ESG: Corporate Borrowers Beware; Banks Screening for ESG, Says Fitch

https://dailyalts.com/wp-content/uploads/2020/01/tree-1827317-fitch-esg-ratigs.jpg

ESG bites into banks’ lending to corporates, says a report by Fitch Ratings.

Fitch Ratings fielded a survey in the third quarter of 2019 and received 182 responses from banks. The survey examined how environmental, social and governance (ESG) considerations are finding a place in banks’ risk, financing, and prudential supervision frameworks.

“The influence of ESG on banks lending decisions will continue to grow. But corporate rating actions due to ESG -related bank funding decisions are likely to remain rare,” said Monsur Hussain, Financial Institutions Research at Fitch.

The report found that ESG screening led to greater due diligence on deals rather than their outright rejection.

However, ESG-driven decisions are already affecting the ability of companies to refinance. Furthermore, ESG considerations have driven credit rating downgrades in only exceptional circumstances.

Key findings from the Fitch report on banks and ESG

Impetus for ESG

Internal company policy and regulation practices led banks to scrutinize borrowers for ESG factors. Application of such ESG policies affected about half of the surveyed banks’ lending assets.

ESG no-go sectors

Banks considered human rights violations as the single most important factor for denying financing. Secondly, especially in developed markets such as Western Europe, policies did not permit project financing for thermal coal mining and coal-fired power stations. Certain EU banks avoided financing weapons manufacturers.

Candidates for ESG screening

Metals & mining, and chemical & fertilizers were sectors most likely to be examined for environmental risks. On the other hand, borrowers in the gaming & leisure sector could find themselves under the lens for reputational risks arising from social issues such as addiction, crime and money laundering.

ESG risks to borrowers over the short to medium term

“Direct corporate rating impacts due to ESG -related bank funding decisions are likely to remain rare, especially for the refinancing of existing borrowings or projects,” the Fitch report said.

ESG risks to borrowers over the longer term

“Sectors facing greater challenges in obtaining bank financing will also be those that are most exposed to other ESG -related risks, such as emissions regulations and the rising cost of carbon.” Further, as social and regulatory pressures grow, banks will be compelled, more and more, to scan for ESG risks. This trend will, therefore, have a growing influence on banks’ financing decisions.

Transition financing

“We believe ‘transition financing’ will become a vital route for the worst-affected entities to obtain bank financing (and for banks to continue providing credit to high ESG-risk entities), to manage the potentially costly transition to a low-carbon economy,” said the Fitch route.

Related Story:   ESG: A Global Transition to 100% Renewable Energy Costs $73T; Payback 7 Years                                               

Free Industry News

Subscribe to our free newsletter for updates and news about alternatives investments.

  • This field is for validation purposes and should be left unchanged.


Shape

Latest Alternative Investment News

https://dailyalts.com/wp-content/uploads/2021/06/bitcoin-3997860_640.jpg
Alternative Investments/Digital: State Street Digital, A New Division At State Street, To Focus On Crypto

State Street (NYSE: STT), which has $40.3 trillion in assets under custody or administration, said Thursday it is establishing a new digital finance division called State Street Digital. The new…

https://dailyalts.com/wp-content/uploads/2021/06/origin.jpg
Venture Capital: UAL Floats United Airlines Ventures For Innovation In Travel And Sustainability

United Airlines (NASDAQ: UAL) announced its new corporate venture fund, United Airlines Ventures, on Thursday. The fund’s brief is to invest in emerging companies that could reinvent travel and aviation…

https://dailyalts.com/wp-content/uploads/2021/06/el-salvador-2379443_640.jpg
Digital Assets: IMF Has Reservations On El Salvador’s Bitcoin Move
June 11, 2021     Digital Assets, News

The IMF warned Thursday that El Salvador’s move to adopt bitcoin as a legal currency in parallel with the US dollar could have various economic and legal repercussions. El Salvador’s…

https://dailyalts.com/wp-content/uploads/2021/06/Clip_Total_Contactless-scaled.jpg
FinTech: Mexican Payments Platform Clip Raises $250M, Turns Unicorn
June 11, 2021     FinTech, News, Venture Capital

Clip, a Mexican digital payments and commerce platform founded in 2012, announced June 10, its raise of $250 million in a round led by the SoftBank Latin America Fund and…