The ESG Risk Atlas
Jun. 03 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.
Environmental Exposure (Risk Atlas: 3)
The moderate environmental exposure of transportation infrastructure reflects mainly its indirect exposure to emissions and pollution from the transportation industry itself, such as from cars, ships, and planes. Given the strong global mobility trends, we expect that underlying demand for these assets will not change fundamentally over the next decade, even as regulators impose significant emission constraints.
Extreme weather events, whether or not insurable, have the ability to disrupt business, typically for shorter timeframes. Airports and ports particularly can see their operations affected by weather. We see the risk of rising sea levels as a remote but potentially high-impact long-term risk.
Land use can be a risk factor in the case of expansions, extensions and new developments. Transport infrastructure businesses are often in highly populated urban areas. Planning and approvals for developments requiring new land or more intensive use of existing land can be more difficult to achieve as government bodies in some jurisdictions respond to the views of increasingly vocal communities and potential environmental impact related to the construction works.
Social Exposure (Risk Atlas: 2)
In our view, the impact on local communities in relation to lifestyle, congestion, noise, and air quality is being increasingly highlighted and brought to the attention of media, businesses, investors, governments and regulators. Given the critical nature of existing road, airport, and port operations, we see these risks as limited, but recognize exposure is likely significant for growth expansions or new projects. Airport and road operations are also exposed to customer service levels. Any disruption to these services would trigger potential negative political pressures, expose them to penalties, or (in a worst-case scenario) possibly put at risk their concessions. For toll road operators, the social acceptability and affordability of tolls is an increasingly important factor.
Safety management is also an important issue for the sector because secure passage of customers and freight is essential to performance. Businesses typically have prescriptive policies and procedures that govern the activities of employees and contractors. Safety risk is particularly relevant for low-probability, high-impact events related to tunnels and bridges, as seen by deadly accidents surrounding the Mont Blanc tunnel and more recently, the Genoa bridge. Airport security against terrorism attacks are of utmost importance to maintain the confidence of all stakeholders and overall sector operations. Security concerns and customer focus are also very relevant for rail operators, similar to airports.
Overall, governance risk is mostly specific to companies. Still at the sector level, governance factors include specifically the ability to oversee and manage interactions with governments and communities, in light of the public-private partnerships, concession agreements, or status as provider of an essential basic service. Proactively managing safety and maintaining related records and policies are particularly important when dealing with regulatory and political risks in case of accidents.