Principles for Responsible Investment looking at credit rating agencies and ESG

Fixed income project headed up by new Director of Investment Practices, Kris Douma

The Principles for Responsible Investment (PRI) is developing a project between investors and credit rating agencies on ESG analysis, and is seeking a consultant to lead on the work across two years.

Speaking to Responsible Investor, Kris Douma, who started this month at the PRI as Director of Investment Practices and Reporting, said the process of developing the project started four years ago when PRI signatories working on the advisory commitment for fixed income said it would be useful to look at how ESG was integrating by rating agencies.

“It’s been a long-cherished wish of a number of PRI signatories,” he said. “It has become more important recently as more PRI signatories integrate ESG into their fixed income investments and ask new sorts of questions.” Douma is the former Director of Responsible Investment at Dutch-based asset manager MN.

He said he suspected that many credit raters were already doing work around ESG. But he added: “It is difficult as a fixed income investor to know, how, and if, it is being done. “Therefore, investors are in the dark. If they try to integrate ESG themselves, they don’t know if it’s additional.”Douma gave examples of where knowing how credit raters assessed ESG was important, such as whether instances of fraud in Brazil affected the ratings of its sovereign bond.

“A credit rater may say the look at governance, but is fraud looked at within this?” he asked.

He continued: “Resource dependency – is that considered? And to what extent if and how it will effect countries under stress from low oil prices?

“These are the questions that will be useful for investors to collaborate on with credit rating agencies to understand what’s included and how, and the potential room for improvement.”

Discussing the recruitment of a senior consultant to lead on the project, Douma said the PRI expected to get funding for the project from interested parties. He said the funder would be announced in due course. He added it “remains to be seen if credit raters take the jump” and take the project on board.

Last year, ratings agency Moody’s released a report outlining its incorporation of environmental, social and governance (ESG) considerations into credit analysis.