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DBRS Morningstar: ESG Factors for Banks, Part Two – Governance Factors

·6 min read

NEW YORK, October 19, 2021--(BUSINESS WIRE)--This is the second in a series of commentaries discussing the Environmental, Social, and Governance (ESG) factors that could affect the ratings of banks rated by DBRS Morningstar. In this second commentary, DBRS Morningstar discusses the three governance risk factors that DBRS Morningstar considers in the ratings analysis of banks. The negative impact of mismanaged governance usually feeds through banks' profits as a result of penalties, and/or payments for compensation, and/or loss of business.

Key highlights:

  • DBRS Morningstar views good governance as a prerequisite to a bank's ratings.

  • Although banks are exposed to a number of ESG risk factors, governance risk factors have had the most negative impact on banks' credit profile.

  • Governance risk factors tend to relate to intangible items such as culture and accountability and are difficult for external parties to monitor and assess.

  • DBRS Morningstar considers three governance risk factors. These are: (i) Bribery, Corruption, and Political Risks; (ii) Business Ethics; and (iii) Corporate Governance

    • Bribery, Corruption, and Political Risks: Alleged or actual illicit payments can pose a financial or reputational risk to banks. Additionally, political risks can affect a bank's financial position and/or its reputation.

    • Business Ethics: General professional ethics can pose a financial or reputational risk to banks. Deficiencies in business ethics would usually result from the lack of a strong risk culture which can be associated with a lack of responsibility, accountability, and/or lack of respect for controls.

    • Corporate Governance: Corporate governance failures can negatively affect banks' financial wellbeing or reputation. Most recent examples would be the money laundering failures that many banks continue to face.

"Although banks are exposed to a number of ESG risk factors, governance risk factors have had the most negative impact on banks' credit profile, and a large number of examples have demonstrated that banks can experience damaging reputational issues that are accompanied with a significant financial impact following governance-related issues. In this commentary, we discuss the three governance risk factors that we consider in our ratings analysis of banks." said Vitaline Yeterian, Senior Vice President, Global FIG.

To read the full report, click here: https://www.dbrsmorningstar.com/research/386141/esg-factors-for-banks-part-two-governance-factors

To read part one in the series, which addresses environmental factors, click here: https://www.dbrsmorningstar.com/research/377394/esg-factors-for-financial-institutions-part-one-environmental-factors

The DBRS Morningstar group of companies consists of DBRS, Inc. (Delaware, U.S.)(NRSRO, DRO affiliate); DBRS Limited (Ontario, Canada)(DRO, NRSRO affiliate); DBRS Ratings GmbH (Frankfurt, Germany)(EU CRA, NRSRO affiliate, DRO affiliate); and DBRS Ratings Limited (England and Wales)(UK CRA, NRSRO affiliate, DRO affiliate). For more information on regulatory registrations, recognitions and approvals of the DBRS Morningstar group of companies, please see: https:// www.dbrsmorningstar.com/research/highlights.pdf. The DBRS Morningstar group of companies are wholly-owned subsidiaries of Morningstar, Inc. © 2021 DBRS Morningstar. All Rights Reserved. The information upon which DBRS Morningstar ratings and other types of credit opinions and reports are based is obtained by DBRS Morningstar from sources DBRS Morningstar believes to be reliable. DBRS Morningstar does not audit the information it receives in connection with the analytical process, and it does not and cannot independently verify that information in every instance. The extent of any factual investigation or independent verification depends on facts and circumstances. DBRS Morningstar ratings, other types of credit opinions, reports and any other information provided by DBRS Morningstar are provided "as is" and without representation or warranty of any kind. DBRS Morningstar hereby disclaims any representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability, fitness for any particular purpose or non-infringement of any of such information. In no event shall DBRS Morningstar or its directors, officers, employees, independent contractors, agents and representatives (collectively, DBRS Morningstar Representatives) be liable (1) for any inaccuracy, delay, loss of data, interruption in service, error or omission or for any damages resulting therefrom, or (2) for any direct, indirect, incidental, special, compensatory or consequential damages arising from any use of ratings and rating reports or arising from any error (negligent or otherwise) or other circumstance or contingency within or outside the control of DBRS Morningstar or any DBRS Morningstar Representative, in connection with or related to obtaining, collecting, compiling, analyzing, interpreting, communicating, publishing or delivering any such information. No DBRS Morningstar entity is an investment advisor. DBRS Morningstar does not provide investment, financial or other advice. Ratings, other types of credit opinions, other analysis and research issued or published by DBRS Morningstar are, and must be construed solely as, statements of opinion and not statements of fact as to credit worthiness, investment, financial or other advice or recommendations to purchase, sell or hold any securities. A report with respect to a DBRS Morningstar rating or other credit opinion is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. DBRS Morningstar may receive compensation for its ratings and other credit opinions from, among https://www.dbrsmorningstar.com/disclaimer/ others, issuers, insurers, guarantors and/or underwriters of debt securities. DBRS Morningstar is not responsible for the content or operation of third party websites accessed through hypertext or other computer links and DBRS Morningstar shall have no liability to any person or entity for the use of such third party websites. This publication may not be reproduced, retransmitted or distributed in any form without the prior written consent of DBRS Morningstar. ALL DBRS MORNINGSTAR RATINGS AND OTHER TYPES OF CREDIT OPINIONS ARE SUBJECT TO DISCLAIMERS AND CERTAIN LIMITATIONS. PLEASE READ THESE DISCLAIMERS AND LIMITATIONS AT https://www.dbrsmorningstar.com/about/disclaimer. ADDITIONAL INFORMATION REGARDING DBRS MORNINGSTAR RATINGS AND OTHER TYPES OF CREDIT OPINIONS, INCLUDING DEFINITIONS, POLICIES AND METHODOLOGIES, ARE AVAILABLE ON https://www.dbrsmorningstar.com. Users may, through hypertext or other computer links, gain access to websites operated by persons other than DBRS Morningstar. Such hyperlinks are provided for convenience only, and are the exclusive responsibility of the owners of such websites. DBRS Morningstar does not endorse the content, the operator or operations of third party websites. DBRS Morningstar is not responsible for the content or operation of such websites and DBRS Morningstar shall have no liability to you or any other person or entity for the use of third party websites.

View source version on businesswire.com: https://www.businesswire.com/news/home/20211019005711/en/


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