MOODY’S Investors Service has revealed in a new report that 36% of its nearly 1,800 rating actions on debt issuers in emerging markets (EMs) in 2019 involved material environmental, social and governance (ESG) considerations which were dominated by governance considerations.
In this regard, the credit rating agency revealed that ESG risks are often higher in EMs than they are in developed markets, while issuers’ capacity to respond to these risks is often also weaker.
“We expect ESG considerations to become even more material to debt issuers’ credit quality globally – and particular in EMs – given the range and rise of ESG risks such as climate change and public health,” Moody’s assistant vice president and analyst Nishad Majmudar pointed out.
Maimudar’s views are encapsulated in the report entitled ESG-Emerging Markets: ESG Risks Are Prevalent, Especially in Public Sector; Governance is Cited Most Frequently.
According to Moody’s, an ESG citation indicates that the factor is material to the debt issuer’s overall credit quality, but does not necessarily mean that it was the primary driver of a rating action.
The rating action can be driven instead by factors unrelated to ESG such as changes in economic growth, profitability or leverage ratios.
In addition, ESG considerations are more prevalent in rating actions for public-sector debt issuers in EMs than for their peers in developed markets, reflecting generally weaker fiscal, financial and institutional characteristics..
The difference is especially clear when comparing factors such as challenges to sustainable development and vulnerability and readiness for physical environmental risk.
In a related development, Moody’s noted that governance was cited as an ESG risk across a broad range of private-sector ratings, indicating its importance and pervasiveness in the credit rating agency’s credit analysis.
“Governance considerations tend to be issuer or transaction-specific, whereas environmental and social considerations tend to be more sector-specific,” added Moody’s.
The COVID-19 pandemic, which Moody’s considers a social risk, has also brought to the fore the materiality of key social and governance issues globally which have been factored into many rating actions in 2020. – Nov 26, 2020
