Environmental, social and governance (ESG) factors are increasingly important to banks in their loan underwriting decisions, says Fitch Ratings in a new report.
The rating agency reported that a survey of 182 banks around the world found that about half of the respondents’ lending was screened for ESG risks.
Fitch said that the banks pointed to both their internal policies and regulation as the primary drivers for incorporating ESG into the underwriting process.
Reputation and litigation risks are also important factors, Fitch said, noting that several banks cited investor pressure as their main motivation to screen for ESG risk.
“Banks’ monitoring of ESG risk generally results in greater due diligence rather than outright deal rejection,” Fitch said.
Deals with a high risk of human rights violations are most likely to be rejected, the rating agency said, although these deals are rare.
Fitch found that many banks also prohibit financing for coal mining and coal-fired power stations, and several European banks refuse to finance weapons manufacturers.
In the long-term, sectors that are highly impacted by emissions regulations and the rising cost of carbon “may find it harder to obtain bank financing,” Fitch said.
The survey found that the mining sector was most likely to be scrutinized by banks for environmental risks, followed by the chemicals and fertilizers sector.
The gaming and leisure sector was most targeted for social risks, such as addiction, crime and money laundering, Fitch said.