Broadening the outreach to ESG information providers

Results from a survey for fixed income investors

Investors utilise a range of data and information to make investment decisions. In addition to traditional financial metrics, there is an increasing consensus that integrating environmental, social and governance (ESG) factors in analyses provides investors with a more holistic view and leads to better-informed investments.

While investors may access data directly from issuers and other stakeholders such as industry associations or regulators, many also subscribe to ESG information providers. The term is used here to refer to third-party providers of ESG data, services, opinions and/or ratings^[1]. Some focus on issuers (corporate, sovereign or sub-sovereign); some are sectoral or issue focused; and some provide tools that facilitate ESG portfolio analytics (e.g. carbon footprint, impact investing). Their products and services can be utilised by different stakeholders and the methodologies, nature and scope of the data inputs may vary. However, they all share the same ESG or sustainability focus.

Given that responsible investment approaches originally developed in equity investing, it is not surprising that for commercial reasons, many ESG information providers have prioritised issuer coverage and tools which suit equity investors. With the adoption of responsible investment expanding to other asset classes, such providers are also being utilised by fixed income investors.

As a result, the PRI’s ESG in Credit Risk and Ratings Initiative launched a survey for fixed income investors to gain insights on their use of these services and their views on the quality and usefulness of such information.

Since the initiative was launched in 2016, the PRI has nurtured a dialogue between the credit analysts of asset managers, asset owners and credit rating agencies (CRAs). This year, the initiative is broadening its outreach to other stakeholders, including ESG information providers, who play a key role in aggregating and analysing data from issuers. Through this work, we aim to clarify the distinction between the incorporation of ESG factors in credit ratings and the evaluations offered by ESG information providers. To this end, the survey also included questions to assess investors’ understanding of how CRAs integrate ESG factors in their analysis, and if this has improved since the start of the initiative.

This note summarises the responses to the survey, which was structured as follows:

1. Usage of ESG information providers by fixed income investors
2. Process for provider selection
3. Satisfaction with product coverage and data collection
4. Data quality and methodology transparency
5. Methodology suitability for fixed income investment
6. The difference between ESG integration in credit ratings and ESG evaluations

The survey was conducted between 10 March and 29 May 2020. We received responses from 59 PRI investor signatories, of which 60% have more than half of their assets under management invested in fixed income assets.

The ESG evaluation landscape has developed significantly in the last few years. CRAs have made progress in transparency and in making ESG factors more explicit in their credit risk analysis. At the same time, ESG information providers have proliferated, and now produce more data and analysis, albeit their methodologies vary and are not always clear. The sector is dynamic and evolving, as demonstrated by increasing M&A activity, with some CRAs buying ESG information providers and vice versa. To clarify these ongoing developments and help fixed income investors to best use available tools and analysis, the PRI will continue to engage with CRAs. Furthermore, the survey results will inform future discussions with ESG information providers, with whom the PRI and credit analysts will begin to engage directly as part of the initiative.

Based on the survey results, the initial discussions with ESG information providers will focus on the following areas:

• Investment universe coverage of products and services;
• Appropriateness of data and methodologies for credit risk analysis;
• Differentiation between credit risks over different time horizons; and
• Transparency of methodologies and their scope and limitations.