ESG is a trend in credit analysis for companies

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Business valuation has evolved and is becoming more comprehensive. Traditionally, strictly financial aspects such as turnover, profit and market share are taken into account. In a new process, with a more holistic vision, ESG is being incorporated, an acronym that brings together the initials of the English words “environment”, “social” and “governance”.

These are the three aspects that are already being considered by investors when deciding whether a particular company offers attractive conditions to receive, for example, a capital contribution. A recent survey by State Street Global Advisors, which is among the world's largest asset managers, indicates that the ESG is already part of the investment strategy of 80% institutional investors. In the last two years, the ESG-based valuation method has grown by 34%, reaching 30 trillion dollars in assets.

Last year, the Moody's rating agency identified 11 sectors, with a combined debt of 2.2 trillion dollars, with the possibility of losing their investment grade rating because of the high volume of carbon emissions. A company in the energy sector had its credit rating downgraded to negative because, among other factors, of ESG, which, in Moody's words, represents an “emerging risk” for the company.

The tendency is for this same form of evaluation to be adopted by institutions that grant credit. The logic is simple: the better a given company performs in these three areas, the more likely it is to achieve good business and sustainability results, which means that the financial institution takes less risk in the credit process.

Understand each of these pillars below and why they are so important.

1) Environment

This evaluation criterion considers how the company uses resources. The use must be intelligent in terms of the use or application of resources in order to save electricity and water, as well as reducing pollution as much as possible, including finding ways to compensate for the impact on the environment.

The company is also analyzed in relation to the risks its activity poses to the environment and, even more importantly, how it is managing these risks. A mining company, for example, must not only be aware of the risks posed by its activity, but must also be alert to possible disasters. It must also have a well-designed emergency plan that can be activated quickly.

2) Social

The universe covered by this criterion is extensive, since it takes into account relations with the various actors involved with the company. Examples include respect for the law, which includes ethical management of working relationships, the safety of the product offered to customers, concern for people's information (protection of personal data) and the relationship with the community in which the company operates. Suppliers are also important in this process. The company must ensure that they have the same values that it upholds.

3) Governance

With regard to governance, the most important aspect concerns the way the business is managed, which must employ transparent and accurate methods of measuring and disclosing financial results. Management must be professional, with the maintenance of supervisory structures, whose suitability must be ensured by a compliance program. These precautions ensure that the company is protected against conflicts of interest in the choice of board members, as well as acts of corruption practiced internally and externally.

All three criteria, in addition to providing greater security for those offering credit, allow for a fairer, more responsible and sustainable business environment. In Brazil, where the economy is recovering, the search for credit has been growing. In September, the demand for credit from companies recorded its highest growth in 11 years, according to the credit bureau sector. As explained in the article, companies that use credit in their business operations achieve a competitive advantage by meeting ESG requirements.

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