The European regulatory landscape governing the ESG (Environmental, Social, Governance) transition is becoming more articulated every day. Since 25 September 2015, when the 17 Sustainable Development Goals was ratified by the UN General Assembly, there have been many other interventions at the European level, ranging from the 2019 Green Deal, to the EBA (European Banking Authority) guidelines, the Sustainable finance disclosure regulation (Sfdr), and the taxonomy of eco-friendly economic activities. Banks will have to comply with the ECB's expectations regarding the management of climate and environmental risks by 2024, which means, among other things, that the assessment of companies' ESG risks, even in the medium and long term, will be part of credit risk management.
In Italy, according to Crif-Nomisma, 60% of companies have a medium to low ESG adequacy. Conversely, benefit companies have grown enormously. At the end of 2022, there were 2,626, an increase of 54.74% compared to 2021. Benefit companies, as the text of the law states, are companies “which, in carrying out an economic activity, in addition to the purpose of sharing profits, pursue one or more aims of common benefit and operate in a responsible, sustainable and transparent manner towards persons, communities, territories and the environment, cultural and social goods and activities, bodies and associations and other stakeholders”.
A definition that seems to leave too much room for subjectivity. This is the conviction of Mattia Ciprian (in the picture below, En) CEO and founder of Modefinance, a fintech rating agency, who points out that right now there is “a bubble in the supply of rating tools because today anyone can claim to be an ESG expert, ESG consultant, ESG certifier. I think the three European regulators Era, Eiopa and Esma should create a register of those entitled to give ESG ratings. The bubble lies in the multitude of expedients that are used, such as the creation of benefit companies by statute or the use of valuations or instruments that do not necessarily have scientific validity”.
2022 was also the year of the boom of ESG minibonds, innovative finance instruments that were practically non-existent until 2018. Sixty were placed for a value of EUR 304.95 million. In this case, the rating is, if possible, even more necessary.
“In the Italian market today, the rating is required when the counterparty is a public investor or if a public guarantor such as Mcc (Mediocredito centrale) or Sace is involved,” Ciprian explains. “It even becomes a mandatory public rating when the minibond goes to the retail market. Most minibonds are unrated, seen as an unnecessary luxury. In my opinion, it should become more and more a standard for measuring risk, sometimes we can see what the investor and the intermediary structuring the bond is unable to see”.
How has the way companies approach a credit application changed?
“In the past, companies applying for credit would bring the business plan for an assessment of the future prospects. Today, they must exhibit a well-defined sustainability profile. In the credit relationship, rating agencies are crucial because they guarantee both parties, in that they are absolutely third parties. In addition, they have specialised analysts who know what to ask the company and how to ask it, so they help in the reduction of collection time. Last but not least, agencies have rating models, nothing more than a summary element, what the market needs. We are invested with an important role that is not yet understood, but which is fundamental for what finance will be, at least in Europe”.
SMEs seem to be the most difficult companies to accept the ESG transition. How come?
“SMEs are not sufficiently structured, they are still culturally distant. It is difficult to even gather information, because there is a lack of this specific culture on the other side. Some are unaware that this change affects them, others see no need to adapt themselves to it. On the downside, the main risk is the credit crunch. In the long run, being unattractive from a sustainability viewpoint could lead to a lack of financing opportunities because, for the bank, lending to a customer with a not particularly good EGS profile would lower the EGS quality of its loan portfolio and thus lead to additional costs”.