NEW YORK (S&P Global Ratings) Jan. 27, 2020--Although awareness of environmental, social, and governance (ESG) risks seems relatively new in the financial markets, ESG has already affected and will continue to affect project finance transactions and our infrastructure ratings. Consideration of ESG factors is no longer a "nice to have," but a must for a project that wants to be successful long term.
While ESG factors are embedded in each project finance credit rating, in our new report "How ESG Factors Have Begun To Influence Our Project Finance Rating Outcomes," published today, we identified clear examples of projects globally that are close to a default, fallen angels, or experiencing credit deterioration due to ESG events. In a few other cases, we found that project-finance-like structures helped to maintain a project's credit quality despite severe environmental events.
We believe the credit risk of project finance transactions could increase going forward due to ESG factors, particularly in the fossil power generation sector, where new regulations could cause assets (such as coal power plants) to be retired and affect a project's long-term financial viability. ESG factors can also be interrelated once an event is triggered; for example, when a coal power plant needs to shut down due to an environmental factor, it could also lead to social issues with job losses in local communities.
Even though projects have higher governance controls than pure corporate companies, aggressive owners such as financial sponsors or hedge funds tend to seek lender consents, often successfully, to perform dividend recapitalizations when a project is performing well.
However, particularly for projects operating in volatile industries, we see this strategy as credit negative from a risk management standpoint, which can result in a downgrade, a lower recovery under a default scenario, or less cushion to maintain the current rating.
This report does not constitute a rating action.
The report is available to subscribers of RatingsDirect at www.capitaliq.com. If you are not a RatingsDirect subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 or sending an e-mail to research_request@spglobal.com. Ratings information can also be found on S&P Global Ratings' public website by using the Ratings search box located in the left column at www.standardandpoors.com. Members of the media may request a copy of this report by contacting the media representative provided.
| Primary Credit Analyst: | Diego Weisvein, New York (1) 212-438-0523; diego.weisvein@spglobal.com |
| Secondary Contacts: | Michael T Ferguson, CFA, CPA, New York (1) 212-438-7670; michael.ferguson@spglobal.com |
| Aneesh Prabhu, CFA, FRM, New York (1) 212-438-1285; aneesh.prabhu@spglobal.com | |
| Jason Starrett, New York (1) 212-438-2127; jason.starrett@spglobal.com | |
| Luisina Berberian, Madrid +(34) 91-788-7200; luisina.berberian@spglobal.com | |
| Trevor J D'Olier-Lees, New York (1) 212-438-7985; trevor.dolier-lees@spglobal.com | |
| Stephen R Goltz, Toronto + 1 (416) 507 2592; stephen.goltz@spglobal.com | |
| Dhaval R Shah, Toronto (1) 416-507-3272; dhaval.shah@spglobal.com | |
| Boyan Kovacic, San Francisco + 1 (415) 371 5082; boyan.kovacic@spglobal.com | |
| Candela Macchi, Buenos Aires (54)-11-4891-2110; candela.macchi@spglobal.com | |
| Media Contact: | Jeff Sexton, New York (1) 212-438-3448; jeff.sexton@spglobal.com |
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