Rating agency Moody’s is stepping up its assessment of companies’ performance on ESG counts.

An analysis of Moody’s (NYSE: MCO) private sector rating actions last year revealed that ESG risks were “material” in a third of the cases.

“We cited ESG risks as material credit consideration in 33% of our 7,637 rating actions for private-sector issuers in 2019.”

“Of rating actions citing ESG risks, 88% mentioned governance issues, 20% referred to social issues and 16% cited environmental issues. In many cases, these ESG considerations were key drivers of the rating action,” Moody’s said.

Moody’s analysts, led by Robard Williams wrote in a report issued Monday that climate change, demographic change, and income inequality are assuming greater importance in companies’ risk assessments. (BloombergLaw)

Rating actions by the sector – Auto and mining

As the financial impact from ESG risks becomes increasingly quantifiable, climate risk is “taking on greater prominence in discussions of credit quality,” Moody’s said.

Carmakers bore the brunt of rating actions by Moody’s. Next to feel the heat were coal mining, coal terminals, and regulated electric and gas utilities with generation.

The risk of large emission penalties in 2020 and 2021 loomed large for Ford Motor Co (NYSE: F). Moody’s, therefore, cut its senior unsecured rating in September.

Social factors

Moody’s took the highest number of rating actions on the social front against mortgage insurance, packaging manufacturers and coal mining.

Health and safety were also cropping up as a risk overhang in assessments.

Outlook for 2020

Last month, Moody’s issued a research report on the growing role of ESG in credit outlooks for 2020.

“One major trend is that climate change and the transition to a low-carbon economy are growing in relevance for global credit markets,” said Ram Sri-Saravanapavaan, ESG Analyst. “Investors are seeking more disclosure from companies about how they are addressing these risks as the financial implications are becoming clearer.”

The report cited utilities, oil and gas, auto manufacturing, airlines, building materials and shipping as the most exposed carbon-intensive sectors.

“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.

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