Activating an environmentally sustainable future

Bringing our ESG approach into focus for stakeholders

In addition to Moody’s efforts to integrate environmental, social and governance (ESG) considerations into our credit analyses in a more structured and systematic manner, it is essential that financial market participants understand the links involved for these initiatives to succeed. In 2018, Moody’s continued to educate the market about our approach and insights at numerous events, including our inaugural Moody’s ESG Conference in London,and by expanding our research into new directions.

“Investors have consistently told us, ‘We value transparency around how you factor things like climate change and worker rights and diversity into your credit analysis,’” says Jim Hempstead, managing director,Moody’s Investors Service (MIS). “We’re seeing more interest from stakeholders in resources that support sustainable investing.”

The chance to lead —And listen

With a theme of “Through the credit lens: A focus on ESG,”our London event in October drew 114 attendees for a half day of presentations and panel discussions.

We set out to make the conference highly interactive and to listen as much as we talked. Throughout the event, attendees’ questions, comments and survey responses were posted live, adding another level of dialogue to complement the onstage presentations.

The on-screen polling questions were particularly useful as a gauge of investors’ most urgent challenges and concerns, said one attendee. “Every single speaker had something informative and interesting to say,” said another. “All were well prepared, and the moderators knew exactly what they were doing.”

Giving voice to thought leaders and perspectives beyond those of MIS helped the conference resonate with attendees. Nikhil Rathi, CEO of the London Stock Exchange Group, began the morning with a keynote on the growing momentum behind “green finance” — a term for investment practices that seek to advance environmental sustainability goals — and how the integration of ESG into credit analysis is enhancing capital markets. Mike Tyrrell, editor of SRI-CONNECT, then led a panel discussion on the physical risks of climate change and their implications for the credit quality of sovereign governments.

The conference also gave us a chance to share research, case studies and analytical frameworks created through our ESG Initiative over the past three years. MIS presenters included Rahul Ghosh, senior vice president for ESG and Green Bonds, who gave an overview of our findings on environmental risks that pose the greatest threat to credit and rated debt across various sectors. Brian Cahill, managing director of the Corporate Finance Group for Asia and global executive sponsor for ESG initiatives at Moody’s Investors Service, joined with a senior executive from Bloomberg New Energy Finance to discuss investment implications of the Paris Agreement, such as how carbon-transition efforts are informing credit risk assessment.

Based on attendees’ feedback, Hempstead says, the team will continue to increase our focus on social and governance issues in future ESG conferences.

“The level of engagement by this audience of experts demonstrated to me that it is key that whenever we talk about ESG considerations, our insights are directly relevant to financial decision makers,” he says.

Tracking exposure in environmental risks

Beyond our presence at international events, MIS researchers also greatly expanded our ESG report library in 2018 to satisfy the market’s appetite for independent insight in this evolving dimension of credit risk.

Moody’s Environmental Risks — Global: Heat Map report, an assessment of credit exposure to environmental risks across 84 industry sectors globally, is one of our most widely read ESG resources. We updated our initial 2015 report in September 2018, providing even more detailed analysis and uncovering some notable shifts in environmental risk exposure over the past three years.

Our 2018 report looked at $74.6 trillion in rated debt, up nearly 10% compared with 2015. About $10 trillion of that total is in sectors assessed as having moderate exposure to environmental risks — including pollution, land-use restrictions, carbon regulations, water shortages and natural disasters — compared with $7 trillion three years ago.

“What’s interesting about that change is that $3 trillion of debt moved from low to moderate risk,” says Hempstead. The move shows investors and others in the financial markets how these kinds of environmental factors are making an impact. “That’s directly answering the question of ‘What are the most at-risk sectors and which credit ratings are being impacted?’” he says.

For 11 sectors, with $2.2 trillion in rated debt, environmental risks are already ratings-relevant or will be in the coming few years

Breakdown of “Elevated Risk” (Immediate/Emerging) sectors in environmental risks heat map (in US$ billion)

Note: Boxes are sized relative to the value of rated debt (in US$ billion) and color indicated for overall credit exposure.
Source: Environmental Risks – Global: Heat Map: 11 Sectors with $2.2 Trillion Debt Have Elevated Environmental Risk Exposure, Moody’s Investors Service, September 25, 2018.

Input to keep us improving

Other ways MIS continued to refine our analysis included seeking feedback from market participants on a new cross-sector methodology for assessing ESG risks that can impact credit quality for issuers and transactions in all sectors, published in January 2019.

“Setting principles for how ESG considerations are incorporated into credit is important to maintain our high standards for analytical rigor,” Hempstead says. “This methodology is an influential resource in our credit analysis, so it’s important that we give stakeholders a chance to weigh in.”

MIS also issued a request for feedback on our proposed governance assessment scoring tool for publicly traded, non financial rated companies. Governance assessments give market participants greater visibility into factors we see as having the most potential to influence credit risk, and they also provide a relative ranking of governance risk characteristics.

“Corporate governance matters to bondholders because a governance breakdown can have negative impacts on creditworthiness,” says Brendan Sheehan, a governance expert and vice president at MIS. “Our governance assessments will be a useful tool that helps create a common language for identifying areas of governance that might call for additional examination.”

“However,” he continues, “governance is only one of many factors that determine an issuer’s credit quality.”

“We’re seeing more interest from stakeholders in resources that support sustainable investing.”
JIM HEMPSTEAD
MANAGING DIRECTOR, MOODY’S INVESTORS SERVICE

114

Attendees at Moody’s inaugural ESG Conference

$74.6

Total rated debt represented in the 2018 update of our Environmental Risks — Global: Heat Map

84

Number of industry sectors assessed for environmental risk exposure

Sharing our ESG expertise across the globe

Sharing our ESG expertise across the globe

  • Barcelona
  • Brussels
  • Chicago
  • Copenhagen
  • Dubai
  • Frankfurt
  • Hong Kong
  • Lisbon
  • London
  • Los Angeles
  • Madrid
  • Milan
  • Munich
  • New York
  • Paris
  • San Francisco
  • Seoul
  • Singapore
  • Stockholm
  • Sydney
  • Tokyo
  • Toronto
  • Vienna
  • Warsaw
  • Washington, DC
  • Zurich