KBRA’s ESG PhILOSOPHY
KBRA focuses on environmental, social, and governance (ESG) factors that affect or have the potential to affect creditworthiness and the risk of default.
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As a credit rating agency, KBRA’s mission is to provide the most transparent and comprehensive credit analysis and research. To this end, KBRA’s focus is on ESG factors that affect or have the potential to affect creditworthiness and the risk of default of an issuer or transaction. KBRA’s approach to ESG has been informed by investors and provides ESG information in a transparent and user-friendly way. KBRA does not offer subjective ESG scoring products but instead includes ESG information directly in our rating reports to give a clear view, rooted in credit, of meaningful ESG factors specific to each issuer or transaction.
ESG At KBRA
ESG In Credit Ratings
STRUCTURED FINANCE CREDIT RATINGS
In structured finance transactions, and in some other related sectors, the ability to influence or mitigate ESG risks and opportunities through active management is limited because the underlying collateral, which may include loans, receivables, or other assets, are generally originated prior to securitization and securitized vehicles typically have finite lives. Given the wide array of assets and transaction structures within structured finance, the ESG factors that KBRA considers to be most relevant will vary depending on the underlying collateral of the loans being securitized, including:
Environment
Environmental factors that have the potential to affect an asset’s long-term value. Risks such as environmental contamination and non-compliance with environmental regulations can impair the value of the underlying securitization collateral. Additionally, the geographic profile of the collateral pool is an important consideration for many structured finance asset classes, as certain geographic areas may be more vulnerable to natural disasters and the effects of climate change.
social
Demographic trends drive the overall direction of the economy, which in turn influences the economy’s growth rate, consumption, and the demand for and performance of financial assets. These trends are primarily driven by population growth, demographic change, employment levels, changes in regulation, consumer behavior, and other secular trends. Additionally, socio-political risks are often a result of the confluence of social, political, and economic factors, and can manifest themselves in various forms. KBRA considers these factors in our analysis in totality, to the extent relevant.
governance
The importance of governance factors in structured finance transactions varies based on the level of exposure the collateral pool has to the business risks of the sponsor, servicer, originator, or other key transaction parties. KBRA’s analysis generally includes a review of these entities depending on their importance to the transaction. Transaction structure and enforcement mechanisms, as well as governance provisions, are also important governance factors and are considered by KBRA in its analysis
CFG CREDIT RATINGS
In rating corporates, financial institutions, and governments (CFG), KBRA considers an issuer’s active management of ESG issues, including its strategy for mitigating or capitalizing on ESG risks and opportunities. An evaluation of ESG management provides KBRA with insight into an issuer’s ability to adapt and plan for ongoing risks and opportunities, and how such activity may contribute to sustainable operating income well into the future. Over the medium-term, issuers across sectors will need to prioritize ESG risk management and disclosure as policymakers across the globe enact and expand ESG-focused regulation. Across CFG, KBRA has identified three ESG factors that intersect with credit for most issuers. Importantly, KBRA analyzes many other sector- and issuer- specific ESG issues but our analysis is often anchored around:
Climate
Climate Change (Focus on GHG Emissions) — As the effects of climate change evolve and become more severe, issuers are increasingly facing an emerging array of environmental challenges and potential opportunities. Physical climate risk, such as wildfires or flooding, and climate transition risk, which includes an entity’s GHG footprint, exposure to potential regulatory changes, and shifts in supply and demand, have the potential to affect financial assets, operations, and capital planning.
stakeholder
Stakeholder Preferences — The effects of stakeholder preferences on ESG issues can affect the demand for an issuer’s product and services, the strength of its global reputation and branding, its relationship with employees, consumers, regulators, and lawmakers, and, importantly, its cost of and access to capital.
cyber
Cybersecurity — As issuers continue to become more reliant on technology, cybersecurity planning and information management are necessary for most issuers. Regardless of size and industry, entities are at risk of cyberattacks. The losses incurred after a cyberattack are not only monetary—sensitive data and the entity’s reputation can also be compromised.
ESG Research
In the quickly evolving world of ESG, we keep our readers informed on topical ESG issues and how they are affecting credit and the risk of default across sectors and regions. Below are the most recent ESG reports we’ve published:
Florida Insurers Weather the Storms
Insurance | 31 October 2024
As the 2024 hurricane season enters its final month, KBRA notes the uptick in storm activity as several weather systems made landfall in the southeastern United States. Florida and several other states in the region were impacted by significant wind and flood damage from Hurricanes Helene and Milton. Read more
Solar Loan ABS: Prepayment Rates Will Likely Remain Subdued
ABS | 18 October 2024
As highlighted in a KBRA research report on solar loan ABS and prepayment rates in March, rising rates and continued home price appreciation led to a slowdown in existing home sales and refinancing activity, pushing mortgage prepayment speeds to cyclically low levels in 2023 and 2024. Read more
Chile’s Mining Sector May Boost Government Revenue
Sovereigns | 19 August 2024
Chile’s mining sector is critical to its macro economy and government finances, as indicated in KBRA’s latest credit analysis of the sovereign (AA-/Stable Outlook for local currency, A/Stable Outlook for foreign currency). Read more
Manufactured Home Communities— Affordable Housing Alternative, but Limited Supply
CMBS | 12 June 2024
While manufactured homes have always presented an affordable housing option, they have recently been in the spotlight, as families are increasingly being priced out of other options due to elevated single-family home prices, as well as multiple years of rising multifamily rents. Read more
FAQs with KBRA’s Pat Welch & Peter Giacone
Double Materiality grow interest to Investors. What does it mean to the KBRA approach?
Why KBRA does not currently provide separate ESG ratings?
Is Climate Disclosure a Growing Area of Interest in the Insurance Space?
Which ESG factors KBRA Focuses on When Analyzing Insurance Companies?
KBRA’S UNIQUE ESG APPROACH
KBRA firmly believes that ESG factors require nuanced analysis to determine and understand financial materiality. We focus on ESG issues strictly in the context of how these factors are currently affecting the risk of default or how they may affect the risk of default over the longer term. We believe our value-add to the market is to comment on how ESG affects credit risk and that subjectivity around ESG impact should be left to the investor, not our credit rating analysts.
Jim Nadler
KBRA CEO & President
ESG Talks
Check out ESG Talks, a KBRA Podcast series focusing on environmental, social, and governance (ESG). The podcast highlights various ESG hot topics and includes commentary from prominent voices within the ESG community. As we continue to expand globally, KBRA Podcasts is a go-to source for timely briefings directly from our knowledgeable team members and guests.
KBRA WINS ESG CREDIT RATING AGENCY OF THE YEAR AWARD
KBRA is pleased to announce it was named ESG Credit Rating Agency of the Year by The Asset, a leading Asian financial market publication. KBRA won ESG Credit Rating Agency of the Year in both the U.S. and Europe at the publication’s Triple A Sustainable Finance Awards 2024 dinner, which was held in Hong Kong in March.
This is the second consecutive year that KBRA has won the ESG award for the Americas from The Asset. KBRA previously won the Asset Backed Securities Rating Agency of the Year award in the region for both 2022 and 2021.
ESG Weekly News Roundup
Access our ESG Weekly Roundup containing news highlights from all fixed income markets, upcoming ESG related events as well as KBRA ESG media updates.
Contact Us
Contact us should you have any questions on our ESG approach or should you wish to discuss ESG with our staff. You can also email questions and comments to [email protected].
Pat Welch
Chief ESG & Ratings Policy Officer
+1 (646) 731-2481
[email protected]
Arianne Schreier
Associate Director
+1 (646) 731-1345
[email protected]