The inclusion of ESG in credit risk analysis became a recognized international best practice in 2016 when the Principles for Responsible Investment (PRI) launched the ESG in Credit Risk and Ratings Initiative with the aim of enhancing the transparent and systematic integration of ESG factors in these assessments. Today there is increasing evidence that ESG factors can affect credit risk[1] and investment performance,[2] and ESG considerations are gaining prominence within investment and risk management groups. After all, mismanagement and poor governance can contribute to credit rating downgrades, and environmental and social issues can lead to reputational, legal, and regulatory risks that may result in negative financial consequences for companies. Mandatory ESG disclosure is now gaining speed. The European Banking Authority (EBA) recently published prescriptive guidelines on loan origination and monitoring, addressing credit-granting practices by European banks. These guidelines will go into effect on June 30, 2021, requiring banks to take into account the risks associated with ESG factors on the financial conditions of borrowers, in particular the potential impact of environmental factors and climate change.

The Evolution of ESG Factors in Credit Risk Assessment | S&P Global Market Intelligence