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Credit Rating Agency ‘Gatekeepers’ open the Gates for Solar Asset-backed Securities Market, but at what cost?

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Whilst the concept of an ‘asset backed security’ was certainly not part of the common parlance before the Financial Crisis, now the concept (if not the technical detail) is perhaps more understand in the current climate. It is important to note that the concept and process of securitisation and asset-backed securitisation certainly is not an absolute negative, we know full well that it is open to abuse and that certain elements need to be witnessed for that abuse to occur. For this reason, this blog post reacts to the news that the credit rating agencies are in the process of opening the gates for solar-backed issuances to feed the hunger in the market for anything related to sustainability, ESG, and non-traditional sources of investment.   It was reported in GlobalCapital yesterday that ‘ ratings coverage gives investor boost to solar ABS market ’. It was noted that the solar ABS sector as a whole is set to hit new records for issuance volumes in 2021, and this was mainly due to
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IOSCO Publishes its Consultation Report on ESG Ratings and Data Products Providers – Does It Go Far Enough or Is More Needed?

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The International Organisation of Securities Commissions (IOSCO) has recently published the results of its initial consultation regarding the need, and the potential methods for regulating the ESG Ratings and Data Products providers that exist to meet the needs of the marketplace in its new endeavour to incorporate the concept of ESG into everything it does. The first stage of the consultation was mainly aimed at the profession, and then the direct users of the profession. Now, IOSCO is opening the consultative period to the wider public for comments on its ten recommendations . In this post, we shall examine those recommendations.   The report itself is, majoritively, an opening account of the new market. It is useful for the uninitiated. Whilst not necessarily diving into every complexity (which is perhaps not its aim), the report covers the different providers, the usage of the differing products, and also some of the major criticisms being aimed at the ESG rating industry, ran
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Analysing the pre-Hearing Statements before the US House Committee on Financial Services’ Examination of NRSROs

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Ahead of the US House Committee on Financial Services’ Subcommittee’s hearing on ‘Examining the “Nationally Recognised” Statistical Rating Organisations (“NRSROs”)’, the President of Fitch Ratings – Ian Linnell – has released his prepared statement that he will read to the subcommittee as one of the witnesses called. There are a number of issues raised in his statement, and they are worth reviewing before the Hearing today (which can be accessed here from 2pm EST [7pm UK]). There are also a number of interesting points raised by the other witnesses called, but we shall start with Mr Linnell.   After some preamble regarding the theorised position of the credit rating agencies within the financial marketplace – and it is important that we keep this concept of the theorised position of the agencies, and their actual position, in the forefront of our minds – Linnell makes the point that whilst Fitch supports the concept of Congress looking to expand the regulatory framework in certai
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The European Regulation of ESG Rating Agencies Takes Its Next Step

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The issue of regulating the so-called ESG Rating Agencies has been reviewed here in the CRRI blog a few times recently – here and here . One thing that is for sure is that the issue of needing to regulate the agencies and their growing influence is now firmly on the global agenda. In the EU, which for quite a while has been calling for regulation in this niche space , there is a document due out any moment which should formally start that regulatory process within the bloc. In this short post, we will take a look at the Strategy for Financing the Transition to a Sustainable Economy .   Different media outlets are reporting different things with regards to the new Strategy document being compiled within the EU, which should be unveiled this week. Bloomberg cites the aim as being to prevent greenwashing, and says that the Strategy will ‘ propose tightening reporting requirements for financial entities and incorporating climate-related risks into credit ratings and bank capital requ
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Is the End in Sight for Credit Reporting Agencies like Equifax, Experian, and Others? What Does This Mean for Credit Rating Agencies?

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The CRRI is solely focused on the larger-scale rating agencies (inclusive of ESG rating agencies), but news recently regarding Credit Reporting Agencies like Equifax, Experian, and others has the potential to be impactful upon the development of the credit rating industry. It can a little complicated to understand the differences, so in simple terms there are credit rating agencies which focus on companies and the issuance of bonds (and also structured finance instruments etc. [an easy way to think of credit rating agencies is providing services for the wider ‘capital markets’ like large-scale investors etc., though this is a massive oversimplification), credit reporting agencies that focus on businesses and providing reports on their suitability for lenders/suppliers etc., like Dun & Bradstreet , and consumer reporting agencies, which provide creditworthiness reports on individuals. It can get confusing as some provide creditworthiness reports both for businesses and consumers (
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Threatening Sovereigns with Downgrades if Healthcare Investment is not Witnessed is Not Helpful

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Today, the G20 will be hosting their Global Health Summit in Rome. Before it, the Chair of a World Health Organisation (WHO) panel that wants to set up a new global body that will focus on improving healthcare investment warned that ‘ states that invest too little in public health could have their credit ratings cut ’. Whilst the sentiment is that the richer nations should be incentivised with a ‘stick’ to invest more in their healthcare programmes, there is am associated problem that has not been addressed.   Mario Monti, the former Italian Prime Minister and the Chair of the Pan-European Commission on Health and Sustainable Development, argued that ‘a pandemic like this one poses huge threats not just to financial stability but to the whole economic and financial system’. This, of course, is true. To counter against future health-related economic shocks, the panel has proposed that a ‘Global Health Board’ be established to prevent future pandemics and coordinate global responses
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Ramaphosa Ramps Up the War of Words with Credit Rating Agencies

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Yesterday, in Paris, President Macron hosted a Summit on the Financing of African Economies post-Covid. As part of that Summit, South African President Cyril Ramaphosa took aim at the credit rating agencies, focusing on their impact on growth on the Continent.   In his speech, Ramaphosa labelled the international rating agencies as a ‘ deterrent to countries who seek to take advantage of credible and transparent credit relief measures ’, adding that in addition to allowing for economic growth, one of the most important factors was to allow the flow of resources to head towards the healthcare infrastructures, and not the servicing of debts in the first instance – this is what I have been calling the ‘credit rating impasse’. He also spoke about the need for equitable vaccination programmes to continue and be developed, as well as the importance of allowing for a vulnerable-nation-focused issuing of Special Drawing Rights (in particular, the idea of developed nations, who have a high
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Experts Predict Concentration in the ESG Rating Universe, and Find Faults with the ESG Push

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Today’s short post reacts to a webinar held recently by Funds Europe , which focused on ESG Reporting Standards as the EU’s Sustainable Finance Disclosure Regulation (SFDR) went live in March. During the webinar, the issues of ESG Rating Agencies came to the fore, unsurprisingly. Familiar issues were put forward, but predictions from experts matched the conclusions that I also came to in my recent book – Sustainability Rating Agencies vs Credit Rating Agencies: The Battle to Serve the Mainstream Investor .   The article that reviews that webinar (found here ) reviews each of the sentiments from the participants, starting with Andrew Parry, the head of sustainable investments at Newton Investment Management, who suggests that the reason that people buy things like investment products is for return, not to be exposed to increased information on that product. He goes on to state that a survey of Newton’s clients found that only 23% of their client base actually knew what the term ESG
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The UK Considers How to Regulate ESG Rating Agencies: Finding the Balance

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The UK, as a result of its decision to leave the EU, does not have to implement the Union’s Sustainable Finance Disclosure Regulations (amongst others) and, therefore, has the option to find equivalence in its own way (as it seeks to do). However, with sustainability massively on the agenda on both sides of the Atlantic (and further afield), the UK and the US are now pushing to catch up. One question, however, is how to handle the ESG rating problem? The Financial Conduct Authority is currently responding to a roundtable they held on the issue and are making statements regarding what the options are moving forward. Yet, is it all talk? Is there even anything that can truly be done?   The problems with the ESG rating agencies are that they are, as a group, relatively new and extremely inconsistent. We have already examined this in the blog and have introduced the ‘ Aggregate Confusion Project ’ that is developing at MIT, and has shown emphatically that there are serious issues withi
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Huarong Issues Hint at Deeper Issues for the Credit Rating Agencies and their New Chinese Adventure

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In today’s short post, the developing problems with Huarong – a state-backed asset manager that is one of China’s largest offshore issuers – are revealing some engrained issues within the credit rating industry that may provide insight into the future of the Big Three’s relationship with China as it continues to open its doors to the international rating agencies.   The company has missed a number of financial disclosure deadlines and, according to the Financial Times, is in the middle of a massive sell-off , which started a few weeks ago. However, it is only over the past few days that the rating agencies have begun to take action, which is leading some to declare that there are similarities between this and the agencies’ actions regarding the collapse of Lehman Brothers . Whilst some negative credit watches have been established, it is Fitch who have broken rank and downgraded the company, from A to BBB. The company itself is in disarray, with it declaring that it will miss an Ap
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The Eurasian Economic Commission Calls for Its Own Credit Rating Agency

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In today’s brief post, the concept of a country or a region developing its own credit rating agency again raises its head, this time in relation to the Eurasian Economic Commission and the countries that it relates to. We have seen on multiple occasions the calls for regionalised credit rating agencies to be developed, often to no avail.   The Eurasian Economic Commission, created by Treaty between Belarus, Russia, and Kazakhstan in 2014, exists very much in the same process as the European Union, complete with its own court system (located in Minsk) and a range of policy objectives across the Member States. However, the reading of the latest announcement from the Minister for Integration and Macroeconomics – Sergei Glazyev – reveals the centrality of Russia and its interests. He states that ‘ I believe that the creation of a rating agency in the EAEU is a very important issue. As long as we use the ratings of America’s Big Three credit rating agencies, we will automatically face
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The SEC is Pushed to take a Stronger Approach to Credit Rating Reporting

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On March 11 th , the Investor Advisory Committee within the SEC discussed the issue of reporting problems within the SEC’s reporting framework for credit rating agencies. The discussion – found here in the SEC’s webcast archive – was based on the analysis of the Market Structure Subcommittee (list of sub-committee members found here ) and the proposal regarding how the SEC should mandate the annual reporting of credit rating agencies and how they are assessed by the Commission.   Essentially, the issue relates to the annual report that the SEC must develop as part of wider regulations. This report must detail any rule infractions that SEC Examiners found, alongside a number of other elements (like the market share and concentration within the industry etc.) This process is replicated in the E.U. via ESMA, and in the U.S. this is conducted through the post-Dodd Frank developed ‘Office for Credit Ratings’ (OCR). The sub-Committee’s Chair, J.W. Verret, explained in the webcast (start
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China’s Continued Reform Posturing Against Domestic CRAs Continues to Miss the Point (or Does It?)

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China’s response to the issues within its domestic marketplace recently has been well covered here in Financial Regulation Matters (like here and here ) so I will not go into the background too much in this short post. However, the most recent posturing from the collected regulatory framework in the country reveals, in perhaps its most obvious form, why a regulatory framework (and not just China’s) is only even a robust façade on top of underlying and societally fundamental truths.   What do I mean by this last sentence? Well, let us start by considering the recent statements made by five of the country’s top financial regulatory bodies. The five bodies – the central bank, the finance ministry, the national economic planner, the securities regulator, and the banking and insurance regulator – have all teamed up to declare that the new regulatory approach will be to shift the burden onto the domestic agencies with the aim being to ‘ guide them to see reputation as the basis of the
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