Moody's: ESG risks are growing

Environmental, social and governance (ESG) risks were cited as material credit considerations in 72% of public sector rating actions in 2020, up from 48% in 2019, Moody’s Investors Service have revealed.

Social inequality and climate risks cause ESG issues 

Moody’s reviewed nearly 5,600 public sector credit rating action announcements, that it published in 2020.

Risks associated with Covid-19 have caused a jump in ESG issues:

• 57% mentioned social risks, up from 32% in 2019
• 43% governance risks, up from 28% in 2019
• 5% environmental risks, up from 3% in 2019

Physical climate risks, water scarcity and natural capital erosion will become more prevalent, while social inequities will continue to influence calls for long-term reforms. 

Public-sector issuers, particularly in some emerging market economies, will face critical challenges in funding climate adaptation and social infrastructure. 

The risk of environmental and social disruption is growing

“The large jump in ESG citations was driven by the pandemic, which we consider a social risk that has also exacerbated and highlighted other long-standing social issues”, said Robard Williams, Senior Vice President and CSR at Moody’s. “The potential for highly disruptive environmental and social risks is growing. The higher frequency of citations across all three ESG categories underscores the growing importance of these issues in our credit analysis.” 

Emerging market sovereigns accounted for the most references to environmental considerations. Physical climate risk was the most frequently cited environmental consideration.