ESG impacts credit ratings

Covid-19 has accelerated many credit-relevant ESG trends that will be of growing importance in rating agencies’ assessment of bond issuers’ credit quality.

ESG risks were cited as a material credit consideration in 85% of Moody’s Investors Service’s 8,700-plus rating actions for private-sector debt issuers in 2020, up from 32% in 2019.

Of its private-sector rating actions last year, 71% mentioned social risk factors, 53% referred to governance issues, and 13% mentioned environmental issues, compared with 7%, 29% and 5%, respectively, in its 2019 actions, according to a report by the rating agency

“Social considerations were most often cited in our rating actions involving sectors with high exposure to social risks and those most affected by Covid-19,” said Robard Williams, senior vice president at Moody’s. “We consider the pandemic a social risk, and the crisis has illustrated how a social issue [such as] a public health shock can have material economic and credit implications.”

The sharp increase in ESG references in Moody’s credit analysis reflected developments including the impact of Covid-19 on already fast-growing social risks, evolving regulatory environments in some G-20 economies in the wake of the pandemic, the rising impact of climate change, and associated policy measures to mitigate these risks.

Rating actions that cited ESG considerations were widely distributed across sectors and among around 100 countries, underscoring the incorporation of these factors in its credit analysis. When a rating action refers to an ESG issue, it indicates that factor is material to the issuer’s overall credit quality. However, it does not necessarily mean that this issue was a key driver of a given rating action.

Other factors may drive the rating action, such as changes in sales growth, profitability or leverage metrics, and may be unrelated to ESG considerations, noted Moody’s. Indeed, financial strategy and risk management was the most cited ESG consideration after Covid-19, with 42% of rating actions mentioning this issue.


Nevertheless, environmental considerations were also cited frequently in sectors identified as high risk. Carbon transition risk was the most frequently mentioned environmental consideration in the rating actions; this risk was referred to often in actions for very high or high-risk sectors, including coal mining and terminals, oil and gas, integrated oil companies, and steel.

Waste and pollution issues, encompassing air pollutants, waste, human-made accidents (such as spills and leaks) and the “circular economy,” were the second-most cited environmental consideration. Sectors with the highest share of mentions were environmental services and waste management, coal mining & terminals, and steel (


Governance issues were alluded to in more than half of the rating actions, partly reflecting expanded corporate risk management measures taken to mitigate the pandemic’s impact, according to Moody’s. Governance considerations both supported and eroded issuer credit quality, according to Moody’s.

“While not included in our count of pandemic-related factors, the large increase in the frequency of governance issues cited in the rating actions was likely partially in response to the pandemic,” said Williams. “The Covid-19 crisis tested many issuers’ strategic resilience and response to avoid the worst effects of the public health crisis.”

Heightened focus on social and environmental challenges, amplified by the pandemic, will remain prevalent through the economic recovery. “Companies’ ability to adapt business models to accelerating ESG trends, such as climate change and rising inequality, will be increasingly important as factors in their overall credit quality,” said Williams.