Addressing an evolving ESG data market: Innovations at Sustainable Fitch
Environmental Finance: What information are investors in today’s labelled bond market looking for?
Gianluca Spinetti: It’s a very dynamic market, with new themes, labels and information emerging every day. We analyse labelled debt instruments and their issuers, aiming to create standardisation and transparency and provide additional, decision-useful information, such as post-issuance impact metrics.
Labelled bond investors are very keen to achieve impact through their investments.
We track the impacts delivered by each bond and every use of proceeds within each bond. That involves some standardisation: for example, there are different ways of calculating avoided emissions, some of which are debatable. We provide standardisation on that front.
We also track the progress companies are making towards meeting targets in sustainability-linked bonds (SLBs).We are also working on a set of metrics to track principal adverse indicators (PAI), focusing on private markets, where there is less transparency, and which will complement our ESG Scores for leveraged finance.
EF: How important are accurate and up-to-date scores and ratings for investors?
GS: Our assessments are guided by human insight. We have a large group of analysts around the world who – helped by technology – analyse every single transaction, and every entity, following a process of review and verification that cuts through the noise and the information to provide products that are accurate, well-informed and respected by our clients.
Marina Petroleka: An example is how we assess EU Taxonomy alignment in our ESG ratings. We look at how every single use of proceeds meets the three benchmarks of EU Taxonomy alignment: the substantial contribution criteria, minimum safeguards and do no significant harm criteria. That is a very rigorous and detailed process. As far as I know, it’s unrivalled in the market.
Also, when we examine use of proceeds or the progress SLB issuers are making towards their targets, we start with framework- level information, but then move to subsequent impact allocation reports to ensure both that we have the most up-to-date information.
EF: How are ESG rating methodologies evolving as more reliable data sources become available?
GS: Certainly, there is a greater volume of source information on which to build ESG ratings, as investors have engaged with companies to disclose more data, and as regulators, particularly in the EU, have pushed in the same direction.
There is also more regulation on ESG data providers, aimed to increasing transparency in terms of how ESG ratings are arrived at, and clarity in terms of what they set out to do. At Sustainable Fitch, we focus on rating the impact entities and their instruments have on the environment, society and the effectiveness of their governance. Transparency is at the heart of what we do, and therefore, more publicly available information from issuers on impact metrics will help us refine our assessment, for the benefit of investors.
EF: What is Fitch doing to help investors navigate global taxonomies and the developing regulatory environment?
MP: Our ESG Regulatory Tracker tool is delivered quarterly, in Excel, alongside an accompanying report from the research team that analyses the latest developments in taxonomies, sustainability disclosure and ESG-related regulation. Sustainability-related regulations are a core part of our thematic research and analysis, aiming to help investors and issuers understand and navigate this fast-evolving segment of the market.
GS: We already provide analysis of EU Taxonomy alignment for all use-of-proceeds bonds. We are also expanding our assessment specifically for SPOs to some Latin American taxonomies, initially Mexico’s, as well as the recently released Hong Kong taxonomy. So far, major taxonomies have similar conceptual structures, with technical screening and the 'do no significant harm' criteria, so we are able to apply our expertise and our analysis for these new taxonomies effectively.
EF: What innovations at Sustainable Fitch would you point to that will help drive better outcomes for investors and issuers?
MP: In addition to the Regulatory Tracker and our impact dataset, we have also introduced a transition assessment that we believe is unique in the market. It aims to provide a nuanced view of companies in hard-to-abate sectors, starting in energy, to enable investors to position, differentiate and benchmark them as they transition from carbon intensive to net zero.
GS: We have also launched our own disclosure tool to help companies report ESG data to their stakeholders. It allows them to centralise the data they collect into one tool, and provide responses to the various – often overlapping – ESG information requests. It’s also attractive to banks and investors, as it allows them to collect ESG data in the same format across their portfolios. It’s a way to increase efficiency and transparency.
Marina Petroleka is global head of research, and Gianluca Spinetti is global head of analytics, at Sustainable Fitch in London.
For more information, see: www.sustainablefitch.com
