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The ESG Pulse: Social Factors Could Drive More Rating Actions As Health And Inequality Remain In Focus

S&P Global Ratings believes the COVID-19 pandemic has further raised the importance of environmental, social, and governance (ESG) factors for credit quality--especially the "S" factor. In our 2015-2017 ESG lookback study for corporates, social factors only accounted for 18% of ESG-related rating changes versus 47% for environmental and 34% for governance. The 2016-2018 lookback for financial institutions showed social factors represented 23% of all ESG-related rating actions, while governance dominated with 68%.

Table 1

ESG-Related Rating Actions April-May 2020
Downgrade CreditWatch negative Outlook revision Number of ESG-related rating actions % of ratings affected by ESG (RHS)
Sovereigns 7 0 24 31 17
International public finance 3 0 27 30 8
U.S. public finance 24 13 469 506 3
Corporates and infrastructure 219 39 112 370 11
Structured finance 14 212 0 226 1
*Issuer-related actions on global scale ratings, except for structured finance, where numbers represent issue-level actions. Table does not show financial Services, as we consider the impact of lockdowns and social distancing on financial services ratings as indirect rather than direct.

Chart 1


The impact of the pandemic on credit quality has directly influenced close to 1,200 ESG-related rating actions during April and May. We classify the pandemic as a health and safety-related social factor in our rating actions, if we believe health concerns and social-distancing measures directly affect the entity. In addition, social factors have risen to the forefront because the pandemic has exacerbated inequalities and could drive social and political instability as low-income workers both in developed and emerging markets have been disproportionally affected. This does not just relate to health issues, but also to communities and society. The Black Lives Matter protests, for instance, have shown the need to address inequality and racism in society. This has spurred many management teams to focus on the relationship between employers and their employees, and put a spotlight on improving workforce diversity and equity. The pandemic has also made clear the need for more resilient business models, which will likely require stronger supply chains and preparedness for climate change.

As part of our ongoing effort to increase the transparency of credit-relevant ESG factors, we will be publishing this monthly cross-practice ESG Pulse, with data and insights around changes to global scale ratings for which ESG credit factors have been a key driver. Since March 30, 2020, S&P Global Ratings has included an explicit reference when one or more of the below ESG factors were a key driver behind a change to the credit rating or outlook.

Chart 2


This additional disclosure in rating action reports further builds on our inclusion of ESG opinions in our regularly published individual entity analyses (initiated for most practices and most high-profile or exposed entities when relevant to credit since early 2019). In addition, we published 33 cross-practice ESG industry report cards with comparative entity insights in February 2020, see At the end of this report, you can find an overview of our most high-profile and recent ESG-related commentaries and sustainable finance research.

Sovereigns And International Public Finance

Tourism-dependent sovereigns and cities and emerging sovereigns with weak external positions have been most affected to date.

Table 2

Sovereigns And International Public Finance ESG-Related Rating Changes (April-May)
Downgrade CreditWatch negative Outlook revision Total number of ESG-related rating actions % of ESG related rating actions to total number of ratings outstanding
Sovereigns 7 0 24 31 17
International public finance 3 0 27 30 8

Sanitary measures to contain the spread of the virus, including travel restrictions and lockdowns, affected sovereign ratings for the most tourism-dependent economies in the Caribbean and Southern Europe (including Portugal, Greece, Montenegro, and Serbia). Other countries most dependent on favorable fiscal and external outcomes in Southeast Asia (Indonesia, Papua New Guinea), Africa (Ghana, South Africa, Cameroon), and Latin America (Chile; Brazil's positive outlook was revised to stable) also experienced ESG-driven negative rating actions. The sovereign rating on Mexico was lowered at the end of March as a result of both lower oil prices and COVID-19. While the number of rating actions has been significant, the rating impact has so far been contained, with outlook revisions far outnumbering downgrades, particularly for highly rated sovereigns. Of note, negative outlook revisions included the one on 'AAA' rated Australia.

Large capital cities or the regions and transport operators in and around them, including Rome, Paris, London, and Lisbon, have also been disproportionately affected given their high population densities, sensitivity to travel, consumer spending and tourism receipts, and in some cases the freeze in the property transaction market.

Despite the preponderance of social factors during this pandemic, governance remains a key driver of sovereign ratings, contributing to the downgrades of Cameroon and Suriname. The latter experienced a two-notch downgrade into the 'CCC' rating category, as refinancing risks mount at a time when policymaking ability is weakened by the president's sentencing. In the case of Brazil, the outlook on which was revised to stable from positive, a potentially more divisive political environment due to the president's relationship with Congress could harm the government's capacity to advance its agenda of structural reform.

Case study: Chile Outlook Revised To Negative On Risks To Growth Prospects; 'A+/A-1' Foreign Currency Ratings Affirmed, April 27, 2020

Our ratings on Chile are supported by a record of stable democracy and rule of law. The sovereign's institutional strength has contributed over the years to stable economic policies along with smooth changes in government, consistent economic growth, a healthy fiscal situation, and low inflation. Governance indicators are strong, perceived corruption is low, and human development indicators are higher than most regional peers.

That said, prolonged and severe protests that erupted in October of last year indicate substantial dissatisfaction with perceived lack of equal opportunity, social exclusion, and other grievances, including inadequate access to health care, education, and pension systems. They also reflect low trust in many Chilean institutions, despite many years of economic stability and rising incomes. In response to the protests, the government has started to consult the population through a referendum on writing a new constitution to partly address these concerns, trying to create a new social pact. If the voters support the writing of a new constitution, the task will be undertaken by a new body elected later this year, and subsequently submitted for popular approval in a referendum. The rewriting of the constitution is likely to be concluded by 2022. The new constitutional process plus recent social policies introduced by the government have contributed to ease social tensions.

By law, the new constitution needs to contain basic aspects of the current constitution, such as democracy, a republican form of government, and existing judicial rulings and international agreements. That said, the new constitution will likely strengthen the welfare characteristics of Chile's economic model, including more social rights.

The global recession and the prolonged economic lockdown caused by the COVID-19 pandemic will likely result in a 4% contraction in GDP in 2020. We expect an economic recovery in 2021, with GDP growing around 4.6% and then decelerating toward 3% in the next couple of years. GDP growth fell to only 1% in 2019, from almost 4% in the previous year, largely because of the negative impact of large-scale protests.

Environmental, social, and governance (ESG) credit factors for this credit rating change: Health and safety

U.S. Public Finance

Public transport and higher education are most affected, while protests and community unrest point to more elevated social risks.

Table 3

U.S. Public Finance ESG-Related Rating Changes (April-May)
Downgrade CreditWatch negative Outlook revision Total number of ESG-related rating actions % of ESG related rating actions to total number of ratings outstanding
Total 24 13 469 506 3
State and local governments 8 11 218 237 2
Higher education 3 0 150 153 25
Health care 2 0 43 45 9
Utilities 2 0 26 28 2
Housing 6 0 18 24 6
Charter schools 1 0 14 15 4
Transportation* 2 2 0 4 2
*Excludes 187 negative outlook revisions on March 26.

While not included in the data above, on March 26 we revised the outlooks on almost all transportation infrastructure issuers (187) to negative as all essential and discretionary travel ceased, mandatory work-from-home requirements were implemented, and supply chain disruptions affected activity levels at airports, transit providers, parking systems, and ports. The higher education sector also suffered under the weight of the pandemic as post-secondary institutions evaluated the risks of continuing on-campus instruction. Although the pivot to virtual instruction was necessary, lack of student activity and the costs associated with revising instructional methods has led to potential operational weakness. Not-for-profit health care institutions and systems were on the front lines of responding to the pandemic, prioritizing the demands of serving sick patients; however this resulted in elective surgery delays and cancellations that have affected operating margins and expenditures. This highlighted pressures in a health care sector already facing merger and acquisition activity to shore up financial results.

State and local governments have been challenged by revenue losses associated with lower sales, hotel/motel, food, and beverage taxes, and delays in personal income tax receipts, which have pressured some ratings in this sector as well as cash and liquidity positions for some issuers, leading to rating and outlook changes. We are currently observing elevated social risk for some governments based on protests and community unrest, and we will continue to analyze any budgetary or governance issues associated with these events.

Case study: Massachusetts Bay Transportation Authority 2011A Parking System Bond Rating Lowered To 'A-' From 'A+' On Revenue Decline, May 15, 2020

A precipitous decline in parking revenues and, in our view, a high likelihood of continued very weak parking trends attributable to the ongoing COVID-19 pandemic weakens credit quality. Growth in COVID-19 infections triggered the March 24 statewide shelter-in-place order by the Massachusetts governor directing all non-essential businesses in Boston to cease in-person operations. Along with the stay-at-home order and social distancing protocols put in place for health and safety reasons, MBTA passenger ridership on the subway and commuter rail system collapsed in beginning in mid-March--ridership declines have been steep, dropping from an average of 483,000 daily validations in February to 36,000 in mid-April. Under the federal CARES Act, MBTA is eligible to receive reimbursement funding totaling $827 million, with $159 million received to date. For perspective, in fiscal 2019, MBTA generated $672 million in fare revenue; however, this is projected to decline by 20% to $540 million by the close of the fiscal 2020 in June.

Environmental, social, and governance (ESG) credit factors for this credit rating change: Health and safety

Corporates And Infrastructure

Health and safety factors directly influenced 11% of all corporate and infrastructure ratings in April and May.

Table 4

Corporates And Infrastructure ESG-Related Rating Changes (April-May)
Downgrade CreditWatch negative Outlook revision Total number of ESG-related rating actions % of ESG related rating actions to total number of ratings outstanding
Total 220 39 113 372 11
Automotive 28 19 15 62 70
Transportation and transport infrastructure 39 7 16 62 34
Hotels and gaming 38 5 8 51 41
Media and entertainment 26 1 4 31 22
Real estate 9 0 21 30 18
Retailing 20 2 6 28 15
Aerospace and defense 17 0 6 23 36
Capital goods 12 0 8 20 10
Consumer products 10 0 8 18 8
Business and consumer services 4 2 8 14 7
Health care 5 0 8 13 7

Corporate and infrastructure experienced unprecedented levels of rating activity in the months that followed the coronavirus pandemic break-out (see "Post-Crisis Credit Recovery Timeline Could Be Long For Some Sectors: Report," published June 24, 2020). Sectors with the greatest direct impact from health and safety (see table 4) include airlines, aeronautics and airports, autos, leisure, hotels, travel and rental cars, out-of-home entertainment, and nonfood retail. During the pandemic, global travel came to an immediate halt, hitting air, mass travel and cruise lines particularly hard, as well as hotels and travel booking companies. Car dealerships had to close their doors. So did restaurants, retail outlets, and movie theaters--also affecting commercial real estate--and leisure and live events were canceled or postponed. While pharma and distributors managed through this, hospitals suffered as elective health care procedures were either postponed or canceled.

Beyond ESG, we saw many indirect impacts from the outbreak: supply disputes triggered downside to oil and gas ratings, exacerbated by the collapse in demand during the lockdown, while the ensuing recession weighed on ratings in capital goods, homebuilders, media, and technology, to name a few.

Case study: French Automaker Renault Downgraded To 'BB+/B' On Weaker Metrics Due To COVID-19; Outlook Negative, April 9, 2020

The outbreak of the COVID-19 pandemic adds to the numerous headwinds Renault is currently facing, including EU-mandated efforts to reduce carbon dioxide (CO2) emissions. We now project COVID-19 will lead to a significant decline in global auto sales of about 15% in 2020, followed by a mild recovery in sales volumes of 6%-8% in 2021.

The pandemic is reducing Renault's financial flexibility to absorb a potential fine due to noncompliance with the CO2 emissions targets in Europe. With fleet-average CO2 emissions of 118 grams per kilometer (g/km) at the end of 2019 in Europe, Renault needs to bridge a large gap of 25 grams to meet the 2020 regulatory CO2 emissions threshold. We calculate that 1g in excess of the limit would be equivalent to a fine of about €150 million based on 2019 unit sales of passenger cars in Europe. Some of the company's initiatives to bridge this gap in 2020 could be delayed due to the COVID-19 pandemic. For example, Renault had planned to launch low-CO2-emitting vehicles in second-half 2020, under its E-TECH technology, which could now face delays due to the current plant shutdowns. This could represent a strain on Renault's efforts to achieve the required reduction in CO2 emissions.

Environmental, social, and governance (ESG) credit factors for this credit rating change: Greenhouse gas emissions, health and safety

Case study: Macy's Inc. Lowered To 'B+' As Prospects Dim On Weaker Economy And Post Pandemic Uncertainty; Outlook Negative, April 24, 2020

We expect recessionary conditions will depress consumer confidence and demand for Macy's discretionary merchandise mix. We assume a gradual re-opening of nonessential retail stores through the second quarter depending on federal and state government guidelines but for foot traffic to remain low and economic overhang to reduce demand.

Post pandemic, we see Macy's as more exposed to disruptive sector trends. We believe the effects of social distancing will extend even beyond store re-openings, including prolonged weak customer traffic at Macy's stores, a majority of which are located in shopping malls. We expect improvement in 2021 but for topline to remain well below 2019 levels as demand is affected by a weaker economy, reduced store count, and headwinds for department stores including intensified competition from value-priced and a more permanent shift toward online purchases. Macy's online business, which represented about 25% of sales last year, remains operational and could offset some of the decline.

Benefits from Macy's turnaround strategy could be delayed and the company could expedite store closures. We believe the environment severely complicates Macy's three-year Polaris plan designed to turnaround performance. In addition, we note the company's recent announcement that its CFO will depart Macy's which leaves an important role unfilled at a time of great uncertainty. Given the management turnover and challenges in executing against strategic priorities, we are revising our management and governance assessment to fair from satisfactory.

Environmental, social, and governance (ESG) credit factors for this credit rating change: Health and safety

Financial Institutions

Financial institutions experienced few direct ESG impacts, even though COVID-19 triggered widespread negative outlook revisions.

While the banking and insurance sectors have seen hardly any rating changes or outlook revisions over April-June directly attributable to ESG factors, they have been susceptible to indirect impacts, namely rising the credit risks and financial market volatility resulting from the COVID-19 pandemic. As of the end of June, we took rating actions on about 210 banks that were indirectly related to COVID-19 and the oil shock, accounting for roughly 25% of total, with about three quarters being outlook revisions. For the insurance sector, the total was 17% (14% being outlook changes). See "COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date," published July 14, 2020.

Structured Finance

ESG asset rating actions trail underlying corporate credit quality impacts.

Table 5

Structured Finance ESG-Related Rating Changes (April-May)
Downgrade CreditWatch negative Outlook revision Total number of ESG-related rating actions % of ESG-related rating actions to total number of ratings outstanding
Total 14 212 0 226 1
ABS 8 21 0 29 1
CMBS 0 126 0 126 5
Repack 3 1 0 4 3
Nontraditional assets* 2 64 0 66 5
*Nontraditional structured finance asset classes include corporate, aircraft, container, railcar, timeshare, small business, and triple-net lease securitizations. ABS--Asset-backed securities. CMBS--Commercial mortgage-backed securities.

Securitized commercial assets, including whole business securitizations (pubs, fast-food restaurants, gyms, stadiums, leisure parks), dealer floorplan and rental car asset-backed securities (ABS), aircraft ABS, and commercial mortgage-backed securities with hotel and retail exposure, have generally been more credit-sensitive to COVID-19 than consumer assets such as auto ABS, residential mortgage-backed securities, and credit card ABS. This is because COVID-19 had a direct impact on labor, supply chains and reduced sales, and there are fewer social safety nets supporting businesses. Meanwhile, consumers are generally more insulated from immediate payment disruption risk, given that household savings, net wealth, and reduced discretionary purchases all support the ability to continue making debt service payments. In some jurisdictions, significant government support programs were also made available to consumers (e.g. furlough and unemployment benefits) to support any reduction in employment income. As a result, we believe consumer securitizations are generally more prone to future liquidity stress in the near to medium term depending on the amount of loan forbearance/payment holidays in transactions, and could also be exposed to credit stress longer term depending on the speed and strength of the recovery. Higher-risk borrowers, however, may face more immediate credit stress.

For collateralized loan obligations (CLOs) we rate, while there have been recent rating actions, we determined that in general COVID-19 did not have direct ratings impact given the significant diversification by obligor and industry in the collateral pools. Due to the diversification of the portfolios, any exposure to the corporate sectors most directly exposed to COVID-19--such as automotive, airlines, entertainment, and commercial real estate--typically do not represent a material exposure in our rated CLO portfolios. Likewise, for recent rating actions in consumer ABS and RMBS, we generally have not viewed COVID-19 as being an ESG credit factor since these rating actions were attributed more to the recession.

Related Research

ESG in ratings industry-related commentaries



Local and regional governments: 

U.S. public finance: 

Corporates and infrastructure: 



Structured finance: 

ESG in ratings criteria-related commentaries


Sovereigns and local and regional governments: 

U.S. public finance: 

Corporates and infrastructure: 



Structured finance: 

This report does not constitute a rating action.

Primary Credit Analysts:Karl Nietvelt, Paris + 33 14 420 6751;
Nicole Delz Lynch, New York (1) 212-438-7846;
Patrice Cochelin, Paris (33) 1-4420-7325;
Nora G Wittstruck, New York (1) 212-438-8589;
Matthew S Mitchell, CFA, London (44) 20-7176-8581;
Michael Wilkins, London (44) 20-7176-3528;
Kurt E Forsgren, Boston (1) 617-530-8308;
Secondary Contacts:Emmanuel F Volland, Paris (33) 1-4420-6696;
Lawrence A Wilkinson, New York (1) 212-438-1882;
Dennis P Sugrue, London (44) 20-7176-7056;
Peter Kernan, London (44) 20-7176-3618;
Michael T Ferguson, CFA, CPA, New York (1) 212-438-7670;
Jesus Palacios, Mexico City (52) 55-5081-2872;
Bertrand P Jabouley, CFA, Singapore (65) 6239-6303;
Timucin Engin, Dubai (971) 4-372-7152;

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