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2018 | Book

The Role of Credit Rating Agencies in Responsible Finance


About this book

This Palgrave Pivot aims to examine the bourgeoning relationship between the Principles for Responsible Investment and the Credit Rating Industry. Since May of 2016, when the partnership was initially publicised, the PRI have endeavoured to incorporate Credit Rating Agencies into its initiative via its ‘ESG in Credit Ratings Initiative’, and have been working diligently to find, and create common ground between Credit Rating Agencies and Institutional Investors seeking to be more forward-looking in their investment approaches. However, in recent years the ‘Big Two’ Credit Rating Agencies – Standard & Poor’s and Moody’s – have finally received record fines for their conduct in the run-up to the Financial Crisis. There is a need, then, to examine the incorporation of the Credit Rating Agencies into such a progressive initiative. To achieve this objective, this book examines the field of ‘responsible investing’, the credit rating industry, and the power dynamic that exists between the rating industry, investors, and the PRI (via its ‘Initiative’).

Table of Contents

Chapter 1. Introduction
There are a number of complex issues and delineations which need to be deconstructed in this book, so in the introduction, the aim is to chart a course for how those complexities will be unravelled. It is also discussed how the work is positive regarding the endeavour of the Principles for Responsible Investing, but that great care ought to be taken when moving forward, on account of the importance of the responsible investment movement.
Daniel Cash
Chapter 2. “Setting the Scene”
The world of ‘responsible investing’ is a complex one that is defined by a number of approaches and delineations. In this chapter, the aim is to present an overview of this particular arena and present an account of those delineations. In addition, there is a need to present an account of the different terminologies used within the sector, so the chapter will introduce these terminologies and make clear the forward trajectory for the rest of the work. The biggest issue to disentangle is the differences between the classical understandings of the concepts of ‘Ethical Investing’, ‘Sustainable Finance’, and ‘Responsible Finance’. As this work is focused upon the Principles for Responsible Investment, the chapter will conclude with an introductory examination of that initiative.
Daniel Cash
Chapter 3. The Role of the Credit Rating Agencies
After having discussed the complexities of the ‘Responsible Investing’ sector, this chapter turns the work’s attention to the second objective of the work, which is to examine the Credit Rating Industry. The chapter will analyse how the credit rating agencies (CRAs) are incorporating ‘Environmental, Social, and Governance’ (ESG) into their credit risk analyses. This is an important phase in the trajectory of both the CRAs and the Responsible Finance movement, so the chapter will present a highly critical analysis of development in this area. The chapter will examine the perspective of the PRI itself, via its ‘ESG in Credit Ratings Initiative’, and develops a ‘three-way narrative’ that presents the idea that this area is dominated by a three-way dynamic between investors, CRAs, and the PRI.
Daniel Cash
Chapter 4. “Disconnects”
As the analytical foundation has been set in the first two chapters, this chapter now begins to pose critical questions regarding the relationship between the three parties. In examining the ‘disconnects’, the chapter assesses the power dynamic that exists amongst the three parties, and questions the stated ‘disconnects’ as identified by the Initiative in their second major report on the relationship. The aim of the chapter is to assess which of these ‘disconnects’ are fundamental, and which are the products of an off-balanced power dynamic that exists almost naturally within the CRA–Investor dynamic.
Daniel Cash
Chapter 5. The Future for the Relationship
In this chapter, the aim is to develop some potential hypotheses for how the relationship between the parties will develop. The first issue developed is that the Initiative must take great care in progressing with the relationship, and that to protect the ‘movement’, certain safeguards need to be established. One such proposed method is the re-imagining of a Dodd-Frank creation which would enable the smaller agencies to actively participate in the ‘responsible investment’ movement, whilst also creating a system of ‘checks and balances’ for on looking investors where the CRAs are concerned. The chapter concludes by airing some of the ‘concerns’ regarding the nature of the CRAs and their potential impact on the development of the ‘Responsible Investment’ movement.
Daniel Cash
Chapter 6. Conclusion
The work concludes by making declarations on the progression of the Principles for Responsible Investment (PRI), and the Initiative. The initial positivity regarding the chances of success for these endeavours is not dented, but the declaration that great care ought to be exercised is solidified. The conclusion uses the phrase ‘reckless change’ to examine the potential for development within the field, and also to ponder the effect of incorporating the credit rating agencies into the field.
Daniel Cash
The Role of Credit Rating Agencies in Responsible Finance
Dr. Daniel Cash
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