Debt issuers ignore ESG at their peril. Moody’s announcement last week – that it was considering stripping US oil company ExxonMobil of its triple-A credit rating, signaling the risks associated with its adjustment to a low-carbon economy – marks a turning point.
Concerns over environmental, social and governance standards are most acute in the fossil fuel sector, where companies are under increased pressure from regulators, activists and investors.
However, the world’s push to meet emissions targets will threaten the solvency of many other industries, including some that don’t emit much carbon directly, according to major rating agencies. Last year, Moody’s identified 11 sectors, with a combined rated debt of $2.2 billion, as being at risk of downgrade due to carbon concerns.
“ESG risk is absolutely starting to hit and it’s spreading like wildfire across all asset classes,” said Mark Lewis, head of climate change investment research in Paris at BNP Paribas Asset Management. “People . . . need to think early about how to revamp their business models to cope.”
ESG factors were not the main driver of Moody’s downgrading its outlook for ExxonMobil, the world’s largest energy company by market capitalization, from stable to negative. Pete Speer, an analyst, cited its negative free cash flow, low margins and growing reliance on debt to fund operations. But in a rare move, the New York-based rating agency explicitly cited ESG concerns as an “emerging threat” to the company.
“A strong financial position and low financial leverage are important characteristics for managing these environmental and social risks,” Moody’s wrote.
Other major credit rating agencies have also increased their focus on ESG.
S&P Global caused a stir last week when it acquired the ESG rating arm of RobecoSAM, a Swiss asset manager, in a bid to capitalize on growing demand for data on sustainable investing. Fitch introduced ESG “relevance scores” earlier this year to show how its credit rating decisions are influenced by these factors. He issued a warning for Brazil’s agricultural sector this month, saying an international reaction to this year’s Amazon wildfires could spark boycotts of the country’s beef and threaten the EU-Mercosur trade deal.
Equity analysts have been alert to heightened political pressures, particularly in the energy sector. Redburn, the London-based equity research firm, recently removed all its ‘buy’ ratings from the biggest integrated oil companies, arguing the industry faces ‘existential risk’ that is not reflected in forecasts. long-term oil demand. ExxonMobil was hit with a double downgrade, dropping to a “sell” rating in one fell swoop.
As for Moody’s, its report last year on sectors at risk of heightened ESG concerns included shipping, steel, automakers and other large carbon emitters. During a Ford downgrade in September, the agency cited the potential for “large emissions penalties in 2020 and 2021” as one of the reasons the automaker was wiped out.
Even non-transmitters are under the microscope. Banks, for example, usually don’t have much direct exposure to environmental risks, but their loans to fossil fuel companies could be at risk from carbon taxes, according to a study released this month by BlackRock, the largest company. of funds in the world with 7 billion dollars under management. .
The European Investment Bank, the lending arm of the EU, pledged this month to cut funding to oil, gas and coal companies in the hope that regulations and emerging technologies will disrupt the sector.
“I think we’re going to hear a lot more talk in the next two years about the crystallization of environmental liabilities much sooner than we thought and that comes at a cost,” said Mr Lewis of BNP Asset Management. “These liabilities are larger than the value at which they appear on balance sheets today.”
According to a recent Moody’s survey, market participants say lack of data is the biggest hurdle they face when trying to separate ESG laggards from leaders. Companies are making progress in publishing more relevant metrics, particularly on emissions, but quantifying the financial effects of climate risks “remains at a nascent stage”, the rating agency writes.
Yet many investors have no doubt that these measures will remain front and center. The United Nations’ Principles for Responsible Investment, a group that counts thousands of asset owners among signatories, says it’s only a matter of time before governments take stronger action to comply. climate-related commitments. It provides for the banning of coal and internal combustion engines, as well as broader adoption of carbon pricing policies.
“The advice we’ve given to companies is, ‘be aware,'” said Chris Kocinski, senior portfolio manager at Neuberger Berman in Chicago, who signed up seven years ago. “From our perspective, it’s an important part of how we assess credit risk.”
This article has been amended from original publication to clearly state that S&P Global has purchased the ESG rating arm of RobecoSAM.