From data to impact: Bringing ESG transparency to the market
Demand for environmental, social and governance (ESG) tools, resources and expertise continues to rise. Over the past year, we made it a priority to provide ESG data, assessments, analytics, research and benchmark products in service of our mission to help companies make better decisions. We have also increased our focus on demonstrating the systematic and transparent incorporation of material ESG issues into credit ratings.
Moody’s ESG and climate capabilities expanded during 2019 as we made strategic investments in ESG leaders such as Vigeo Eiris, Four Twenty Seven, Inc. and SynTao Green Finance, as well as created a central team dedicated to driving our ESG offering.
Our increasingly sophisticated understanding of the trends and market demands for ESG and climate risk assessments gives us an opportunity to deliver on our mission.
Moody’s Investors Service (MIS) has always incorporated all risks, including ESG considerations, into credit ratings where relevant and material. As a global integrated risk assessment firm, Moody’s now provides ESG and climate insights across three main areas: standalone ESG, sustainable finance and climate risk solutions via our newly acquired affiliates; transparent and systematic integration of ESG consideration with the rating agency; and ESG data and insights integrated into Moody’s Analytics’ risk management solutions.
Moody’s investments in 2019 included majority stakes in Vigeo Eiris, a global provider of ESG research, data and assessments, and Four Twenty Seven, a provider of climate data and risk analysis, as well as a minority stake in ESG and sustainability specialist SynTao Green Finance in China.
In a September 2019 report, MIS used Four Twenty Seven’s data on exposure to heat stress in US jurisdictions alongside information on outstanding debt and credit quality. We found that 21% of outstanding debt that Moody’s rates is exposed to high or very high heat stress. “That analysis shows the power of bringing different data expertise together in a new and different way,” says Lisa Rabbe, chief government and public affairs officer of Moody’s Corporation. “It really highlights the power of these acquisitions paired with what Moody’s has always done.” The response from regulators and policymakers to the Four Twenty Seven acquisition has been positive.
“I recently attended a meeting at Climate Week NYC with senators from the Special Committee on Climate Crisis,” says Rabbe. “When they learned how the Four Twenty Seven dataset was used in the heat map, they affirmed that this was exactly the kind of data everybody needs right now. And these new datasets and capabilities have been met with very high degrees of enthusiasm from every policymaker and every regulator we’ve spoken to.”
We are now integrating data from Four Twenty Seven into some of Moody’s business lines. For example, aggregated Four Twenty Seven climate risk data is now available on the Reis Network, Moody’s Analytics’ commercial real estate platform.
We saw similar benefits from our Vigeo Eiris acquisition. “Vigeo Eiris is well known in its field of expertise,” says Gwen Safa, managing director of Strategy & Marketing for Moody’s Corporation. “Moody’s Investors Service was one of the first global agencies to assess green bonds, back in 2016. Now, with the combined expertise of Vigeo Eiris and MIS, we are becoming leaders in assessing labeled bonds and sustainability-linked debt globally.”
“With the combined expertise of Vigeo Eiris and Moody’s Investors Service, we are becoming leaders in assessing labeled bonds and sustainability-linked debt globally.”
MANAGING DIRECTOR, STRATEGY & MARKETING, MOODY’S CORPORATION
Four Twenty Seven data shows heat stress will be concentrated in the central Midwest
Improving ESG assessments
Analysis of how social considerations affect creditworthiness has historically been the least developed among ESG considerations. Social issues may include an issuer’s interactions with employees, customers, supply chain partners, counterparties and society at large.
Of note today, MIS regards the recent and rapid spread of COVID-19 as a social risk under our ESG framework, given its substantial threat to public health and safety, with credit implications that will continue to play out in the years to come. Measures we took in 2019 to classify social considerations are helping us understand and analyze the severe credit shock sparked by the 2020 pandemic.
“Defining material social considerations is difficult because the underlying issues are often intangible or difficult to measure — there were no hard metrics,” says Swami Venkataraman, senior vice president at MIS. “This shifted last year.”
In February 2019, MIS published a formal classification of social risk considerations. In October 2019, MIS published a heat map illustrating the credit materiality of social considerations to 82 global sectors with total rated debt of about $78 trillion.
The heat map report was the first of its kind and one of more than 220 MIS research pieces published on ESG in 2019. The report tells investors which sectors are more exposed to social risks and explains how we classify those risks. More than 1,200 of our analysts across the globe collaborated to produce the classifications, and the result has been compared with outside frameworks such as the Sustainability Accounting Standards Board (SASB) and the Principles for Responsible Investment (PRI).
Response from market participants has been very positive. “We added clarity to something that people were struggling to understand,” says Venkataraman.
In China, where financial regulators will require all publicly listed companies and bond issuers to disclose their ESG risk in 2020, we have expanded our commitment and expertise by investing in SynTao Green Finance.
“We are now building an integrated risk management solution and not just a point solution for ESG as if it is a standalone risk,” says Nick Reed, executive director at Moody’s Analytics. “It’s about discovering what the integration of several risk types looks like. We have a long history of being able to do just that as new risks emerge.”
“Our goal for 2020 is to scale up governance and carbon transition assessments substantially.”
GLOBAL HEAD OF ESG, MOODY’S INVESTORS SERVICE
The social risks heat map complements our earlier issuer-level governance assessment efforts, including the 2019 publication of a framework to assess corporate governance at publicly traded nonfinancial corporations. Moody’s governance assessment framework helps credit analysts and investors compare companies on a consistent, transparent and verifiable basis, giving greater visibility into the governance factors that could most influence credit risk. These assessments also provide a relative ranking of governance risk characteristics.
“Our goal for 2020 is to scale up governance and carbon transition assessments substantially,” says Brian Cahill, global head of ESG at MIS.
MIS also continued to improve issuer-level analysis for carbon transition risk. Beginning in 2018, we identified which sectors were at risk with our Environmental Risks — Global: Heat Map report. We then turned our attention to developing a framework for specific companies at risk. And our carbon transition assessments helped expand our toolbox for bringing ESG intelligence to market.
“There is a lot of intention in the market to move toward more responsible capitalism,” says Andrea Blackman, global head of ESG and Climate Risk Business at Moody’s Corporation. “Moody’s can help by bringing data and information modeling and risk evaluation capabilities together to formulate risk and valuation.”
And serving the practical business of the market is both Moody’s past and future as we move forward into the ESG space.
Leaning into leadership
Moody’s is proud to help standardize and shape the sustainable finance market. In this shifting regulatory landscape, we offer a unique perspective to our industry peers. Together, we are united for positive change.
UN Global Compact
In 2019, we became a founding member of the UN Global Compact CFO Taskforce for the SDGs, signed its Business Ambition for 1.5°C pledge, joined the Reporting on the SDGs Action Platform and, through CSR Europe, shared our expertise in sustainable finance and advanced the conversation with the European Commission.
We also took steps to join the Business Roundtable at the participant level and sign its Statement on the Purpose of a Corporation in 2019. “The Roundtable is a great opportunity for us to help corporate America’s CEO population who signed that statement to walk the talk on ESG,” says Lisa Rabbe, chief government and public affairs officer of Moody’s Corporation.
Sustainability rating certificate for Moody’s
In addition to the acquisition of Vigeo Eiris, Moody’s has solicited Vigeo Eiris to conduct an independent ESG and sustainability rating.
As of March 2020, Moody’s holds an A2+ rating, based on an overall score of 53/100. Moody’s ranks within the top 10% of all companies rated by Vigeo Eiris worldwide and first out of 58 within the Business Support Services North American sector, and we aspire to continue improving our overall score.
Rank in sector 1/58
Rank in region 5/1,252
Rank in universe 268/4,859
ESG reporting rate 87%
Sector average 61%
Vigeo Eiris is a majority-owned non-credit rating agency affiliate of Moody’s Corporation. Vigeo Eiris produces assessments and research using its own methodologies.
Q&A with Wendy Cheong
Managing Director, Regional Head of Asia-Pacific, Moody’s Investors Service
Heading MIS’ growth strategy for Asia-Pacific has given Wendy Cheong a unique perspective on China’s regulatory landscape and approach to ESG issues. Through her management of operations and joint ventures in the region, she has seen the acceleration of change firsthand.
Q: What is the state of ESG and sustainable finance in China?
A: We’re seeing strong momentum and tremendous opportunities in China, where the move toward ESG integration has historically been driven by the government and international investors. Specifically, the government, along with other institutions, has taken a leading role in developing the ESG markets through pilots, education, training and policies as well as regulatory guidance. We’re now also seeing increasing awareness among domestic investors. The Chinese government has announced requirements for publicly listed companies and bond issuers to disclose ESG risks by 2020, which is fueling transparency.
Q: Why did Moody’s decide to invest in SynTao Green Finance?
A: The investment in SynTao Green Finance aligns with Moody’s commitment to promote globally consistent approaches for assessing ESG risks and opportunities — for credit and beyond. SynTao Green Finance’s China-specific datasets enhance Moody’s global ESG research and data, and complement Moody’s acquisitions in 2019 of Vigeo Eiris, a leading global provider of ESG research, data and assessments, and of Four Twenty Seven, a leader in climate data and risk analysis.
Q: You just mentioned a few firms Moody’s acquired in 2019 — what is next?
A: Demand for climate risk, sustainable finance and ESG solutions has grown rapidly, and we will leverage the strengths and capabilities of SynTao Green Finance and our other new affiliates to become a one-stop shop for credit, ESG, cybersecurity and climate risk solutions. Together with these affiliates, we’ll seek to provide a range of solutions for investor and issuer ESG needs, including joint research, product development and technical cooperation.
China Sustainable Investment Review 2019
This SynTao Green Finance report illustrates best practices and latest industry trends from global ESG practitioners and is used by domestic institutional investors in China as ESG investment guidance. It gained commendations from international organizations such as the UN Environment Programme Finance Initiative, PRI, International Finance Corporation, London School of Economics and domestic organizations in China such as the China Banking and Insurance Regulatory Commission and the Sustainable Stock Exchange at China Social Investment Forum.