Governance the most frequently cited ESG factor, across all issuers, but pandemic brings social and environmental issues to the fore.
ESG factors were material credit consideration in half of 6,900-plus rating actions by Moody’s Investor Service affecting public-sector issuers globally in the 15 months ending Q1 2020.
Rating actions citing ESG considerations were present across government and business-like governmental sectors in more than 130 countries, with the level of exposure to certain ESG issues varying by sector and issuer.
Governance was the most frequently cited ESG factor, across all issuers, noted in approximately 3,500 rating actions from January 2019 to March 2020. Developing economy sovereigns saw the highest share of rating actions (94%) citing governance issues. Budget management was the most commonly mentioned governance consideration for government issuers (20%).
Environmental considerations were most frequently cited in rating actions among developing economy sovereigns (41%), followed by mass transit (20%) and developed economy sovereigns (!9%). Developing economy sovereigns are most exposed to the physical effects of climate change and tend to have smaller, less diversified economies that are more reliant on agriculture. Natural disasters were the most frequently cited environmental consideration for both government and business-like governmental issuers, with water shortages the second-most cited.
Social issues, particularly those concerning labour and income, were the most common for US state and local government rating actions, accounting for about two-thirds of actions taken during the 15-month period. Developing economy sovereigns were the sector with the highest share of rating actions that referenced social considerations at 66%, followed by developed economy sovereigns, at 63%.
The credit implications of access to healthcare, housing and basic services, income inequality, educational attainment and crime rates are more pronounced for emerging market governments than advanced economy governments, the report stated.
“The prominence of social considerations in our public-sector rating actions highlights that social factors are a core component of government credit quality,” said Robard Williams, Senior Vice President at Moody’s. “Social issues such as health and safety, demographics, labor force, income and education drive key aspects of credit quality for public-sector issuers. While such issues most often pose credit risks, they can also be a source of credit strength.”
The overall direction of rating actions shifted from more positive in 2019 to more negative in the first quarter of 2020. Of the 3,452 public-sector rating actions that cited ESG risks as material, 12% announced positive rating actions and 10% announced negative rating actions. The remaining 78% were neutral. Rating directionality for public sector issuers took a negative turn in the first quarter of 2020, accelerating downwards in March, as the Covid-19 pandemic intensified.
According to Moody’s, the pandemic brought the credit materiality of social and environmental issues to the fore, as business-oriented governmental entities in sectors affected by the outbreak – such as airports, not-for-profit hospitals and higher education institutions – saw a significant increase in rating actions citing ESG issues.