From business conduct incidents to credit events: connecting the dots

Sustainable investing is entering a new phase, one defined less by abstract principles and more by concrete financial implications. These themes were front and centre in a recent RepRisk webinar featuring senior credit and sustainability leaders. The conversation explored how investors are navigating 2026’s rapidly shifting economic and technological landscape, making sustainability-aligned analysis no longer a specialist exercise, but an essential dimension of prudent credit risk assessment. The insights below draw from that conversation.

# From value creation to value preservation

The materiality and financial relevance of sustainability factors is increasingly defined not by how much value it creates, but by how much existing value it protects, which for credit investors remains an essential question. Although recent academic work in collaboration with a large institutional asset owner demonstrates clear links between real-world sustainability risks and financial performance, previous results have often been inconclusive, reflecting both methodological challenges and the slow materialisation of benefits.

But increasingly, evidence on sustainability-related downside risk is becoming harder to ignore. For example, a 2025 study found that borrowers with elevated business conduct risk pay more for bank loans than firms exhibiting strong sustainability practices. These findings underscore a key component of credit risk: sustainability factors may matter less for outperforming peers than for avoiding structural deterioration in credit quality.

# Industry-specific materiality remains foundational

For private credit markets, sustainability considerations are most meaningful when assessed through the lens of industry-specific financial materiality. The essential questions are straightforward: Are these sustainability factors relevant to underlying business outcomes? Do they enhance or erode credit quality?

Effective risk management focuses on the industry- or company-specific factors that will most likely influence cash flows, covenant compliance, or enterprise value. Maintaining that discipline, both at deal entry and throughout the life of the loan, anchors sustainability analysis firmly within the core objectives of credit investing.

# The risk landscape is shifting, fast

Meanwhile, the broader risk environment continues to evolve – quickly, and in many cases, unpredictably. Since many sustainability standards were first established, the operating environment has changed in fundamental ways. The aftershocks of the pandemic, rising geopolitical tensions, and rapid advances in AI have introduced new cross-industry risks that investors must be prepared to assess.

Panelists on a recent RepRisk webinar highlighted two themes that are now increasingly top-of-mind for credit investors:

• Climate-related physical risk: Companies with significant geographic footprints must evaluate exposure to heat, flooding, storms, and other physical hazards. For lenders, understanding the location, vulnerability, and mitigation plans of portfolio companies is becoming a core component of underwriting.
• AI implementation risk: As organizations deploy AI at unprecedented speed, investors are paying closer attention to governance, controls, training, and oversight. Poorly managed AI adoption can introduce operational, regulatory, or reputational vulnerabilities – risks that credit investors must be prepared to assess.

# Making sound judgments even when data is incomplete

One of the biggest misperceptions in the market is that sustainability analysis requires perfect, or at least fully quantifiable, data. It does not. In practice, some of the most valuable insights come not from spreadsheets, but from examining how a company actually operates: its processes, policies, and operational discipline.

How does management oversee energy use? How are employees treated and retained? What systems are in place to monitor compliance, supervise suppliers, prepare for physical disruptions, or identify emerging risks? These qualitative signals are often leading indicators of resilience and long-term performance. And because they are interconnected, they frequently reveal more than any single metric can capture.

The absence of standardized or perfectly comparable data should not discourage investors from assessing what is clearly financially material. Evaluating these factors is not a values-based exercise; it’s part of responsible, risk-adjusted decision-making.

# Triangulating insights in private markets

Information asymmetry is a known challenge in private credit, which is why investors are increasingly adopting a mosaic approach to stay ahead of emerging risks. Rather than relying on any single data source, they triangulate insights from third-party incident monitoring, direct engagement with portfolio companies, sponsor relationships, and specialist networks. Taken together, these perspectives create a more complete and nuanced understanding of borrower risk profiles and help investors build the confidence needed to price risk appropriately.

# What’s ahead for 2026 and beyond

As sustainability-aligned risk management matures, investors can expect heightened focus on three fast-evolving areas:

• The financial implications of climate-related physical disruptions, with knock-on effects on biodiversity and ecosystem dependencies
• The governance challenges and hidden risks associated with rapid AI deployment, often outpacing organizational competence and experience
• The execution gap between commitments made in the last three to five years, which is increasingly coming under scrutiny

Taken together, these trends will continue to push investment teams to expand their expertise, evolve their frameworks, and build new capabilities in real time.