ESG Is Increasingly Important in Credit Ratings, Moody’s Says

Moody’s Investors Service is paying more attention to environmental and social issues when assessing companies’ risk as the financial impact becomes clearer. Climate and demographic change, as well as societal issues like income inequality, are increasingly highlighted, Moody’s analysts led by Robard Williams wrote in a report Monday.

“We expect ESG considerations to be of growing importance in our assessment of issuer credit quality,” the Moody’s analysts wrote. “While our ratings have always reflected our views of ESG risks, the materiality of key environmental and social issues continues to increase.”

Moody’s cited ESG risks as material credit considerations in 33% of the 7,637 private-sector rating actions published in 2019. This underscores “the significance of these considerations in our credit analysis,” Moody’s said.

Financial strategy and risk management -- a governance risk category -- was cited in the largest share of rating actions. Climate risk, including transition to a low-carbon economy as well as the adverse effects of physical climate change, is “taking on greater prominence in discussions of credit quality,” Moody’s said.

Auto Risk

Carmakers had the highest proportion of ratings action citing environmental considerations, followed by coal mining, coal terminals as well as regulated electric and gas utilities with generation. Moody’s cut Ford Motor Co.’s senior unsecured rating in September because the product portfolio left it vulnerable to potentially large emission penalties in 2020 and 2021.

“Deeper market integration of climate risks will constrain the availability of capital for the most-exposed sectors,” Moody’s said.

Mortgage insurance, packaging manufacturers and coal mining had the highest proportion of rating actions referencing social factors.

Vale SA, was downgraded in February after a trailings dam managed by the the world’s largest iron ore producer collapsed, resulting in deaths and environmental damage. Moody’s cited health and safety as a material social consideration.

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Caleb Mutua in New York at dmutua@bloomberg.net

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Nikolaj Gammeltoft at ngammeltoft@bloomberg.net

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