Governance is the biggest ESG risk for financial firms, Fitch reports

The size of that influence means corporate governance, management strategy and financial transparency are important considerations in the credit rating process for financial institutions, Fitch says.

Environmental risks currently have a “minimal impact” on financial institutions’ credit ratings, it says, given that firms’ exposure to these risks is generally secondary, not a direct impact on their businesses.

“Where environmental risk appears in the sector, it is typically associated with insurance company issuers who have high exposure to a variety of catastrophic risks,” it says.

Firms also face a variety of social risks, Fitch notes, “ranging from social or political disapproval of high interest rate lending, through customer welfare concerns caused by aggressive debt collection practices to exposure to the economic and social crises in places such as Venezuela.”

While governance issues are the top concern for banks, and insurers are most impacted by environmental issues, Fitch says non-bank financial institutions see impacts from both governance and social risks.

The report also points out that in developed markets, governance issues that impact ratings generally involve a firm’s structural complexity, key person risk and transparency; in emerging markets, these risks usually relate to management strategy.

Kevin Duignan, managing director and global head of financial institutions at Fitch, said some of the most visible credit rating actions recently have focused on governance or conduct issues, including heightened regulatory focus on anti-money laundering efforts. Unsurprisingly, he said, the affected institutions saw higher governance relevance scores in Fitch’s new ESG analysis.