Fitch Ratings expects idiosyncratic governance weaknesses to weigh on ratings more often than previously as the tolerance of governance failures from a wide range of stakeholders (e.g. authorities, investors, creditors, customers and employees) declines.

It is likely that investors’ growing focus on ESG topics and better ESG-related disclosure will mean that governance failures will have a more rapid impact on credit profiles, notably because of investors shying away from entities with perceived governance weaknesses.

We believe a combination of structural features and other qualitative elements, such as an entity’s risk appetite, strategy, culture and control frameworks, are essential in spotting heightened vulnerability to governance events. A company’s record of governance and ability to learn from a major governance event are similarly important elements in our assessments. The cost of governance failures for entities in regulated industries, in particular in developed markets (DMs), has risen in the past decade. Following the financial crisis regulatory tightening led to higher fines and remediation, including for misconduct and mis-selling. There is also more focus on the impact on retail clients and consumers, and we expect this trend to continue. The hefty fines by the authorities for auto manufacturers is an example that the cost of governance weaknesses has also risen in the non-financial sector.

Governance and Credit Ratings