Integration of ESG

Moody’s systematic and transparent
integration of environmental, social and governance considerations into credit risk.

What is ESG?

Our reports describe the relevance of the Environmental, Social and Governance Risk (ESG) considerations that are material to credit quality.  

ESG considerations may affect issuers’ credit quality and their counterparties either directly or indirectly. We would typically assess ESG considerations in relation to the sector practices to identify potential trends in conjunction with the entity ESG risk management of those ESG risks identified. 

ESG risk issues typically have disproportionate downside risk. However, ESG considerations are not always negative and can be a credit strength in rare instances. 

Environmental

Moody’s Local views environmental risk as falling broadly into two categories: (i) the consequences of regulatory or policy initiatives that seek to reduce or prevent environmental trends or hazards; and (ii) the adverse effects of direct environmental trends and hazards like pollution, drought, severe natural and human-caused disasters, depletion of natural capital, clean-up costs and climate change. Moody’s Local classify the environmental risks that are generally most relevant from a credit perspective into five categories: (i) carbon transition; (ii) physical climate risks; (iii) water management; (iv) waste and pollution and (v) natural capital.

Social

Moody’s Local considers social considerations as falling broadly into issuer-specific considerations, such as product safety problems that damage an issuer’s reputation; and the adverse effects of external factors like regulation leading to higher compliance costs or creating rigid work rules. Moody’s Local broadly classify most relevant social risks from a credit perspective into five categories: (i) customer relations; (ii) human capital; (iii) demographic and societal trends; (iv) health and safety; and (v) responsible production.

Governance

Governance considerations relates to the framework and processes through which decisions are made and related actions are carried out. Moody’s Local typically assess the extent to which an entity’s strategy; management and its corporate policies may reduce or increase its overall risk profile. Moody’s Local broadly classify governance risks that are generally most relevant from a credit perspective into five categories: (i) financial strategy and risk management; (ii) management credibility and track record; (iii) organizational structure; (iv) compliance and reporting; and (v) board structure, policies, and procedures.

Integration into Credit Analysis

Moody’s Local credit analysis seeks to incorporate all issues that can materially impact credit quality, including ESG and climate risk; and aims to take the most forward-looking perspective that visibility into these risks and mitigants permits. Our ESG considerations approach is described in our methodologies.

Sustainability is at the core of Moody’s Local business, and helping the market understand sustainability factors is one of our key priorities.

Second Party Opinions

Moody’s Local offers Second Party Opinions (SPOs) that are independent assessments or opinion of how domestic debt instruments or financing frameworks align (or not) to sustainability principles. Moody’s Local assesses the alignment in accordance with published principles of the International Capital Market Association (ICMA) and the Loan Market Association (LMA) and relevant local standard-setters. These principles outline best practices in connection with financing frameworks and/or debt instruments that serve social-related and/or environmental matters, with the purpose to promote transparency and disclosure, underpinning the integrity of the market.