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RAM Ratings updates criteria on ESG in Credit Ratings
Published on 23 Jun 2022.
RAM Ratings, as a responsible global citizen, supports national efforts to transform Malaysia’s financial ecosystem into a more sustainable one and help the nation achieve its Net Zero Carbon aspirations by 2050. RAM was one of the pioneer signatories to the UN-supported Principles for Responsible Investment’s Statement on Environmental, Social and Governance (ESG) considerations in credit ratings. We have now enhanced our disclosure standards to meet the investing community’s expectation of more transparent disclosures of ESG factors in our evaluations and credit ratings.
Progressively from 1 June 2022, ESG Credit Impact descriptors will be included in our published rationales as additional disclosures, alongside our credit ratings. These indicators summarise our views on the potential rating impact that the identified ESG factors have or may have on the creditworthiness of the rated entity or transaction. This complements the dedicated ESG Risk Assessment section that discusses ESG issues pertinent to the rating, which has been a regular feature of our rationales since July 2018.
Our updated criteria paper, ESG in Credit Ratings, explains RAM Ratings’ enhanced framework and approach to ESG assessment, how ESG factors are evaluated, and their impact on a rated entity’s or transaction’s credit rating. The revised framework is applicable to corporate, financial institution, project finance and structured finance (restricted to asset-based transactions) ratings. Other portfolio segments will be included in later phases.
By its very definition, ESG assessment encompasses a vast gamut of considerations from industry to firm-specific, global to local and long to short-term issues. Our ESG assessment in credit ratings is narrower, focusing on ESG considerations that have a relevant and material business and financial impact over the near and intermediate time horizons. Such ESG risks, if unmitigated, could impair an entity’s capacity to honour its financial obligations on a timely basis.
RAM’s enhanced approach leverages on R1ESGoTM (RAM One Earth Shared Goals), an ESG evaluation service of our sister company, RAM Sustainability Sdn Bhd. R1ESGoTM provides ESG assessments for industry sectors and entities based on public information and market research. From this base, our credit rating analysts assess which ESG factors are pertinent, adverse or supportive of the entity or transaction in question, depending on the materiality of the impact to the entity’s creditworthiness.
We are cognisant that entities in our rating universe will be at different stages of ESG preparedness. Defining benchmarks and disclosure quality remain key challenges in our attempt to quantify ESG risks and their impact. We rely on companies’ sustainability disclosures, peer data, market research and our engagements with clients to support our analysis and guide forecasts. As ESG risks evolve, not just over time but also through mitigating efforts of entities and/or in response to market and regulatory changes, our evaluation takes these and the potential impact of transition into account.
Concurrent with this release, we have also refreshed our methodology paper, How Does RAM Ratings Factor Corporate Governance into Credit Ratings. Please click here for the full updated criteria papers.
Analytical contacts
Chan Yin Huei
(603) 3385 2498
yinhuei@ram.com.my
Julie Ng
(603) 3385 2595
julie@ram.com.my
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
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