit ratings should the risks not be adequately mitigated by banks.

• We have also started to see banking regulators looking to assess and regulate banks' climate-related financial risks. However, the long time-frame for these exercises indicates banks should have sufficient time to adjust, so the likelihood of any credit impact is low.

“Components of environment risks such as transition risks, physical risks, but also liability risks can materialise over the medium term and affect banks’ franchise (including reputation and strategy), asset quality metrics, earnings generation, and ultimately capital levels, however, for now we anticipate banks should be able to adapt and mitigate a large part of these risks.” said Vitaline Yeterian, Senior Vice President on the DBRS Morningstar Financial Institutions team.