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Environmental, social and governance (ESG) risks are increasingly important to asset managers’ credit ratings and strategies, says Moody’s Investors Service in a new report.

The rating agency said that a number of factors, including growing concerns about global warming, demographics and evolving investor expectations, are making ESG considerations a strategic priority among the world’s asset managers.

“ESG risks cover a range of factors related to the sustainability and social impact of asset managers’ activities and investments. These risks have become more significant due to evolving regulations, climate change and demographic trends, and changing consumer and investor expectations,” Moody’s said.

These factors represent both a heightened risk, and a potential opportunity for firms, the rating agency added.

“This creates opportunities for asset managers that apply strong ESG criteria to their investments to stand out. Conversely, those that fail to do so may suffer reputational damage, regulatory penalties or financial loss,” the report noted.

Moody’s also said that it considers ESG factors in evaluating asset managers’ credit positions.

“Governance risk typically has the greatest impact on Moody’s assessment of creditworthiness, as poor risk governance can result in harm to a firm’s franchise, and reduce profitability via client redemptions and regulatory fines,” it said.

While governance is a key concern for all asset managers, other sorts of ESG exposures differ by region, Moody’s said.

For instance, the report noted that the risk of misconduct-driven litigation is greater in developed countries, “which typically have stricter consumer protection laws.”

The report also said that environmental factors typically have the least impact on asset managers’ credit ratings, “because [firms’] own environmental footprint tends to be limited.”

However, it noted that firms do face risks from their investment activities if they invest heavily in industries that are contributing to climate change.

In terms of ESG-driven opportunities, the report said that growing demand for sustainable finance is impacting asset managers’ processes and products, noting that “growing pressure from policymakers, regulators and investors to prioritize the allocation of capital towards the development of a sustainable economy…has led to a strong increase in the volume of assets managed by dedicated ESG funds.”