CRISIL Ratings to call out ESG impact on credit profiles
MUMBAI, India, Jan. 14, 2022 /PRNewswire/ — CRISIL Ratings will start disclosing the impact of environmental, social and governance (ESG) parameters separately when assigning credit ratings, taking cognisance of their increasing importance in investment decisions and when accessing capital world over.
The past couple of years have seen ESG-led investments gain traction. ESG assets stood at $37.8 trillion as of March 2021, and accounted for around a third of global assets under management (AUM). India has also caught on to the trend, with the AUM of ESG-focused funds totting up to more than Rs 12,000 crore as of December 2021.
Says Gurpreet Chhatwal, Managing Director, CRISIL Ratings, “ESG-readiness is becoming an important distinguishing feature for corporates to access funds from the capital market. Given this, and the improving disclosures on ESG parameters, we will assess — and make known — their impact separately when assigning credit ratings.”
The assessment will be based on a proprietary framework that weighs sectoral impact on environment and social factors, and the relative performance of a company on ESG aspects1.
To be sure, ESG factors impacting fundamental business sustainability have always been a part of the credit assessments done by CRISIL Ratings — under different parameters. For instance, estimation of governance-related risks is the cornerstone of our credit-rating methodology. Further, investments towards reduction in emission intensity, deployment of efficient methods of effluent treatment, strong supply chain and labour management that translate into long-term sustainable and efficient operations are also considered. CRISIL Ratings will continue to factor these in rating assessments as applicable.
Additionally, with investors beginning to screen opportunities through the ESG lens, sustainability parameters can have a bearing on the cost and availability of funds for corporates. Such corporates generally access the capital markets — both equity and debt — and/or rely on foreign investors to meet their funding needs.
CRISIL Ratings will, therefore, assess and disclose the impact of the ESG aspects on the credit risk profiles of companies, which will underscore their ability to raise funds and, in turn, financial flexibility. This, however, is predicated on the availability of ESG information.
Improving disclosures of non-financial data is crucial to broader espousal of ESG and early steps towards this have already been taken by the Securities and Exchange Board of India (SEBI), which has introduced Business Responsibility and Sustainability Reporting (BRSR). As a part of BRSR, the top 1,000 listed companies will now have to mandatorily disclose non-financial information from next fiscal and voluntarily this fiscal.
Says Rama Patel, Director, CRISIL Ratings, “We will call out the impact of ESG on credit ratings for listed corporates that publish their ESG data, and lean on the capital markets and foreign investors for funding requirements. Over the medium-term, as ESG disclosures improve and get integrated more and more into investment and lending decisions, CRISIL Ratings will expand its scope to assess and disclose ESG impact on more companies.”
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CRISIL Ratings pioneered the concept of credit rating in India in 1987. With a tradition of independence, analytical rigour and innovation, we set the standards in the credit rating business. We rate the entire range of debt instruments, such as bank loans, certificates of deposit, commercial paper, non-convertible/convertible/ partially convertible bonds and debentures, perpetual bonds, bank hybrid capital instruments, asset-backed and mortgage-backed securities, partial guarantees and other structured debt instruments. We have rated over 33,000 large and mid-scale corporates and financial institutions. We have also instituted several innovations in India in the rating business, including ratings for municipal bonds, partially guaranteed instruments and infrastructure investment trusts (InvITs).
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1 Refer to the below relevant criteria documents for further details: