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Essential Intelligence: General Purpose

ESG in Credit Ratings

"When risks are unknown or ill-defined, the market cannot allocate resources in an efficient and profitable manner." Mark Carney, Governor of The Bank of England

"Environmental, Social, and Governance risks and opportunities have the potential to affect creditworthiness. At S&P Global Ratings our analysts work to ensure that we provide essential insights into ESG factors as they relate to the financial markets." John Berisford, President, S&P Global Ratings

S&P Global Ratings has long considered Environmental, Social, and Governance (ESG) factors in its credit ratings, and we capture ESG factors in many areas of our methodology. 

Corporates
ESG factors are most often considered in our assessment of the issuer’s Business risk (specifically, its competitive position); Financial risk (through our cash flow/leverage assessment and financial forecasts); and Management and governance. 

The management and governance assessment includes consideration of environmental and social risk management, as relevant. At the industry level, we also consider industry-specific key credit factors, which may include the effectiveness of ESG risk management.

For corporate and insurance ratings, we employ our Management And Governance Credit Factors For Corporate Entities And Insurers November 13, 2012. This criteria is the basis of the evaluation and scoring of the range of oversight and direction of an issuer by its owners, board representatives, executives, and functional managers. The criteria is based on the proposition that if the issuer’s management can manage successfully the issuers strategic and operating risks, its credit profile may improve. Alternatively, weak management with a flawed operating strategy or an inability to execute its business plan effectively is likely to substantially weaken the issuer's credit profile. Management and governance is scored as (1) strong, (2) satisfactory, (3) fair, or (4) weak.

Sovereigns
ESG factors are most often considered in our assessment of the sovereign’s institutional quality and governance effectiveness (typically accounting for roughly a quarter of the indicative sovereign rating). Although climate change, on average, poses a negligible direct risk to sovereign ratings on advanced economies, ratings on many emerging sovereigns (specifically those in the Caribbean or Southeast Asia) would likely come under significant additional pressure over time. Of course, in an integrated world such as today's, what happens in emerging and developing countries can have indirect repercussions for advanced economies as well, for example, through trade and migratory flows.

Financial Institutions
Our financial institutions analysis typically considers ESG factors in the context of the Banking Industry Country Risk Assessment (BICRA), risk position, and governance assessments. Our analysis of ESG risks and strengths permeates our bank rating methodology. ESG factors are also included in our assessment of a bank's risk position which incorporates risks that are not captured directly in our capital model.

Insurance
Our insurance methodology typically considers ESG factors in our (i) industry and country risk analysis, (ii) competitive position analysis, (iii) capital analysis, and (iv) management and governance and enterprise risk management (ERM) analysis.
Our insurance methodology takes a similar approach to our corporate and bank criteria frameworks (including our Management And Governance Credit Factors For Corporate Entities And Insurers criteria (November 13, 2012) referred to in the Corporates section above) weaving analysis of ESG risks and opportunities into several aspects of the rating process.

Project Finance
Under our project finance methodology, ESG factors are most often analyzed in the context of a project's construction and operations phases. On the construction side, we assess the likelihood that, among other things, project construction will have no materially adverse social or cultural consequences, so that it can be completed on time and within budget; and that the project will be capable of operating as expected. If ESG factors materially affect funding adequacy, timing of completion, or the budget required to complete construction on time, we could modify the construction stand-alone credit profile (SACP). Similarly, ESG factors may also affect our operations phase SACP and forecasting of revenues, operating and maintenance costs, and capital costs.

Structured Finance
Structured finance vehicles typically comprise a pool of financial assets that generate cash flow over time. Our analytics focus on the following factors: the credit quality of the securitized assets; legal and regulatory risks; payment structure and cash flow mechanics; operational and administrative risks; and counterparty risks. Though ESG is typically not a factor directly considered in our structured finance analytics, it may have a negative indirect impact due to ESG factors that may be reflected in the credit rating on a key transaction party, such as the servicer of the pool, or the ratings on specific corporate obligors in a collateralized loan obligation pool.

Learn more about the critical role played by ESG factors in our rating process: Credit FAQ: How Does S&P Global Ratings Incorporate Environmental, Social, And Governance Risks Into Its Ratings Analysis.

“E”, “S”, and “G” in Detail

S&P Global Ratings has published a series of studies describing how it incorporates ESG factors into its corporate ratings. Please find a few examples below.

“E” - Environmental
In How Environmental And Climate Risks And Opportunities Factor Into Global Corporate Ratings - An Update, Nov. 9, 2017, we looked at E&C factors again, and how they affected corporate ratings between July 16, 2015, and Aug. 29. 2017. For that period, we've found 717 cases where E&C concerns were relevant to the rating, and 106 cases where E&C factors--both event-driven and those occurring over a longer time horizon--resulted in a rating action. As in our previous review of E&C factors, most affected ratings were in the oil refining and marketing industry, among regulated utilities, and in the unregulated power and gas subsector.

We then took definitions of climate-related risk and opportunity set out by the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD) in June 2017 and looked at how the 106 cases where E&C risks and opportunities have had a material impact on credit quality fit into the TCFD's definitions. We give examples of this mapping exercise to provide further insight into our review.

In How Environmental And Climate Risks Factor Into Global Corporate Ratings, October 21, 2015, we reviewed 38 corporate subsectors and identified 299 cases in which environmental and climate (E&C) risks resulted in or contributed to a corporate rating revision or have been a significant factor in our rating analysis. In 56 of these cases, E&C risks have had a direct and material impact on credit quality, resulting in a rating action (outlook change, or CreditWatch action, or notching of the rating)--nearly 80% of which were negative. Most of these ratings were in the oil refining and marketing, regulated utilities, and unregulated power and gas subsectors.

“S” - Social
In How Social Risks And Opportunities Factor Into Global Corporate Ratings, April 11, 2018 we reviewed how social factors were incorporated into our analyses and how factors may have affected our corporate and infrastructure ratings between July 2015 and August 2017. We found 346 cases where social factors were explicitly identified as relevant to the rating, and 42 cases where social factors--both event-driven and those occurring over a longer time period--resulted in a rating action. The cases were spread across various sectors, with retail and restaurants, leisure and sports, and regulated utilities being most frequently affected.

“G” - Governance
Our issuer credit ratings aggregate assessments of many different variables including our analyses of management and governance, as described in our Corporate Methodology. The assessments, which range from strong, through satisfactory, fair and weak, evaluate the broad range of oversight and direction conducted by an enterprises owners, board representatives, executives and functional managers. Those assessments are a direct input into our corporate issuer credit ratings and can either contribute to a higher or lower entity issuer credit rating depending on the assessment and the entities’ other credit characteristics.

The ESG Risk Atlas: Sector And Regional Rationales And Scores, May 13, 2019

Emerging Markets Have Hope For Sustainable Infrastructure Projects, Roundtable Participants Say, May 7, 2019

The ESG Advantage: Exploring Links To Corporate Financial Performance, April 8, 2019

S&P Global Ratings Launches ESG Sections In Corporate Credit Rating Reports, January 31, 2019

COP24 Special Edition: Shinging A Light On Climate Finance, December 2018

Climate Finance & Sustainability: Key Research By S&P Global Ratings, 2018, November 21, 2018

Greener Pastures: China Cuts A Path To Becoming A Green Superpower, November 19, 2018

How Management & Governance Risks And Opportunities Factor Into Global Corporate Ratings, November 7, 2018

How Environmental, Social, And Governance Factors Help Shape The Ratings On Governments, Insurers, And Financial Institutions, October 23, 2018

Through The ESG Lens: How Environmental, Social, And Governance Factors Are Incorporated Into U.S. Public Finance Ratings, October 10, 2018

The Rise Of ESG In Fixed Income, Sept. 10, 2018

What's Behind The Rise In Green Covered Bond Issuance?, June 26, 2018

Credit FAQ: Japanese Corporations' Management And Governance Gains Importance In Rating Analysis As More Issues Emerge, May 16, 2018

How Social Risks And Opportunities Factor Into Global Corporate Ratings, April 11, 2018

How Our U.S. Local Government Criteria Weather Climate Risk, March 20, 2018

How Does S&P Global Ratings Incorporate Environmental, Social, And Governance Risks Into Its Ratings Analysis, November 21, 2017

How Environmental And Climate Risks And Opportunities Factor Into Global Corporate Ratings - An Update, Nov. 9, 2017

Credit FAQ: Understanding Climate Change Risk And U.S. Municipal Ratings, Oct. 17, 2017

Credit FAQ: An Overview Of U.S. Federal Disaster Funding, Sept. 19, 2017

In A Storm's Aftermath: Assessing The Impact On Local Government Credit Quality, Sept. 13, 2017

How Long 'Til We Get There? Major Post-Hurricane Recoveries In Recent Years, Sept. 7, 2017

Near-Term Rating Stability Does Not Preclude Longer-Term Challenges For Hurricane Harvey Affected Texas MUDs, Sept. 5, 2017

Beyond Green Bonds: Sustainable Finance Comes Of Age, April 26, 2017

Policymakers Play A Role In Preparing Financial Systems For Climate Change Risk, Nov. 10, 2016

Evaluating The Environmental Impact Of Projects Aimed At Adapting To Climate Change, Nov. 10, 2016

Climate Finance A Year After Paris: Driving Politics Into Action, Nov. 8, 2016

Climate Change-Related Legal And Regulatory Threats Should Spur Financial Service Providers To Action, May 4, 2016

The Heat Is On: How Climate Change Can Impact Sovereign Ratings, Nov. 25, 2015

Insurers May Anticipate A Smooth Road Ahead On Climate Change, But Their View Could Be Restricted, Nov. 16, 2015

Economic Research: Reversing Global Warming Requires Nothing Less Than A Global Effort, Nov. 16, 2015

Climate Change: Building A Framework For The Future, Nov. 13, 2015

Climate Resilience Can Protect Ratings From Sea-Level Rise And Threats To U.S. Coastal Infrastructure, Oct. 22, 2015

How Environmental And Climate Risks Factor Into Global Corporate Ratings, Oct. 21, 2015

Storm Alert: Natural Disasters Can Damage Sovereign Creditworthiness, Sept. 10, 2015

Countries And Companies Are Taking Steps To Counter Climate Change And Natural Catastrophes, April 21, 2015

Climate Change Will Likely Test The Resilience Of Corporates' Creditworthiness To Natural Catastrophes, April 20, 2015

If Flood Defenses Don't Keep Up With Climate Change, Flood Re Could Increase Risks To U.K. Insurers, Oct. 1, 2014

Economic Research: For The U.S. Economy, Climate Change Is A Case Of Pay Now--Or Pay More Later, Sept. 18, 2014

Climate Change Could Sting Reinsurers That Underestimate Its Impact, Sept. 3, 2014

Working With Governments To Increase Disaster Resilience Can Open New Doors For Reinsurers, Aug. 27, 2014

Dealing With Disaster: How Companies Are Starting To Assess Their Climate Event Risks, May 21, 2014

Are Insurers Prepared For The Extreme Weather Climate Change May Bring?, May 19, 2014

Credit FAQ: As Investors Seeking Higher Yields Eye New Catastrophe Bond Issues, What Are The Key Risks?, Nov. 11, 2013

Environmental Regulation Starts To Squeeze Utilities' Credit Quality, Nov. 14, 2012

New U.S. Emissions Standards Mean Slower Sales For Heavy-Truck Makers And Suppliers, April 12, 2007

Insurers Seek To Weather Changes In The Weather, May 22, 2007

Utilities: Influence Of Regulatory And Policy Decisions On Utility Credit Quality Deepens, Demanding Timely Assessments From Standard & Poor's, May 15, 2007

Credit Considerations Of Carbon Cap-And-Trade Mechanisms, May 15, 2007

Solar Power's Potential Shines Brighter As Technology Advances, May 11, 2007

How Close Is Carbon Capture And Sequestration To Being Ready For Prime Time?, May 11, 2007

Turning Coal Into Liquid Gold: Alchemy? No, Polygeneration, May 11, 2007

Lower Emissions, Higher Costs? U.S. States Plan For Carbon Reduction, May 11, 2007

The Cost Of Potential Climate Change Laws And Its Effect On U.S. Utility Credit, May 11, 2007

Which Power Generation Technologies Will Take The Lead In Response To Carbon Controls?, May 11, 2007

Coping With Climate Change: The Varied Credit Effects Of A Portfolio Approach, May 11, 2007

Economic Research: The Cost Of Keeping Our Cool: Global Warming And The Economy, May 10, 2007

Biomass Will Grow In Importance With Caps On CO2, May 10, 2007

Global Carbon Emissions And The “Chindia” Factor, May 10, 2007

Effects Of Warming, Efficiency Programs, And Conservation On Energy Usage And Credit Quality, May 10, 2007

Combating Climate Change In The EU: Risks And Rewards For European Utilities, May 10, 2007

Public Power Explores Ways To Reduce Emissions As Federal Regulation Looms On The Horizon, May 9, 2007

Can Global Automakers Meet Emissions Limits Without Steering Off The Road?, May 7, 2007

Credit FAQ: For European Utilities, Climate Change Policies Are More Than A Lot Of Hot Air, December 12, 2006

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