Environmental, Social, and Governance Ratings

Kroll Bond Rating Agency

9. Industry, Innovation and Infrastructure 12. Responsible Consumption and Production 16. Peace, Justice and Strong Institutions

Overview

Environmental, social and governance factors at Kroll Bond Rating Agency are indirectly promoting a positive ESG impact by providing more disclosure for investors to make their own decisions.

Authors

Basirie Hoxha

Basirie Hoxha

BRANDON HAUGHTON

BRANDON HAUGHTON

Anthony Guarino

Anthony Guarino

School

St. John's University

St. John's University

Professor

Charles Wankel

Charles Wankel

Innovation

KBRA’s formal environmental, social, and governance approach was implemented about four years ago. KBRA provides, where relevant, a qualitative analysis within its credit rating to aid investors in their investment process. If an ESG factor is related to the credit quality of an issuer that KBRA is producing that report for, it will be used to analyze the credit rating alongside all other factors that influence credit. For example, governance factors that have the potential to influence credit are company history, business model, ownership, management, strategy, or industry profile.

ESG factors are applied externally to the companies that KBRA rates. KBRA looks at ESG differently than its competitors because KBRA doesn’t have an ESG rating or scoring product. A credit rating has a very narrow definition which measures the risk of default of any bond being rated and is what is being analyzed. When measuring the ESG impact, it can vary from provider to provider. Some companies may place more emphasis on environmental factors while others may focus more on social or governance. As a result, it depends on the provider's definition of ESG. KBRA’s ESG issues are the ones that have potential to impact credit. The three core issues are climate change (emissions), stakeholder preferences and reputational risk, and cyber security but other issues can be important and vary from sector to sector. ESG factors are often longer-term issues.

Environmental, Social, and Governance Ratings

Inspiration

KBRA is always looking to innovate and create the most effective way of determining one’s credit ratings. The idea of implementing environmental, social, and governance originated by embracing a forward-looking view of creditworthiness. There was also a rising ESG because wealth is shifting to younger people, women and minorities who have more interest in a positive ESG impact. There’s heavy consumer interest which is driving the investor interest and investors respond to clients who want to invest in positive environmental projects and there’s also a regulatory effort. Stakeholder movement towards positive ESG investments is driving the credit risk for ESG because consumers and investors are interested in a way they haven’t been before. KBRA is dedicated to providing the most transparent process possible. KBRA’s motivation for implementing this innovation is due to wanting ratings to be meaningful to market participants. For example, KBRA realizes a company's carbon emissions are a major concern for the majority of stakeholders, so they are facilitating better disclosure on an issuer’s climate exposure. As Emilie Nadler, associate director of ESG at KBRA mentioned, governance factors have historically had the most relevance to credit, but as ESG factors become more important to investors and consumers, they are becoming more important to credit analysis.

Overall impact

Providing ESG disclosures in KBRA’s credit ratings gives investors and stakeholders more information to make an investment decision. This data can better prepare companies for future regulations that may be put in place regarding emission control, so they’re more familiar with ESG than being rated by a rating agency that doesn’t provide this information. ESG provides longer-term insight with the information because it doesn’t necessarily mean that a company has to take action on their ESG now, but it may impact them in the future and they will be prepared if they do have to make changes. Overall, the disclosure that is provided through ESG is something that investors can take into account if they care more about environmentally friendly companies.

Business benefit

This innovation puts KBRA in a good position because they provide the best quality credit analysis and research as they possibly can. ESG issues are becoming important to credit, and KBRA wants to be the best at understanding it and providing investors with higher quality ESG information as related to credit.

Social and environmental benefit

As ESG factors becoming more relevant to credit, they may spur companies to reduce their carbon emission footprints, develop a better stakeholder management plan, and improve on cyber security. For example, by reducing carbon emissions, or any other kind of pollution being produced, a company’s ESG profile can improve its reputation which may attract more investors. In the long term, companies that perform better in an ESG sense may be more attractive to investors while also creating a positive social and environmental impact for companies, investors, and society as a whole. Providing more disclosure to investors is what’s important to make sure that they have enough information to make their own decisions on their investments.


Interview

Emilie Nadler, Associate Director

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Kroll Bond Rating Agency

Kroll Bond Rating Agency

New York, US

Business Website: https://www.kbra.com

Year Founded: 2010

Number of Employees: 201 to 500

Kroll Bond Rating Agency (KBRA) is a global rating agency that was established in 2010. KBRA’s mission is to set a standard of virtue by creating new criteria for evaluating risk and transparency ratings. KBRA is implementing transparentcy ratings and enforces environmental, social, and governance (ESG) factors in their credit ratings.