Beyond Ratings receives accreditation as a credit rating agency
As of Monday 18 March 2019, Beyond Ratings is a regulated credit rating agency. Accredited by the European Securities and Markets Authority (ESMA), we can now issue ratings for central, regional and local governments as well as (both supranational and national) policy-driven financial institutions.
“We believe ESMA accreditation validates our central proposition that ESG analysis is essential to evaluate all manner of risks, including credit risks of sovereigns, sub-sovereigns, and development banks”, said Rodolphe Bocquet, CEO and co-founder of Beyond Ratings. “ESMA registration has been an objective since the firm’s founding in 2014 and will enable us to expand our ESG platform for positive finance.”
The ratings will be based on both a quantitative and qualitative analysis, where ESG factors represent roughly half of the quantitative rating. Elie Hériard-Dubreuil, Managing Director, comments “We think that really looking at ESG in greater detail is enabling us to have a more forward-looking view of credit risk, as these ESG factors will influence the creditworthiness of an issuer over the medium-to-long term.” The framework for the quantitative ratings is depicted below.
The need to integrate ESG related risks in credit risk assessment has received increasing support from industry organizations, academic and regulatory bodies. According to the report from UNPRI’s ESG in Credit Ratings Initiative, “Shifting Perceptions: ESG, Credit risk and ratings, Part 3: From Disconnects to action areas”, there are currently 146 investors that are signatories to the ESG in Credit Ratings Statement, compared to 91 when the initiative was launched in 2016. Further, in 2018, the European Commission Action Plan on Financing Sustainable Growth acknowledged that it remains unclear to what extent sustainability factors are being considered by existing Credit Rating Agencies (CRAs) and invited the regulator (ESMA) to promote solutions which would ensure that CRAs fully integrate sustainability and long-term risks. This evolution is particularly striking with regards to emerging financial risks associated with climate change issues, as illustrated by the recommendations of The Task Force on Climate Change related Financial Disclosure (TCFD), and the launch early 2018 of the international Central Banks and Supervisors Network for Greening Financial Systems (NGFS).
In terms of academic research, the impact of governance factors on sovereign bond yields is to date the most documented. Concerning environmental risks we can however refer to the Stern Review on the Economics of Climate Change which states that climate change is the greatest and widest ranging market failure ever seen, presenting a unique challenge for economics. The review published in 2006 is not the first economic report on climate change, it is however the largest and most widely known and discussed report of its kind. Regarding social factors, Giraud & Grasselli state that “the pace at which the size of the pie increases cannot be considered in isolation from the manner it is divided within a given society. Distribution [of income and debt] does have an impact on growth, and more egalitarian economies are more likely to be efficient in the long-run”. These are just a couple examples of the vast amount of research on the topic, of which a good deal are highlighted in our research notes.
The next step for Beyond Ratings is to prepare a calendar setting out when we plan to publish our first ratings [of sovereign issuers], so stay tuned...
Sources: UNPRI, The Stern Review on the Economics of Climate Change, Beyond Ratings, Gaël Giraud and Matheus Grasselli