Do ESG Considerations Impact the Decision to Rate a Specific Issuer or Transaction?

DBRS Morningstar has released a commentary discussing how environmental, social, and governance (ESG) factors could impact the decision to rate a particular issuer or transaction.

Key highlights include:

• The most common factor that could potentially lead to DBRS Morningstar not rating a transaction or issuer is governance.

• Social factors are unlikely to preclude DBRS Morningstar from rating an issuer within the Governments, Financial Institutions or Corporate sectors. However in the Structured Finance area there are examples where social factors, mostly in relation to Human Capital and Human Rights, could impact the decision on whether DBRS Morningstar can rate a transaction.

• The impact of environmental factors can vary greatly across sectors and it is difficult to envisage examples where DBRS Morningstar would not rate a particular issuer solely based on this factor. However, for certain sectors environmental factors could have a significant impact on the rating level.

“DBRS Morningstar routinely declines to assign ratings to potential transactions and issuers for a number of reasons. These would normally be for reasons such as a lack of sufficient data and information, or if the quality of information raises serious questions as to whether a credible credit rating can be provided. In this commentary we discuss a number of potential examples of ESG related issues where DBRS Morningstar could decide not to rate a particular issuer or transaction. Importantly though, these examples and commentary do not necessarily signify new reasons to decline assigning ratings. Rather, such reasons may have existed historically, but were not defined as being ESG related” said Ross Abercromby, Managing Director, Global FIG at DBRS Morningstar.