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Credit rating agencies

In 2010 the FSB adopted Principles for Reducing Reliance on Credit Rating Agency (CRA) Ratings. In 2012, the FSB set out a roadmap implement those principles and reduce mechanistic reliance on CRA ratings in standards, laws and regulations, which if implemented would remove mandatory use of credit ratings. The 2014 peer review of national authorities' implementation of the 2010 principles found that more could be done to address gaps in individual action plans.

CRA assessments have a strong impact on asset allocation, such as for pension funds that have internal guidelines based on ratings. Because of this impact on demand, ratings also impact the interest rate borrowers pay for obtaining financing. Ratings are also written into certain prudential regulations. The Basel II framework hard-coded ratings into the capital requirements, while the Basel III framework allows banks to determine the risk weights for capital requirements on the basis of CRAs’ evaluations. Credit ratings are also used by central banks in the lending eligibility policies and foreign exchange reserves management, and provide a guideline for investment funds’ strategies. As part of efforts to implement the 2010 principles, In the United States, for example, financial regulators replaced mandatory use of credit ratings with alternative approaches that include the use of definitions, regulatory models, and evaluation by third parties, but as noted above, CRA ratings are still allowed to be used by banks in their internal risk models.

The FSB has no plans to conduct additional peer reviews of CRAs. Going forward national level reviews will be the main follow-up. The December 2015 report by the US Securities and Exchange Commission (SEC), which annually assesses CRAs, covered the 2014 activities of the CRAs, found that one larger agency as well as some smaller ones did not have sufficient policies, procedures, and controls to manage the issuer-paid conflict or to prevent analytical personnel’s access to fee or market-share information. It also found that at one larger CRA, there were not sufficient policies and procedures to prevent prohibited unfair, coercive, or abusive practices, and this larger agency’s decision to issue an unsolicited rating of an issuer was motivated at least in part by market-share considerations.

In 2016, eight CRAs, including Standard and Poors and Moody’s, agreed to a UN-PRI-led statement on environmental, social and governance impacts in credit ratings. The statement included a commitment by the rating agencies to:

  • evaluate the extent to which ESG factors are credit relevant for different issuers;
  • publish the ways in which ESG factors are considered in credit ratings;
  • review the ways ESG factors are integrated into credit analysis;
  • maintain organisational governance and resourcing to deliver quality ratings, including ESG analysis where relevant;
  • participate in industry-wide efforts to develop consistent public disclosure by issuers on ESG factors that could impact their creditworthiness;
  • participate in dialogue with investors to identify and understand ESG risks to creditworthiness.

While this agreement is an important step in bringing environmental and social risks into economic analysis, CRAs are mandated to analyse all relevant risks, and thus should already be incorporating this analysis in their ratings. A second step would be the analysis of how companies’ actions impact sustainable development, e.g. through carbon emissions, pollution, or through positive impacts. This would complement the above agreement, which focuses on analysing risks from these factors to companies’ businesses, but does not incorporate analysis of the impact of company actions. The impact of companies on sustainable development is also covered in the cluster on policies and regulatory frameworks in the chapter on private business and finance.