Source: Institute of International Finance (IIF), Morningstar.

Navigating the Next Steps

In corporate credit, CRISIL’s analysis of more than 400 global companies found that only 75 percent of the high-yield, or non-rated, firms reported Scope 1 and 2 emissions measures, compared with 95 percent of investment-grade issuers. Of the emerging markets fixed-income issuers, only 39 percent reported water-related emissions versus about half of issuers in the developed markets. Additionally, CRISIL’s research highlighted the wide disparity across ESG ratings providers. For the firms within the study, the average correlation across ESG ratings by six third-party providers was only ~0.34, reflecting the continued divergence of external ratings.

Diving Deeper

While a refinement in ESG fixed-income methodology is the clear next stage, CRISIL’s three-step approach serves as a guideline for fixed-income managers with actionable ways to address the data and framework inconsistencies that exist today, and to help enhance ESG integration within the fixed-income segment.

As a result of its findings, CRISIL recommends the following steps for fixed-income managers: 

• Build a base model focused on the most financially material ESG metrics.
• Adjust that model to better reflect relevant metrics and the needs of fixed-income investors.
• Adopt a more detailed three-pronged process that includes utilizing alternative data to plug data gaps; leveraging reliable proxies for ESG metrics; and, going beyond labels for issue-level analysis. 

Says Abhik Pal, Senior Director & Global Practice Head-Fundamental Research, CRISIL, “Our asset management clients are focused on building customized frameworks, which can be used to integrate ESG across public and private credit, but more can be done. They are also realigning product portfolios to be in sync with regulatory requirements, particularly in Europe, and other agendas such the Paris Agreement and Net Zero.” He continued, “Given the significant increase in the quantity of sustainable debt, managers can adopt and implement our approach to better analyse the ESG quality of debt issuers, absent a cohesive international ratings and regulatory framework.”

Bespoke Assessment of Sustainable Bonds

An example of how CRISIL developed a two-stage sustainability bond assessment framework for a large global asset management client seeking to assess sustainable bonds: 

Source: CRISIL GR&RS.

Additionally, CRISIL hosted a panel discussion on May 10, 2022, to discuss the current state of ESG integration across fixed-income portfolios, actionable ways fixed-income investors can handle framework challenges, and the outlook for ESG investing in the fixed-income space. To watch a replay, click here.