Expanding Credit Risk Analysis

Traditional risk categories embodied in credit research – business risk and financial risk – can capture a number of Environmental, Social and Governance (ESG) issues. However, there are some risks that are difficult to assess in this framework, primarily because ESG categories themselves are not particularly efficient, or even meaningful, as analytical categories. We propose that a better analysis of these risks can be obtained by categorizing what are currently called ESG risks into three specific risk categories: operational or management risks, climate risks, primarily mitigation and adaptation risks, and natural capital risks, a category intended to capture natural capital depletion, subsidy loss risks, and certain geopolitical risks-risks associated with water resources perhaps being the best example of a natural capital risk.