First to Incorporate ESG in risk methodology

Euler Hermes, a subsidiary of Allianz SE, has become the first credit insurer to add ESG criteria to its country risk methodology. In its announcement, the insurer explained that it has become increasingly clear that ESG issues will impact companies’ growth, market share and profitability, and must now be included in the assessment of non-payment risk.

Correlation between ESG and non-payment risk

Ludovic Subran, Chief Economist at Allianz, explained the new methodology:

“For non-payment risk, the correlation between non-payments and severe climate-related events (supply chain interruptions), or between insolvencies and social unrests (looting, profit loss) are increasing over time. New payment risks could come from more difficult access to financing for companies with higher carbon footprint or with assets at risk of stranding because of regulatory decisions.”

While Euler Hermes has already included governance risks, such as regulatory and legal frameworks, and control of corruption in its country risk analysis, it will now add indicators measuring environmental stability, as well as sentiment analysis from social media in its political risk assessment.

Mr. Subran continued:

“Our new country risk rating methodology aims to capture the vulnerabilities related to climate change and social unrests on companies, which could face higher costs of financing and disrupted supply chains, and business interruption. Small island developing states, countries with a carbonated energy mix, or countries where floods risks are high are on the watch list for their impact on B2B trade. These exogenous shocks are often a blind post for providers who do not think of extending their due diligence on their clients to include these risks of non-payment. In the future, as awareness increases, I would not be surprised that some countries exhibit lower nonpayment risks thanks to successful adaptation policies.”