‘Governance’ Impacts Corporate Credit Most among ESG Issues, Report Finds

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Governance impacts corporate credit ratings the most when it comes to ESG situations, according to a report from Fitch Ratings.

The report finds that at the end of 2021, nearly 12% of corporate issuers had at least one elevated score in terms of how governance was handled, indicating that concerns in that area of ESG can have an impact on credit ratings. As a result, governance risks should be managed by all corporate issuers to maintain credit quality of a business.

The impact of environmental and social issues on corporate credit ratings are significantly lower than that of governance; environmental carryies the least impact with 2.5% receiving elevated results, according to Fitch. However, Fitch says there has been an increase in elevated scores for those factors and expects the trend to continue to rise as more companies focus on sustainability topics.

After a few recent corporate setbacks, some organizations have viewed governance as drivers of the breakdowns, which heightens awareness of the issue, Fitch says. However, the report finds it does not expect a significant increase in elevated governance scores over the next five years.

The report looked at 14 general ESG topics for corporations and scored an organization’s efforts on a scale of 1 to 5, with higher scores indicating more relevancy for the rating. Fitch says a 4 or 5 score can be positive or negative in terms of a rating decision, but most indicate a negative impact.

Regulations are becoming more of an ESG focus on businesses: the recent SEC proposal that requires environmental disclosures such as Scope 1, 2 and 3 emissions impacts is a primary example. The European Union, too, has implemented taxonomy on sustainable activities. Additionally, businesses have sought governments to require reporting of emissions targets as well as misinformation on sustainability goals.

As a whole, ESG reporting and investment continue to be a priority for many corporations. Nearly 83% of executives that responded to a NAVEX survey say brand reputation is impacted by ESG efforts, while a report from Planetly finds voluntarily reporting ESG practices can also give businesses a market advantage.

Some of the governance issues analyzed by the Fitch report include management strategy, governance structure and financial transparency. Environmental issues include emissions, energy management and waste management.