KBRA Reiterates ESG Considerations in Credit Ratings; Comments on ESG Scores

KBRA releases an update to its February 2023 message from company CEO Jim Nadler, following recent market developments and a move by some credit rating agencies (CRA) away from environmental, social, and governance (ESG) scoring systems. In KBRA’s role as a CRA, we remain steadfastly focused on analyzing the financial materiality of ESG factors and their relevance to credit today and in the future.

KBRA’s Unique ESG Approach

As rating agencies increasingly entered the ESG space, many opted to create ESG scoring systems to reflect how various ESG factors were analyzed within their existing credit ratings—although, they nearly always stated the scored ESG factors were neutral or not impactful to the credit rating.

KBRA’s long-held position is that the process of merging ESG scoring into credit ratings muddles the purity of credit risk analysis by introducing ESG metrics that may have little to no financial materiality. In short, it does not aid in the understanding of credit risk analysis to score factors that are not impactful to credit, and neither does it provide ESG-focused investors with sufficient details on ESG impact. On a more fundamental level, the ESG concept is difficult to distill into a single score at this current stage of evolution. In KBRA’s view, ESG considerations require bespoke, holistic analysis to understand financial materiality as well as societal impact.

“Very early on in our ESG strategy, KBRA made the deliberate decision not to rush to market with an ESG product we didn’t feel would serve investors,” said Jim Nadler. “After extensive market outreach, we knew our value-add to the ESG space was to identify and explain in a qualitative way exactly how ESG factors connect to the risk of default. We firmly believe in the value of ESG as an investing concept but, as a rating agency, our focus is on a subset of ESG issues and those are ones that have relevance to credit and financial materiality.”

Pat Welch, KBRA Chief ESG and Ratings Policy Officer, believes the current market environment is really reaffirming of KBRA’s approach to ESG. “As a regulated CRA, we seek to deliver rigor, transparency, and trust in our credit opinions,” he said. “Our place is to provide as much credit-connected ESG information as possible in our credit opinions but ultimately leave the question of impact up to the investor. We have always believed it is irresponsible to arbitrarily incorporate scored factors that have no bearing on our credit rating opinions.”

KBRA was founded over a decade ago, and its mission remains the same today: to restore trust and integrity in credit ratings after the fallout of the global financial crisis. KBRA’s approach to ESG reinforces this mission. The firm remains dedicated to providing the market with the highest quality credit analysis and research in a timely and transparent way. KBRA’s focus will continue to be providing the best quality, credit-focused ESG information to our clients so they can make informed investment decisions that align with their individual ESG strategy.

Related Publications

• A Message From CEO Jim Nadler on KBRA’s ESG Philosophy
• Credit Ratings Deserve ESG Risk Analysis, Not ESG Scores
• KBRA Has a Clear Focus on Credit Ratings, Not ESG Scores
• KBRA Commentary on the Current ESG Ratings Market

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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