While a small number of issuers enjoy positive credit effects due to ESG factors, the impact is much more likely to weigh negatively on credit ratings, says Moody’s Investors Service.
In a new report, the rating agency said ESG issues directly affect the ratings of about one-quarter of issuers. For about 4% of issuers the credit impact is positive, and these are primarily governments in advanced economies.
Conversely, ESG factors are “highly negative” or “very highly negative” for about 20% of issuers, including corporations, financial institutions and government entities, Moody’s reported.
For corporate issuers, about 41% currently face a material credit impact (positive, highly negative or very highly negative) from ESG factors, it noted.
Additionally, the report said that almost 30% of rated issuers face potential future negative impact from ESG factors.
“The credit impact is moderately negative for these entities, meaning a greater potential for an adverse impact to crystallize over time,” Moody’s said.
For speculative-grade issuers, governance factors tend to have a bigger negative impact on ratings than environmental and social issues, the report said.
“ESG considerations have a highly negative or very highly negative credit impact on just over half of speculative-grade entities, driven largely by relative governance weaknesses, particularly aggressive financial policies,” Moody’s said.
Among investment-grade issuers, social risks have the most impact on ratings.
“Of those for which the ESG credit impact is highly negative, 60% have highly negative or very highly negative exposure to social risks,” the report said, adding that some of these firms also face significant governance concerns.