ESG Risk Factors for Banking Organisations: 2021 Review

DBRS Morningstar has released a commentary discussing how ratings or rating trends of publicly rated banking organisations have been affected by Environmental, Social and Governance (ESG) factors in 2021.

Key highlights include:
• ESG risk factors were visible across all geographies in 2021, but the number of ESG risk factors assessed as Significant for banks’ credit ratings were limited.
• Governance risk factors have been the most common ESG risk factors negatively affecting banks’ credit profiles and this is likely to remain unchanged in 2022 in DBRS Morningstar’s view. Anti-money laundering concerns will remain a key focus with regulators in many jurisdictions increasing their scrutiny.
• In terms of Social risk factors, the subfactor ‘data privacy and security’, which was among the ESG risk factors in 2021, could increasingly negatively affect banks’ ratings and trends, given the increased digitalisation of banking services that has been accelerated by the pandemic.
• Climate-related issues, which are part of Environmental risk factors, are likely to become more of an issue as some central banks/ regulators, such as the European Central Bank and the Bank of England, undertake climate related stress-tests/scenario exercises in 2022. However, it is unlikely Environmental risk factors will affect banking organisations’ credit ratings in 2022 across the geographies covered by DBRS Morningstar, as we don’t expect that the outcomes will drive higher capital requirements in 2022.

“ESG risk factors were visible across all geographies covered by DBRS Morningstar in 2021, however, the number of ESG risk factors assessed as Significant for banking organisations’ credit ratings were limited. We expect Governance or Social risk factors to continue to potentially affect banks’ credit profiles in 2022 while banks’ resilience to climate change is going to be increasingly under scrutiny.” Said Vitaline Yeterian, Senior Vice President from the DBRS Morningstar Global Financial Institutions team.