New activities under the EU Taxonomy’s environmental objectives (aside from climate mitigation and adaptation) led to improvements for the environmental scores of a few entities this quarter, Sustainable Fitch has said, showcasing the ability of ESG scores to account for changes in the external classification environment. The data provider published its ESG Scores for Leveraged Finance Quarterly Briefing – Q2 2024, reviewing the scores of 250 entities and evaluating 100 new ones. Around 8% of assessed entities had material score changes in at least one category among E, S, or G in Q2, compared to 5% in Q1. Improvements were most notable for activities linked to the circular economy, such as online marketplaces for second-hand goods, paper packaging, and scrap metal management. Sustainable Fitch said it expected this trend to continue in Q3. Across the entire portfolio, average governance scores (63 out of 100) remained in the ‘good’ score category, followed by social scores (55) and environmental scores (37) – with averages unchanged from the previous quarter. European entities performed slightly better than peers in North America, with each category being scored two to three points higher. The North America universe of entities is more concentrated in industries with bigger negative environmental impacts – such as energy, utilities and mining – and social impacts such as fast food and gaming. Such a composition of issuers could drive down the performance of North American collateralised loan obligations (CLOs), which are still outperformed by their European counterparts. Composition changes have also impacted ESG scores at the CLO-level, with the removal of assets related to air travel, automobiles, fossil fuel utilities, having had a positive impact – while the addition of gambling-related assets and the removal of healthcare and telecommunications ones having negatively impacted CLO social performance.
