ESG becoming more important to credit assessments, investment decisions

Environmental, social and governance (ESG) issues are weighing more heavily on credit assessments and investment decisions, says Moody’s Investors Service in a new report.

The rating agency has found that the impact of climate change and the transition to a low-carbon economy are increasingly relevant to global credit markets.

“Investors are seeking more disclosure from companies about how they are addressing these risks as the financial implications are becoming clearer,” Ram Sri-Saravanapavaan, ESG analyst at Moody’s, said in a statement.

The report noted that stricter climate-related policies will increase transition risk for industries that are most exposed to carbon regulation, such as utilities, oil and gas, auto manufacturing, airlines, building materials and shipping.

“Rising concerns of future asset write-downs and reduced cash flow may raise companies’ cost of capital or reduce access to funding, impairing their ability to raise, service or refinance debt,” Moody’s said.

Alongside climate change, Moody’s said that public interest in “preserving natural assets, such as land, water and living things, will increase significantly over the coming years.”

From a credit assessment perspective, Moody’s said that “water scarcity, biodiversity, land use, deforestation and food insecurity” will put the spotlight on issuers’ resource management.

“Other trends include risks and opportunities created by aging populations and socially driven regulation,” Moody’s said.

“Aging is already a big concern in advanced European economies and Japan, and will become a rising credit issue in emerging markets,” it noted.

“Consumer activism and heightened focus on responsible production throughout the supply chain will exacerbate the risks of certain products and services, and encourage regulation of new categories such as e-cigarettes.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.