Environmental, social and governance (ESG) issues “increasingly influence credit quality assessments and investment decisions,” a financial ratings agency has warned in a new report.
Moody’s Investors Service said companies need to be prepared to address a wide range of ESG concerns or they could face a credit crunch. At the same time, it is a “growth opportunity” for fund firms.
Ram Sri-Saravanapavaan, ESG analyst at Moody’s, stated in a press release:
“One major trend is that climate change and the transition to a low-carbon economy are growing in relevance for global credit markets.... Investors are seeking more disclosure from companies about how they are addressing these risks as the financial implications are becoming clearer.”
The Moody’s research note forecast that:
“Market participants will continue to place more emphasis on factoring climate change into risk management and investment decisions. Stricter climate policies will raise transition risk for the most exposed carbon-intensive sectors, including utilities, oil and gas, auto manufacturing, airlines, building materials and shipping.”
Companies unprepared for potentially holding stranded assets or for “physical risk” could experience increased “investor scrutiny” and face difficulty issuing bonds. Moody’s predicted that:
“Rising concerns of future asset write-downs and reduced cash flow may raise companies’ cost of capital or restrict access to funding altogether, impairing their ability to raise, service or refinance debt.”
A number of sectors--including shipping, travel and tourism, mining and steel, paper and consumer products--will face increased scrutiny of how they manage natural resources.
“Consumer activism and media scrutiny will exacerbate the risks of certain products and services; for example, regulation is evolving to focus on new areas such as e-cigarettes.”
The gaming, retail and apparel sectors are likely to face similar pressures.
However, the credit ratings agency said that:
“ESG is a growth opportunity for asset managers.
“Investor interest will drive wide-scale creation of ESG investment products and advisory services.
“Asset managers will aim to reduce risks, spot long-term opportunities and deliver returns uncompromised by ESG constraints.”
That said, all financial services companies need to be responsible stewards of client information. Moody’s advised:
“Social risks around data security and customer privacy are critical for many finance companies, particularly those that have access to large amounts of consumer data. Fines and reputational damage from product mis-selling or other misconduct represent further social risks.”