Fitch throws hat into ESG ratings market with launch of fixed income-focused unit

The credit rating agency has medium-term plans to bring the issuer-pays model to ESG ratings

Fitch Group has announced the launch of a new unit which will rate the ESG performance of companies, in addition to bonds and loans, making it the last of the the big three credit rating agencies to enter into the ESG ratings space.

The newly-created Sustainable Fitch will offer entity-level ESG ratings – similar to other conventional ESG ratings products on the market – together with ESG assessments of debt instruments and sustainability frameworks which underpin those instruments.

According to Fitch, its framework rating will assess the effectiveness of the use of proceeds frameworks for labelled bonds and sustainability-linked targets for loans on a standalone basis without accounting for the issuer’s broader activities, while its instrument rating will combine both entity and framework ratings to provide a holistic assessment of a specific instrument's ESG profile.

Conventional bonds and loans, which do not have underlying sustainability KPIs, will only be assessed at entity and instrument level.

Fitch said that its instrument rating will allow for an “absolute comparison” of the ESG performance for all labelled and conventional debt instruments, regardless of the market standard they are aligned to.

“It may seem that we are coming to the market at a later stage but for us it's been a case of approaching it methodically and listening to fixed income investors which is a market typically undeserved by ESG ratings providers. In fact, we will be among the first to provide such granular information in this particular space,” Marina Petroleka, Global Head of ESG Research at Fitch, told RI.

Fitch will initially focus its coverage on the labelled bond market, which will be gradually expanded to cover the entire global fixed-income universe. It aims to eventually “offer the broadest coverage from a single provider in the ESG information market”.

There are no immediate plans to use Fitch’s ESG ratings as an input to its credit analysis, with both units to operate independently for the time being.

In a move which could raise a few eyebrows, Fitch revealed to RI medium-term plans to replicate the issuer-pays model, which is prevalent in the credit ratings market, within Sustainable Fitch. This will see the unit offer a paid ratings service to prospective issuers, which will include management meetings and an opportunity for issuers to provide supporting information. A timeline for this was not provided.

In contrast, the ESG ratings market largely operates according to the subscriber-pays model, where providers sell ratings to stakeholders such as the rated entity’s suppliers, clients and investors – with exceptions  including for example Mercer’s FundWatch. 

Meanwhile, setting itself apart from peers Moody’s and S&P – who each embarked on a series of acquisitions to build out their ESG offerings – Fitch said that the data which will underpin its ESG ratings was built entirely from the ground up by its analysts.

“Control on the underlying data is key for us. We want to be the owner of the data that we use as an input to our analysis so that we have a full understanding of whatever that we put out,” said Gianluca Spinetti, Sustainable Fitch’s Head of Product Development.

Spinetti said that the unit’s underlying data was developed over a period of six to nine months by a team of around 20 analysts. Sustainable Fitch is actively recruiting.

Separately, MSCI has launched a new dataset to help investors assess how portfolio companies are aligning with global temperature targets which will cover nearly 10,000 publicly listed companies on the MSCI ACWI.

Remy Briand, Global Head of ESG and Climate at MSCI, said that the new tool can be used “to set decarbonisation targets and strengthen engagement on climate risk”.