Improved disclosure and enhanced transparency on significant environmental, social and governance (ESG) issues will increasingly affect access to capital and valuations in high-risk sectors, says Moody’s Investors Service.
In a new report, the rating agency said that it expects ESG issues to become increasingly important in financial markets in 2021 due to the convergence of increased disclosure requirements, decarbonization policies and the effects of government stimulus efforts.
“As the global economy recovers from the coronavirus pandemic, environmental, social and governance issues will assume greater importance in the actions of policymakers, regulators, investors and corporate decision-makers,” the report said.
“The increasing interaction of these issues will amplify their impact on credit quality, while the positive credit implications of being well-positioned to adapt to ESG trends will become more apparent,” the report suggested.
Moody’s said that greater transparency on material ESG issues is likely to become increasingly important for access to capital and asset values in high-risk sectors.
“A growing landscape of sustainability standards and disclosure requirements, that exposes financial flows to greater scrutiny and oversight, is expected to start having more influence on investment decisions at all levels, from banks to asset managers to consumers,” the rating agency said.
At the same time, the report said that major economies will aim to address the economic effects of the pandemic and rising inequality, with “longer-term efforts to reduce carbon emissions, and develop green infrastructure.”
The European Union, China and the U.S. are all stepping up their efforts to develop low-carbon economies, the report noted.
“The alignment of the major economic blocs on decarbonization will further sharpen the credit implications of the energy transition,” Moody’s said.
“The events of 2020 will have lasting credit impacts, with green stimulus a priority in advanced economies post-Covid, consumers paying more attention to sustainability issues, and international alignment on climate policy restored,” said James Leaton, senior vice president at Moody’s, in a release.