Fitch debuts ESG ratings for CMBS, structured bonds

US ratings agency continues its initiative to bring greater transparency to bonds labeled with environmental, social or governance criteria.

Sustainable Fitch, a unit of Fitch Ratings, has launched ESG ratings for commercial mortgage-backed securities and other structured bonds. 

The initiative is part of the New York-based ratings agency’s aim of bringing more clarity around the impact that environmental, social and governance issues have on commercial real estate, structured finance and the broader financial services community. 

Sustainable Fitch has a current database of more than $100 billion of ESG-labelled structured bonds, part of a $500 billion dataset of KPI-linked financial instruments issued by North American, UK and European corporates and institutions. 

The ratings division aims to achieve full coverage of ESG-labeled bonds including public finance, agency and sovereign debt issuances by early 2023, says Gianluca Spinetti, a senior director at Sustainable Fitch. 

The initiative allows Sustainable Fitch to evaluate the impact and performance of entities and financial instruments on environmental, social and governance issues.

“[Investors] can use the ratings to cross-compare their own analysis, if they already have some form of analysis internally,” Spinetti says. 

In addition, rating criteria, commentary reports and datasets that Sustainable Fitch developed are also resources that investors can access through subscription.  

The structured finance ratings come after Sustainable Fitch last year launched ESG scores for leveraged finance and collateralized loan obligations. The agency started with leverage finance and CLOs because this part of the market has been more opaque. 

“It’s a market where ESG analysis or sustainability analysis is not really entrenched yet,” Spinetti says. 

“ESG scores is a higher-level product that we came up with to provide an opinion or an analysis in areas of the market where there are limited available informational products to use.”  

Spinetti notes that Sustainable Fitch has already provided ESG scores in the European market and is shifting coverage toward the US market this year. “The aim is to finish 80 percent of coverage of the American CLO market in Q3 next year,” Spinetti adds.  

Sustainable Fitch provides entity, framework and instrument ratings. Entity ratings look at the positive and negative impact on the environment and society of an issuing entity, while framework ratings evaluate the impact of a financial instrument. 

Meanwhile, instrument ratings combine entity and framework ratings to provide a broader ESG context to investors who seek to compare potential investors across sectors, geographies and labelling frameworks.

“Without analysis, we won’t be able to capture or highlight those intrinsic environmental or social features that the securitization may have,” Spinetti adds.