The ESG Risk Atlas
May. 21 2019 — To calibrate the relative ranking of sectors, we use our environmental, social, and governance (ESG) Risk Atlas (see "The ESG Risk Atlas: Sector And Regional Rationales And Scores," published May 13, 2019). The Risk Atlas provides a relative ranking of industries in terms of exposure to environmental and social risks (and opportunities). The sector risk atlas charts (shown below) combine each sector's exposure to environmental and social risks, scoring it on a scale of 1 to 6. A score closer to 1 represents a relatively low exposure, while 6 indicates a high sectorwide exposure to environmental and social risk factors (for details see the Appendix). This report card expands further on the Risk Atlas sector analysis by focusing on the credit-specific impacts, which in turn forms the basis for analyzing the exposures and opportunities of individual companies in the sector.
Social Exposure (Risk Atlas: 5)
The most relevant ESG category for media companies is social risk, due to issuers' exposure to and increasing reliance on customer engagement, data security, and cultural social movements. Environmental factors are rarely material to our ratings. Governance factors are important but we consider them case-by-case, depending on the nature of each company's operating environment and organizational behaviour.
We believe social risks in the media sector are pronounced and systemic. Common risks across our portfolio include client privacy, data security, content regulation, social media activism, and key man risk. Data privacy risk (cybersecurity) is substantial for most media companies for client privacy as well as intellectual property (IP) theft. For example, targeted advertising models collect consumer data that must be kept confidential, and many media companies develop and rely on proprietary IP that has exclusive-use rights. Any theft of consumer data or IP would have negative implications for these companies' reputations, competitive advantages, and profitability. Moreover, we believe that, as content companies reach for more thrilling or nontraditional entertainment, they may face backlash or negative feedback from customers. In addition, regulators could impose monetary fines, or in more extreme cases, revoke TV licenses (primarily in the U.S., where private companies can own over-the-air TV stations). Social media, particularly micro-blogging, has proliferated. We believe high-profile media companies or media figure-heads run the risk of being accused or implicated in controversies, which could hurt their brand reputation and lower growth prospects and cash flows. Furthermore, we believe content-producing media companies are substantially exposed to key man risk because they depend on key persons with extraordinary creative talent, charismatic influence, or similar leadership qualities. Without these, whether these organizations could maintain key sales relationships, comparative advantages related to creative content, or organizational inertia is uncertain.
Environmental Exposure (Risk Atlas: 1)
The lack of material environmental risk in the sector reflects the low and indirect use of raw materials and relatively minimal waste output for most of our issuers. For example, companies such as movie studios, advertising agencies, and television and radio broadcasters produce minimal waste due to their focus on creating content with their IP and distributing that content through their established networks. While this sector contains print-based media providers such as newspapers, magazine publishers, and printers that emit both liquid and solid waste in their manufacturing processes, we believe regulations and the declining use of the print medium means there is diminishing environmental risk for these companies.
We closely monitor governance risks, especially given the number of companies within the media sector with controlling shareholders. While we assess governance risks as neutral for the sector, we assess each company individually. Our analysis includes the quality of a company's public disclosures and the transparency it provides investors and industry stakeholders. We also evaluate company-oversight characteristics such as independent representation on the board of directors, the concentration of controlling ownership, and internal controls behaviors that promote enterprise risk management.