Adding an ESG factor can improve quantitative credit rating models, says Christoph Klein of ESG Porfolio Management in a new research report.
The study used an optimized discriminant function that included four factors in order of importance: the logarithm of the market capitalization (size), retained earnings to total assets
(cumulative profitability), the carbon emissions GHG mitigation score (ESG factor)
and market capitalization to total liabilities (valuation). The results suggest that the inclusion of ESG factors in the industrial sector improves the power of quantitative rating models and is a factor in credit assessments.