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The ESG Pulse: Better Climate Data Could Provide Foundation For Understanding Physical Risks

Introducing S&P Global Ratings' Second Party Opinions, featuring Shades of Green


Sustainability Insights: California’s Evolving Insurance Market Has Mixed Impacts: Spotlight On U.S. Public Finance, Spotlight Off U.S. RMBS


FAQ: Applying Our Integrated Analytical Approach For Use-Of-Proceeds Second Party Opinions


Analytical Approach: Shades Of Green Assessments

The ESG Pulse: Better Climate Data Could Provide Foundation For Understanding Physical Risks

Table 1

ESG-Related Rating Actions April-August 2020*
Downgrade CreditWatch negative Outlook revision (downward) Total number of ESG-related rating actions** % of ratings impacted by ESG
Jul-Aug April to Aug Jul-Aug April to Aug Jul-Aug April to Aug Jul-Aug April to Aug April to August
Sovereigns 0 9 0 0 7 36 9 47 24
International public finance 1 6 1 1 4 38 6 45 14
U.S. public finance 39 84 80 93 8 482 128 660 4
Corporates and infrastructure 46 296 3 42 32 187 91 546 15
Structured finance 210 271 0 376 0 0 210 647 1
TOTAL 296 666 84 512 51 743 444 1,945
*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 to be indirect rather than direct. **Including 14 positive rating actions over April-August.

Chart 1


With Climate Week just behind us, climate-related risks continue to be prominent in our analytical thinking.  We recently published an exploratory climate scenario analysis, which tests the potential of new alternative climate-physical-risk data sets and how they might enhance our dialogue with rated U.S. public finance entities regarding future physical climate risks. See box below "Better Data Can Highlight Climate Exposure: Focus On U.S. Public Finance," Aug. 24, 2020.

Like sensitivity analysis, we believe targeted scenario analysis can provide a better understanding of the range of possible exposures.  We do not factor such scenarios into our base case for our ratings, given the difficulty to assign accurate probabilities about when weather events may occur, and at what frequency and severity, but also the need to take into account potential future public policy measures and adaption and risk mitigation efforts. Instead, we are exploring the potential for these datasets and scenario outcomes to enhance understanding of the degrees of uncertainty, while promoting a dialogue with issuers about risk and risk mitigation.

Along the same lines, our ratings aim to capture long-term climate and ESG risks, where we see them as sufficiently predictable and material.  In our recent oil and gas sector update, "Write-Downs, While Eye-Catching, Are Not The Largest Issue Facing Oil And Gas Supermajors," Aug. 3, 2020, we explain how declining profitability, heightened volatility, and uncertainty about companies' responses to the energy transition are weighing far more on our business risk assessments than the hefty write-downs in early 2020. We factor downside sensitivities into our oil and gas analysis, for instance through our cash-flow volatility adjustment or our long-term business risk assessment. We recognize the increased probability of lower-for-longer oil price scenarios. COVID-19 has cemented this further, with long-term oil demand reduced by 2.5 million barrels per day. Under its sensitivity analysis, Platts Analytics shows demand for refined products (excluding growth in chemical feedstocks) could peak as early as 2025, compared to 2035 under its base case. This scenario assumes tighter restrictions on discretionary travel and a continuation of people working remotely following the pandemic, representing up to 25% of vehicle miles traveled in the U.S. (and similar outside the U.S.). Platts Analytics also assumed a severe reduction in aviation demand in this sensitivity analysis, with annual growth in passenger volumes halving to 2% versus its 4% base case. See "The Energy Transition: COVID-19 And Peak Oil Demand," Sept. 24, 2020.

Sovereigns And International Public Finance

The pandemic continues to weigh on government ratings, but so do governance factors.

Table 2

Sovereign And International Public Finance ESG-Related Rating Actions
Downgrade CreditWatch negative Outlook revision (negative) Total ESG-related rating actions Downgrade Total ESG-related rating actions % of total ratings affected by ESG
Recent activity (July-Aug) Cumulative actions (April-Aug)
Sovereigns 0 7 9 9 47 24
International public finance 1 1 4 6 6 45 14

Health and safety factors, resulting directly from the pandemic, dominated ESG-related sovereign and IPF rating actions in July-August. Measures to contain the damage from the pandemic continue to hit global economies, weigh on government revenues, and require significant government spending on social and economic safety nets. For local governments, the impact was large enough to deprive the German state of Baden-Wuerttemberg of the 'AAA' rating it had regained eight years ago, and in Australia led us to place our 'AAA' rating on the State of Victoria on CreditWatch.

At the same time, governance remains a critical rating factor in the sector. Our positive outlook revision to our 'AA' rating on the European Union is a recent example and reflects the political consensus for the EU Recovery Fund, which we view as a major step forward in the strengthening of EU member states' political cohesion. The EU is set to become one of the world's largest issuers of green bonds as the Recovery Fund helps with the union's net zero carbon emissions objective. Meanwhile, our strong management and governance assessment contributed to us assigning our 'AAA' rating to the European Stability Mechanism. Also, our negative outlook revision to the 'AA-' rating on Kuwait reflected the risk that the sovereign's institutional settings might prevent the government from finding a sustainable solution to its rising long-term funding needs.

U.S. Public Finance

The health and safety risks associated with the pandemic continue to negatively affect credit quality, particularly for higher education and not-for-profit transportation issuers.

Table 3

U.S. Public Finance ESG-Related Rating Actions
Downgrade CreditWatch negative Outlook revision (negative) Total ESG-related rating actions Downgrade Total ESG-related rating actions % of total ratings affected by ESG
Recent activity (July-Aug) Cumulative actions (April-Aug)
TOTAL 39 80 8 128 84 660 4
State & local governments 19 1 4 25 38 275 2
Higher Education 4 16 1 21 9 177 29
Health Care 0 0 2 2 4 51 11
Utilities 1 0 0 1 4 30 2
Housing 0 0 0 0 7 25 6
Charter Schools 0 0 1 1 1 16 4
Transportation* 15 63 0 78 21 86 33
*Excludes 187 negative outlook revisions on March 26 on almost all public transportation infrastructure issuers.

In July-August downgrade activity picked up, with almost 40 actions spread over states and local government entities (19), higher education (4), and public transport (15), many of which were airports.

We placed 16 privatized student housing projects on CreditWatch with negative implications. These projects are exposed to lower rent revenue and stalled lease up rates as higher education institutions provide either all-virtual instruction for the fall semester, projects reduce beds available to implement social distancing measures, or campuses close as in-person instruction has led to a spike in virus transmission rates.

We also placed 63 U.S. airport obligors on CreditWatch with negative implications. The entire aviation industry continues to face significant disruption caused by the pandemic. We believe the U.S. airport sector landscape will be dramatically reshaped, adding uncertainty and potential variability to operations, along with weaker financial performance and competitiveness. This is unlike previous downturns in terms of severity, likely duration, the rise of virtual meetings and decline of business travel, and, most notably, the industrywide transformation required to address consumer health and safety issues on a global scale. We view this precipitous decline not as a temporary disruption with a relative rapid recovery, but rather as a backdrop for what we believe will be a period of sluggish air travel demand that could extend for some years.

Finally, governance risks associated with lack of risk management and internal controls contributed to nine downgrades in July-August and one CreditWatch with negative implications. We believe risk management and internal controls are crucial to an issuer's credit quality, particularly when maintaining credit quality through a one-time event like a pandemic. If such controls are lacking, credit quality can be undermined. For example, we lowered Lansing, MI's rating as the city wrestled with a variety of issues, including fines from the Internal Revenue Service related to a failure to provide required information to the federal government under the Affordable Care Act.

Corporates And Infrastructure

Transportation, Autos, Leisure, Hotels, Restaurant, and Retail sectors continue to be rocked by the pandemic.

Table 4

Corporates And Infrastructure ESG-Related Rating Actions
Downgrade CreditWatch negative Outlook revision Total ESG-related rating actions Downgrade Total ESG-related rating actions % of total ratings affected by ESG
Recent activity (July-Aug) Cumulative actions (April-Aug)
TOTAL 46 3 32 91 296 546 15
Transportation 13 1 5 19 61 94 44
Aerospace and defense 1 0 1 2 23 31 54
Automotive 2 0 4 6 30 70 76
Hotels and gaming 6 1 5 12 50 73 59
Media, entertainment, and leisure 5 0 2 7 41 52 35
Retailing 3 0 2 5 27 38 27
Real estate 4 0 0 4 13 37 12
Capital goods 2 0 2 4 15 26 7

The sectors most directly affected are those exposed to health and safety factors as a result of social distancing and consumers' reluctance to travel, as well as the closure of retail and recreational locations. They represented the bulk (about 70% of negative rating actions) during July-August:

  • Transportation (over 20% of July-August total corporate rating actions); including downgrades of Deutsche Lufthansa AG, Air Canada, and Flughafen Zurich. We lowered our ratings on SAS to 'CC', while Grupo Aeromexico defaulted, as the pandemic continues to shake air travel (see "From Bad To Worse: Global Air Traffic To Drop 60%-70% In 2020," Aug. 12). Railway operators AMTRAK, SNCF, and Central and East Japan Railway saw negative outlook revisions or CreditWatch placements.
  • Media, entertainment, and leisure including hotels (more than 20% of total corporate rating actions); including downgrades of Accor (fallen angel), Cinemark Holdings, Travel Leaders Group, and Affinity Gaming. Two leisure companies defaulted, including education travel provider Lakeland Holdings LLC, and lodging company Grupo Posadas S.A.B. de C.V. Media. Entertainment provider Global Eagle Entertainment also defaulted. Finally, the ratings on Town Sports International Holdings Inc. were lowered to 'SD' (selective default).
  • Restaurants and retailing (about 10%); We revised our outlook on Walgreens Boots Alliance Inc. to negative. Two apparel retailers defaulted--Tailored Brands Inc. and Ascena Retail Group, Inc.
  • Autos (7%) saw downgrades of Nissan Motor and Valeo (fallen angel), and General Motors and Ford were assigned negative outlooks after we resolved their CreditWatch placements.

COVID-19 had a positive influence on about 10% of rating actions over July-August (five upgrades and five positive outlooks). For example, specialty premium grocer The Fresh Market Inc. experienced improved sales because of the health and safety practices implemented during the pandemic. Home décor retailer At Home Group Inc. saw increased demand from consumers spending more time at home amid lockdowns and social distancing measures. Stay-at-home mandates and a surge in sanitization procedures have increased consumption of household disinfectant and cleaning products, which has supported Kronos Acquisition's operating performance.

Financial Services

Financial services experienced very few direct* ESG effects, even though COVID-19 triggered widespread negative outlook revisions.

While the banking and insurance sectors have seen very few rating changes or outlook revisions directly attributable to ESG factors, since the onset of COVID-19 and fall in oil prices, they have been susceptible to indirect effects--namely rising credit risks and financial market volatility resulting from the pandemic. As of Sept. 7, 2020, we took rating actions on 234 banks--three quarters of which were outlook revisions--that were indirectly related to COVID-19 and the oil shock; this corresponds to roughly 25% of total bank ratings being affected. For the insurance sector, the total share of affected ratings was close to 10%, with equally three out of four actions being negative outlook revisions.

*See Appendix for our approach to direct ESG effect and indirect non-ESG effects of COVID-19.

Structured Finance

ESG-related rating actions concentrated in U.S. CMBS.

Table 5

Structured Finance ESG-Related Rating Actions
Downgrade CreditWatch negative Outlook revision Total ESG-related rating actions Downgrade Total ESG-related rating actions % of total ratings affected by ESG
Recent activity (July-Aug) Cumulative actions (April-Aug)
TOTAL (all sectors) 210 0 N/A 210 271 647 1
ABS 0 0 N/A 0 1 40 0
CMBS 199 0 N/A 199 218 441 10
Repack 1 0 N/A 1 17 20 11
Non-traditional Assets 10 0 N/A 10 35 146 11
*Repack ratings are weak-linked to the ratings of the underlying securities (and do not include CLOs). **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. N/A--Not applicable.

ESG-related rating actions in July and August predominantly related to 200 downgrades of U.S. commercial mortgage backed securities (CMBS) transactions, initially placed on CreditWatch negative in May and June. The rating actions reflect our revised valuations and credit views of the underlying assets (malls and hotels, for example). Downgrades were primarily to speculative-grade classes. For certain classes, we lowered our ratings to below the model-indicated ratings to reflect our view of their susceptibility to reduced liquidity support.

Although there were also numerous rating actions on collateralized loan obligations (CLOs) in July and August, we did not classify these as ESG-related. This is because the collateral pools have a significant diversification by obligor and industries, whose business we do not see as directly impacted by COVID-19 but rather from broader downgrade activity resulting from the economic crisis (see Appendix for our approach to direct versus indirect COVID-19 impacts).


COVID-19's direct (ESG) versus indirect (non-ESG) impact

We consider the COVID-19 pandemic a social credit factor when we believe health concerns and social distancing measures have a direct impact on an entity's activities. Put differently, our data presented here exclude rating actions stemming from the recession triggered by the pandemic, and from the downturn in oil and gas that started before the COVID-19 outbreak and is tied to oversupply and a price war. For sovereign ratings, however, we see the pandemic's direct and indirect macroeconomic, fiscal, and external impacts as intertwined and feeding into each other, and therefore consider rating actions triggered by the COVID-19-induced recession as health and safety-related.

For the broader statistics of COVID-19 and oil-related downgrades, see "COVID-19 Activity In U.S. Public Finance," published Oct. 2, 2020; "COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, And Project Finance To Date," published Sept. 29, 2020; and "COVID-19 Activity In Global Structured Finance As Of Sept. 18, 2020," published Sept. 24, 2020.

We have tagged rating actions tied directly to health and safety concerns as ESG-driven:

One of the clearest examples is airlines, which have seen a significant drop in demand due to travel restrictions to stop the spread of the virus. Other examples include auto dealers, which were forced to close their doors due to social distancing requirements, resulting in lost sales for auto manufacturers. Movie theaters, airports, restaurants, and leisure activities were/have been shut down due to the virus and local requirements for social distancing, resulting in a total cessation of revenue streams and limitations on large and social gatherings.

For the purposes of classifying ESG impacts, we excluded indirect rating actions tied to the recession triggered by the COVID-19 pandemic:

For example, the recession may ultimately increase the risk of nonpayments for banks or depress asset values, affecting insurers. While important, we have not flagged these as ESG. Similarly many corporate sectors are indirectly affected, for instance many consumer products companies have had to reduce their advertising, thereby affecting many media companies. Also, job losses and loss of consumer confidence has stopped buyers from making large consumer products purchases.

Related Research

ESG in ratings industry-related commentaries


Sovereigns and supranationals: 

International public finance: 

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) 1-4420-6751;
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, Paris (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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