Global Banks’ ESG Factors Are Dominated by Governance Issues

Governance is by far the most important ESG factor in bank ratings globally, Fitch Ratings says in a new report. The minimum Environmental, Social and Governance Relevance Scores (ESG.RS) for all governance issues is ‘3’, highlighting that these issues are, at the very least, relevant to all bank ratings. About 14% of rated banks had at least one elevated governance score at end-2021, indicating that governance concerns have a negative rating impact.

Notable examples of banks whose credit profiles are affected by governance weaknesses are Credit Suisse and Wells Fargo. Credit Suisse has an ESG.RS of ‘4’ for ‘Governance Structure’ as its governance issues are a contributor to the Negative Outlook. The bank has started to address severe weaknesses in risk controls that were identified in an independent report published in 3Q21.

Wells Fargo has an ESG.RS of ‘4’ for ‘Management Strategy’ and ‘Governance Structure’, reflecting various risk control and governance issues, and regulatory findings. Its ratings are affected by its progress in remediating and exiting various regulatory consent orders.

Environmental issues do not currently affect bank ratings. However, they could have an influence in future, particularly for banks in countries with faster transition plans to a low-carbon economy, or in regions more exposed to extreme weather events linked to climate change. We expect banks to improve how they manage environmental risks as regulators introduce more prescriptive disclosure requirements. This could trigger changes in strategy, business models and mitigation policies, all of which could lead to higher environmental relevance scores and implications for ratings.

The impact of social issues on bank ratings is still very low, with less than 2% of bank ratings affected.

‘Where ESG Matters for Bank Ratings’ is available by clicking the link above.
Source: Fitch Ratings