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ESG Industry Report Card: Financial Market Infrastructure Companies


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ESG Industry Report Card: Financial Market Infrastructure Companies

Analytical Approach

Environmental, social, and governance (ESG) risks and opportunities can affect an entity's capacity to meet its financial commitments in many ways. S&P Global Ratings incorporates these factors into its ratings methodology and analysis, which enables analysts to factor in near-, medium-, and long-term impacts--both qualitative and quantitative--during multiple steps in the ratings process (see "The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis," published Sept. 12, 2019, on RatingsDirect). Strong ESG credentials do not necessarily indicate strong creditworthiness.


We define ESG credit factors as ESG risks or opportunities that influence an obligor's capacity and willingness to meet its financial commitments. This influence could be reflected through a change in the size and relative stability of the obligor's current or projected revenue base, its operating requirements, the emerging risks it is exposed to, its earnings, cash flow or liquidity, or the size and maturity of future financial obligations.

Our ESG report cards qualitatively explore the exposures of sectors to ESG credit factors over the short, medium, and long term. This sector comparison is not an input to our credit ratings and not a component of our credit rating methodologies; it is based on our current qualitative, forward-looking opinion of credit risks across sectors.

In addition to our sector views, this report card lists ESG insights for individual companies, including how and why ESG factors may have had a more positive or negative influence on an entity's credit quality than peers or the broader sector. These comparative views are qualitative and established by analysts during industry portfolio discussions, with the goal of providing more insight and transparency.

ESG Cuts Both Ways For FMIs

When considering the relevance of ESG in our view of FMIs' creditworthiness, we see it through two lenses--the risks and opportunities for them as corporations in meeting the expectations of their stakeholders, and the commercial risks and opportunities they face from key ESG trends. In many respects, the two aspects are intertwined: the better they assume the leadership and influencer roles that stakeholders increasingly demand of them, the more likely they are to preserve and in some cases to reinforce their market position, and so their long-term profitability.

One year ago, we commented on the eight secular growth trends that are shaping the FMI industry (see "For the FMI Industry, Global M&A Remains An Elusive And, For Now, Unnecessary Dream," published Oct. 10, 2019). While the revenue upside from ESG-related initiatives lacks the immediacy of some of these other trends, we now see ESG as a ninth secular growth trend for the industry. We doubt social or environmental credit factors would lead to any significant change in our view of issuer creditworthiness, at least in the short to medium term, but governance factors easily could, and have already. The FMIs we rate are almost all in the investment-grade category, and a large chunk of them in the 'A' category or above. The importance of risk management, and of strategic execution, makes sound governance a prerequisite at this rating level, and any deficiency could be a potential downside trigger to our ratings.

However, ESG cuts both ways for FMIs because it also brings some potential pitfalls that could have a bearing on credit ratings, possibly in the nearer term. Some have already emerged in some notable cases, while others have longer-term relevance.



FMIs' emissions from their own operations remain relatively low compared with those of many other corporate sectors, as they are for many non-bank financial institutions. However, as technology-centered businesses, a growing reliance on power-hungry technologies means that a failure to monitor, manage, and report their carbon footprints could see FMIs come under investor pressure. Indeed, expectations are rising from regulators, investors, and customers as they look at all financial institutions' contributions and exposures to environmental risks in their operating activities, and FMIs are no exception.

Despite this scrutiny, the increasing focus on ESG and its growing role as a stand-alone asset class offers an opportunity for FMIs to lead in the standardization of ESG disclosure, and the creation, monetization and promotion of new products and services. This already includes venues for listing sustainable bonds, new indices, ESG data products, and novel financial contracts that are looking to meet a growing client need for risk management or speculation. In time, a handful of FMIs could develop deep pools of liquidity in these areas, attracting issuers and investors beyond their traditional geographic footprint.

That said, the impact of climate change, carbon transition, and changing investor appetites could fall heaviest on markets dominated by environmentally harmful industries. In time, this could dampen the prospects of FMIs that depend on the vitality of those markets, and so undermine their longer-term profitability.

FMIs will drive ESG standards and disclosures but will also need to walk the walk to maintain their domestic and international franchises.  FMIs will be pivotal in building standards for climate and sustainability disclosures, encouraging harmonization across users of their marketplaces. Indeed, without clear guidance on standards for ESG disclosure, market participants will be unable to allocate capital efficiently and effectively, stalling green investment.

Data from the UN's Sustainable Stock Exchange Initiative (SSE) suggests that this leadership and influencer role is understood among our rated issuers. The SSE aims to bring together global exchanges to set and communicate ESG standards to their markets, and as of today it has 104 global partners. We rate eight of these members, and all but two of them currently share guidance on ESG best practices for issuers, and all but one produces their own sustainability report. This second point is essential. It not only enhances the exchange's role as a credible standard-setter but demonstrates to key stakeholders that they are improving their own sustainability.

Table 1

Sustainable Stock Exchanges (SSEs), Rated FMIs, and Their ESG Practices
Issuers Country SSE partner exchange Annual sustainability reports Written guidance on ESG reporting Sustainability bond listing segment

ASX Ltd.*

Australia Yes No Yes No

B3 S.A - Brasil, Bolsa, Balcao

Brazil Yes Yes Yes Yes

Deutsche Boerse AG

Germany Yes Yes Yes Yes

Euronext N.V.

Netherlands Yes Yes Yes Yes

Intercontinental Exchange Inc.

U.S. Yes Yes No No

London Stock Exchange Group PLC

U.K. Yes Yes Yes Yes

Nasdaq, Inc.§

U.S. and Europe Yes Yes Yes No

Six Group AG

Switzerland No Yes No No
*ASX does not produce a stand-alone sustinability report, choosing instead to embed this in its corporate annual report. §According to the SSE, NASDAQ's U.S. franchise does not have a sustainability bond listing segment. However, we note that its smaller Nordic and Estonian franchises are noted as running sustainable bond listing segments by the organization.

These factors are not a source of imminent ratings pressure. But the long-term impacts on issuers from weak, or unclear, ESG standards, and a perceived lack of credibility as an ESG reporter could see FMIs bleed liquidity and revenue to more credible regional competitors. As such, a failure to build standards and frameworks for sustainable finance in the short term could have unforeseen impact beyond our standard two-year rating horizon that could affect our views of the business risk profile, and therefore credit quality.

FMIs have a crucial role to play in facilitating the carbon transition and the expansion of sustainable finance, which could generate meaningful new strategic and revenue opportunities for the industry.  FMIs have a unique opportunity to use their product expertise and large pools of liquidity to build new revenue streams and help markets adapt to the challenges of carbon transition and climate change.

In 2019 the UN estimated that the funding gap to achieve its sustainable development goals was approximately $2.5 trillion per year. This implies a necessary step change in global investment that banks can intermediate but cannot fund alone, with an urgent need for corporate capital raising through green and sustainable financing products. To be sure, some of this sustainable finance issuance and investment will replace activity that would have happened in conventional bonds, but we anticipate also that the bond market could expand—that is, the revenue pie will grow.

Who will share that pie? All but two of our rated issuers that operate securities exchanges have opened venues or sections for listing sustainable bonds, but FMIs that develop particularly deep pools of liquidity could develop a virtuous cycle of ever-growing volumes, and so disproportionate competitive strength. As such, while a growing capital market could benefit all market operators, laggards that fail to secure market share early may face an uphill battle to recover it later.

Beyond the issuance of sustainable finance securities, novel financial products may be essential tools to help carbon transition and mitigate the risks arising from climate change. The established derivatives market operators could be particularly well placed to develop new products given their expertise in product design and the development of liquidity in new contracts. For example, Intercontinental Exchange (ICE), which has long run Europe's carbon credit trading schemes, and Deutsche Boerse, which runs emissions allowance trading through its European Energy Exchange, could have a head start. In a similar vein, we also note the emergence of new contracts: CME's water futures contract in the U.S. and North American environmental contracts through Nodal Exchange (a Deutsche Boerse subsidiary).

In sum, these trends present a meaningful opportunity for revenue growth for some FMIs over the medium term. The size of this opportunity remains difficult to quantify today though, as FMIs remain in the early stages of developing new products and investor ecosystems. Furthermore, our rated issuers generally have solid strategic positions, which are reflected in high business risk profile scores. This high start point means that the incremental credit enhancement of successful delivery of FMIs' sustainable finance strategy may have a limited rating impact. That said, we would expect these opportunities to enhance and stabilize robust competitive positions, though we do not discount the possibility that a dominant listing or risk mitigation franchise could emerge and meaningfully enhance credit quality.

FMIs are indirectly exposed to the environmental risk of their issuers and markets. Those FMIs most exposed to environmentally harmful industries and issuers could see their revenues erode over time as the global carbon transition gathers pace.   FMIs are relatively low direct emitters of greenhouse gases (GHG) and consumers of water. That said, we see FMIs' indirect environmental exposure as far more significant. Their listing and trading venues are central to the economies they serve, and the direct climate and ecological impact of listed companies can be vastly greater than the FMI. Consequently, we see a medium-term risk for venues that are highly exposed to brown industries and issuers, which may struggle with the carbon transition. In time, investment capital will likely move away from these industries and issuers, and this could erode an FMI's revenues.

The risk here will be uneven across the securities exchanges. Charts 2 and 3 below are based on metrics compiled by S&P Dow Jones Indices, a separate and independent division of S&P Global, as is S&P Global Ratings. They show us that some exchanges have greater exposure and concentration in environmentally harmful industries, which leads to weaker CO2 metrics for their leading index. In this example, the ASX200 and B3's Ibovespa index comprise a greater proportion of materials and industrials sector issuers than the S&P 500, which is more heavily weighted to information technology companies.

Chart 2


Chart 3


In derivatives markets, the shifting fortunes and investibility of major issuers could spur more equity market volatility and so more trading activity on single-name instruments, in the short to medium term at least. Similarly, for commodities the shift of economies from high carbon to low carbon could spur an eventual decline in oil and coal market activity and a rise in electricity market activity. However, in the short to medium term, the main determinant would likely rather be whether the energy transition leads to more price volatility. If so, activity in carbon-heavy commodities could actually rise over the short term.


The FMI sector tends to have a strong institutional bias, although certain subsectors, such as payment network operators, can face additional risks, not least where they face retail clients or handle their data. A productive human workforce is, and will remain, at the core of these firms' business models.

Payment system operators have a complex social risk profile, not least where they face retail customers, with failures to meet the needs of these clients carrying large financial and regulatory risks.   As with other FMIs, the largest payment system operators, Visa, Mastercard, and PayPal, intermediate transaction flow between institutional clients, in their case, banks, merchant acquirers, and payment processors. However, while PayPal operates institutional payment rails for some of its transaction flow, in many areas of its business it directly touches retail customers. Indeed, through diverse acquisitions and the expanding scope of its operations, its retail exposure continues to grow. For example, it provides consumer credit, underwritten by Synchrony Financial in the U.S. and directly by PayPal elsewhere. In its acquired subsidiaries, such as Venmo or Xoom, the group provides payments and remittance services to a global network of individuals. These unusual (for an FMI) exposures to retail customers create a different social and regulatory risk profile, and the direct management of end-customer data potentially accentuates the implications of data loss. Indeed, this business carries many of the risks we associate with traditional banks and non-bank financial institutions.

But for all payment systems operators, the risk of anti-money laundering (AML) breaches hang heavily on them. Visa, Mastercard, and Paypal are all responsible for monitoring their global networks for breaches of AML regulation, and while their track records in this area are robust so far, significant breaches carry not only material financial expense, but also damage reputations and franchises. Failures have damaged the creditworthiness of banks and corporates around the world, and this is no different for payment system operators.

In sum, payment system operators run a longer and more complex gauntlet of social risks than most FMIs, and we would expect these considerations to remain important factors in our views of their credit risk over the long term.

FMIs rely on a productive, evolving workforce and may need to invest in their own workforces to demonstrate a leadership role.  While risks from human capital management are unlikely to weigh heavily on our ratings, we anticipate that this area will feature prominently in FMI ESG strategies.

FMIs are technology-centric businesses, but human capital remains central to their success. That said, as in many services industries, FMIs are continuing a steady march of rebalancing workforce and headcount. FMIs are also unapologetic in their search for further margin and sustained growth in shareholder value. Therefore, the need to manage human capital sensitively will continue to be important, especially for those FMIs undertaking M&A whose financial case relies on the realization of cost synergies, not least workforce reduction.

Beyond their employees, FMIs are prominent financial institutions within their economies and the markets that they operate. Therefore, as for sustainability, stakeholders may expect FMIs to take a leadership role in improving their diversity and inclusion (D&I). Efforts to improve representation in their workforces are affordable for the profitable groups that we rate, but achieving a high standard of D&I takes sustained investment and management focus.


Governance has long been a central consideration for our ratings analysis, whether through the assessments of "management and governance" or of "clearing and settlement risk," or our view of a business' "competitive position." However, deficiencies have led to ratings actions in the past, and will likely continue to do so. That said, shortfalls in this area are rare. Furthermore, even where our negative assessment of a FMI's management of clearing and settlement (C&S) risk affects the ratings, this assessment tends to reflect structural factors that are beyond direct management control, such as exposure to lower-rated sovereigns or concentrated membership profiles.

Effective governance and enterprise risk management are essential traits for highly rated FMIs, but deficiencies can arise.  FMIs are stewards of global financial markets, and deficient governance could have significant implications for not only the FMI but also orderly markets. Our typical high ratings on FMIs are almost always underpinned by a recognition of robust management and governance, notably around enterprise risk management (ERM).

While the industry track record of operational and cyber resilience is quite strong, trading outages are highly visible when they occur, particularly when trading is interrupted for many hours or even whole days. So far, we have yet to see a rated FMI suffer disproportionately, but persistent or extended outages could weaken our view of an FMI's governance and, in time, also weaken our view of its competitive position if its franchise suffers material damage. As the recent case of the Tokyo Stock Exchange, a subsidiary of Japan Exchange Group (unrated), shows, operational risk events can have an immediate effect on governance structures and regulatory relationships. Similarly for cyberrisk, the industry track record is strong, but the NZX incident this year was a salutary reminder of what can go wrong, and a similar event at a rated FMI could lead to ratings actions.

One prominent exception among the generally robust ERM frameworks of rated issuers is Options Clearing Corp (OCC). In 2019 regulators cited material risk and control deficiencies, which in turn led us to downgrade the rating. The example of OCC highlights our high expectations of highly rated firms in this sector, and so the sensitivity of our ratings to material governance shortcomings.

FMIs' profitability typically benefits from strong incumbency, but with this privilege comes a need to manage regulatory and stakeholder needs, and shortcomings could weigh on their business and financial positions.   As oligopolies or de facto monopolies, FMIs have a privileged position in their domestic and regional economies. In most cases, this has supported high profitability--often vastly more than that of their users. No longer user-owned, these FMIs face a challenging balancing act to use their well-entrenched competitive positions to serve their institutional shareholders and service users even-handedly. Perceived failures have precipitated not only client dissatisfaction but also a series of regulatory interventions in the past two decades.

Some FMIs remain substantially user-owned, such as DTCC or Six Group. DTCC operates as a utility provider, with a well-established system of user rebates. Six Group, on the other hand, operates in a competitive environment, but as the cornerstone of the Swiss financial center it provides some services at low margin where it is uniquely well-placed to meet members' needs.

Many capital-markets-focused FMIs have had to cut fees in cash equity trading in the past decade, the most commoditized of their activities, following regulatory change that sought to spur competition. In the U.S. and Europe in particular, users set up their own trading venues--in Europe these took the form of dealer and broker-dealer run multilateral trading facilities, while in the U.S. this has been realized through new member-owned exchanges.

Visa and Mastercard, the operators of the leading international card schemes, have demonstrated remarkable competitive resilience despite the payments industry being one of the most innovative and fast moving. They have faced various lawsuits and regulatory challenges over many years, however, primarily pertaining to their rules, fees, and alleged anticompetitive behavior associated with payment processing. Governments in Europe, the U.S., Australia, and other countries have also mandated reductions in interchange rates over roughly the last decade. While Visa and Mastercard do not collect interchange fees, which are generally paid from merchants to banks, a reduction in those fees can put indirect pressure on them to cut their own fees.

With all these broad pressures in mind, we see a prominent governance risk arising for FMIs from the challenge of managing their actions as market incumbents and believe that, if they are to avoid further intervention, FMIs will need to be astute and proactive in managing their conduct risk. So far, past interventions haven't weighed heavily on ratings, but additional economic regulation could weaken sector earnings and therefore weigh on their business and financial positions.

Clearing and settlement are important FMI services, but pose significant, specific, and dynamic governance risks.  FMIs that operate clearinghouses (CCPs) and central securities depositaries (CSDs) derive commercial benefit from clearing and settlement, but also take on significant additional risks beyond other FMIs. Our C&S risk assessment captures these risks, going well beyond our broad assessment of enterprise risk management and governance.

The CCPs and CSDs that we surveil are subject to some of the world's most stringent regulatory standards, and their risk tolerance and policies are often set at an even more demanding standard than this high bar. Nevertheless, we do see differences among them and, occasionally, market events can expose areas of weakness. In recent years, the two most notable clearing risk events globally involved Korea Exchange's (unrated) 2014 management of the default of a broker (HanMag Securities), and a clearing member default in 2018 at Nasdaq Clearing Nordic, part of the Nasdaq group (BBB/Stable/A-2). In both cases, the default fund was partially consumed by losses. CCP members acknowledge that such losses can occur in extreme circumstances, but this was true for neither default event, and the two CCPs both subsequently overhauled aspects of their risk management.

The management of clearing (and settlement) risk is a continuous process of change and enhancement: markets and trading practices change over time, CCPs extend their clearing services to new products and asset classes, and industry best practices evolve. In this context, new products to mitigate for carbon transition and a changing climate could have particular implications for risk controllers. It is not just that new products need to be safely clearable, but that the complex consequences of climate change and the associated change in markets could mean that market movements may become more extreme, and established correlations within and across asset classes could break down. This requires forward-looking, exploratory clearing risk management, for example via hypothetical scenario analysis. While shortcomings could yet lead to acute events, we see the risk posed by climate change to the modeling of clearing risk as most likely of medium-term relevance.

As growth-hungry FMIs seek megadeals at high multiples, often outside of their historic core disciplines, strong governance will be required to manage execution and strategic risks.  Beyond the range of secular trends that have supported FMIs' organic growth, acquisitions have formed a key pillar of many of our rated FMI's growth strategies and profitability. As FMIs have expanded their franchises into new asset classes and businesses, M&A has helped them to build scale quickly and cement strategic positions. So far, the track record is strong and few deals pose meaningful risk to creditworthiness: leverage tolerance remains quite tightly controlled; FMIs tend to be highly cash-generative with cost-effective access to term debt; and the majority of deals have been bolt-on in nature, posing immaterial execution and financial risks. Furthermore, we do not rule out eventually taking negative rating action on FMIs that have modest organic growth potential, resist M&A, and gradually see their competitive position erode.

Transformational deals are, however, a notable feature in the sector. Since they tend to be substantially debt financed and involve valuations at significant earnings multiples, they can give rise to materially higher financial risk and execution risks—usually short-lived, but sometimes sustained or even permanent. After a decade of deal-making that has shaped the strategic landscape, in 2020 alone we took four ratings actions linked to M&A and saw an even wider range of M&A activity undertaken in the sector (see "For The FMI Industry, Global M&A Remains An Elusive And, For Now, Unnecessary Dream," published Oct. 10, 2019). Still, where we have taken related negative ratings actions, we have usually seen ratings pressure ease within the following two years as deleveraging and synergies progress.

Table 2

Financial Market Infrastructure Rating Actions Triggered By M&A In 2020
Company From To Date Rationale
SIX Group AG A+/Stable/A-1+ A/Stable/A-1 06/17/2020 Nonoperating holding company (NOHC) ratings were lowered after acquisition of BME consumed its liquid resources, increased leverage. Rating is now one notch below the a+ GCP, aligned with our approach for its FMI NOHC peers.
Intercontinental Exchange Inc. A/Stable/A-1 BBB+/Negative/A-2 10/8/2020 Downgrade due to the significantly higher leverage that the company will assume to complete its acquisition of Ellie Mae.
Euronext N.V. A-/Stable/A-2 A-/Watch Neg/A-2 12/10/2020 Ratings place on CWNeg on announced acquisition of Borsa Italiana from LSEG for EUR4.325 billion.
London Stock Exchange Group PLC A/Watch Neg/A-1 A/Watch Neg/A-1 10/14/2020 Rating affirmed on sale of BI to EuroNext. Maximum downward rating movement now 1 notch on improved metrics and deleveraging profile assuming all proceeds are used to pay-down existing debt.
Source: S&P Global Ratings.

While M&A is likely to remain an ever-present feature of the sector, we see rising strategic and, to a degree, financial risk. FMIs continually expand the scope of their activities, and increasingly move beyond their traditional disciplines into parallel, ancillary areas. This is true particularly for capital-market focused FMIs, but also those operating payment infrastructure—and we see the brief as being stretched. Deal size and multiples continue to rise, and if we consider prospective deals like LSEG-Refinitiv, which has signaled the era of megamergers, or Nasdaq-Verafin, with an extremely high multiple well in excess of 25x, the deal landscape is constantly evolving. Failed strategic execution could yet dilute franchises, challenge our view of management effectiveness, and weaken creditworthiness. Positively, debt financing has never been cheaper, and interest burdens are sustainable, but this ready financing can facilitate larger leverage multiples, and financial risks could still mount if new assets underperform.

ESG Risks/Opportunities For Rated FMIs

Issuer / Country / Analyst / Comments

Asigna Compensacion y Liquidacion / Mexico / Alejandro Peniche.   We see ESG credit factors for Asigna as neutral to its credit quality compared to other Financial Market Infrastructures (FMIs). In terms of environmental risk, we see limited risk to Asigna's existing business, being focused primarily on the clearing of interest rate and bond derivatives. Looking ahead, Asigna is implementing new products that may serve as a platform for offering clean energy products, aiding carbon transition and climate change mitigation. Social factors, although relevant for the group's long-term strategy, don't have more influence on the company's credit quality than for its peers. As with many industry peers the company is subject to high governance standards, although failures could have an acute effect on ratings.

ASX Ltd / Australia / Lisa Barrett.   We see ESG credit factors for ASX to be broadly in line with the industry. As a service-based organization, ASX's environmental footprint is small and therefore environmental factors are less material to our credit analysis. Nevertheless, as the dominant provider of critical market infrastructure in Australia, ASX enjoys a privileged and highly profitable position. It will play a key medium to long term role in the smooth and orderly transition to a low carbon economy in Australia, which remains heavily reliant on carbon and environmentally intensive industries. It continues to invest proactively in its infrastructure, enhance its customers' experience and the smooth functioning of markets, and build an engaged and skilled workforce. ASX maintains high standards of corporate governance. Furthermore, as an operator of critical financial markets infrastructure ASX has a range of fraud and cyber-risk mitigation strategies and systems in place.

B3 S.A. / Brazil / Guilherme Machado.   The Brazilian Stock Exchange (B3) is in line with the ESG risks and opportunities that major FMI players face globally. B3 is a low direct emitter of greenhouse gases and a low user of natural resources. As the dominant provider of critical market infrastructure in Brazil, it enjoys a privileged and highly profitable position. It will have an important role as a venue to finance the economy's ongoing growth and transition to sustainable development and promote related financial instruments in its home market. Thus far B3 has been successful in controlling its risk management, system capabilities, and clearing and settlement responsibilities, all of which translate into sound market function. Although we do not rule out that a failure in an ESG factor could affect our view of the stand-alone creditworthiness for the group, it would very unlikely lead us to lower the issuer credit rating on B3 given the longstanding sovereign rating constraint.

Cboe Global Markets, Inc. / U.S. / Thierry Grunspan.   Cboe's ESG risks and opportunities are broadly in line with FMI peers'. As with other FMIs and non-bank financial institutions, it is a low direct emitter of greenhouse gases and a low user of natural resources. We note an opportunity for Cboe to create novel financial products for its market users, and at full year 2019 Cboe had listed 19 ESG-exchange-traded funds on its trading platforms. Our view of governance risk for Cboe, like other FMIs, begins with its role of preserving the financial integrity of its markets by providing risk management services and facilitating price discovery for its customers. Failure to discharge these key responsibilities, either due to its inability to manage pricing or because of events related to cyberattacks and other operational risks could potentially precipitate customer dissatisfaction and regulatory interventions. The company does not directly serve retail customers, limiting social risks overall. Cboe's governance is robust in our view, though we note it is somewhat of a laggard against peers in gender diversity, with women comprising only roughly one-quarter of the workforce.

CME Group Inc. / U.S. / Thierry Grunspan.   CME's ESG risks and opportunities are overall in line with peers. As with other FMIs and non-bank financial institutions, CME is a low direct emitter of greenhouse gases and a low user of natural resources. That said, the company derives about 20% of its revenues from the trading of fossil energy, an asset class that we believe could be challenged over the medium term as markets and economies undergo a sustained period of carbon transition. Contrary to some of its peers, the company currently has a limited presence in non-fossil and renewable energy and has been relatively slow at diversifying away from oil and natural gas. However, as one of the globally leading commodity derivatives exchanges, it has the franchise and expertise to build a share in emerging contracts, and we see products such as the California water futures contract as an important indicator of this. Our view of governance risk for CME, like other FMIs, begins with its role of preserving the financial integrity of the markets by providing risk management services and facilitating price discovery for its customers. Failure to discharge these key responsibilities could potentially precipitate customer dissatisfaction and regulatory interventions, eroding its strategic position. CME's governance is robust in our view, and as a globally systemic financial institution, CME's risk management and governance frameworks are essential to supporting and maintaining financial stability. To this end, we see CME Clearing as being a strong risk manager and regard the management of clearing risk as in line with best practices.

Depository Trust & Clearing Corp. (The) / U.S. / Prateek Nanda.   The Depository Trust & Clearing Corporation (DTCC) faces broadly the same ESG risks and opportunities as the rest of the FMI sector. As a parent company of two clearinghouses (FICC and NSCC) and a central securities depository (DTC), DTCC has a low impact on the environment, in line with FMI and non-bank institution peers. Prospectively, DTCC has the opportunity to support exchanges by offering efficient clearing and settlement services for innovative sustainable finance such products. DTCC's governance profile, like other FMIs, begins with its monopolistic position in the markets its clears, notably cash equity, and U.S. government and agency mortgage-backed securities, and the need to balance the interest of the company's various stakeholders. As a member-owned utility, with the primary mission to serve market participants, DTCC needs to manage the pricing of its products and the value it provides to clearing members. We believe failure to provide efficient clearing and settlement services, could precipitate customer dissatisfaction and regulatory interventions. That said, DTCC's governance is robust in our view, and its risk management and governance frameworks are essential to supporting and maintaining financial stability in the U.S. markets. To this end, we believe all the DTCC subsidiaries benefit from strong risk-management controls.

Deutsche Boerse AG / Germany / Philippe Raposo.   We see ESG credit risk factors for Deutsche Boerse AG (DB1) group to be broadly in line with the FMI industry. We see DB1's exposures to direct GHG emissions and resource utilization as relatively low compared to other industries, in line with FMI peers and other bank and non-bank financial institutions. ESG is a key component of DB1's recently updated 'Compass 2023' strategic plan, and the announced acquisition of ISS, an ESG analytics business, is one materialization of such ambitions. As a systemic operator DB1's governance framework is crucial to smooth market function, and we consider the group's risk management framework to be sound. Of note, Clearstream board members have a fiduciary obligation according to German law and need to act in the best interest of the company and not the parent. Further governance risk at DB1 mainly relates to its responsibility to manage its various stakeholders and keep well-functioning financial markets. As a vertically integrated service business DB1 has many stakeholders to satisfy, from pre-trading analytics to post-trading assets custody, and their dissatisfaction could have direct implications on revenues.

Euroclear Group / Belgium / Taos Fudji.   We believe Euroclear Group is in line with key FMI industry trends for ESG risks and opportunities. As the operator of the largest international central securities depository (CSD) and operator of multiple national CSDs, Euroclear plays a crucial role in the settlement of transactions and the provision of collateral. To this end it will have a role to play in supporting the efforts of European investors and financial institutions in better identifying the ESG profile of the assets they hold and transact. Beyond these strategic opportunities, we see Euroclear, as with other FMIs, as a low direct emitter of greenhouse gases, and a low user of natural resources. The governance profile of Euroclear rests on its responsibility to maintain a well-functioning settlement function for the Europe-wide securities market, and to facilitate the evolution of developing capital markets the countries it operates in. We believe Euroclear's long-term focus on an open-architecture model, widespread but ultimately private ownership, and robust risk control framework puts the group in a good position to control the risks stemming from potential operational failures. Contrary to most FMIs, Euroclear has not engaged in large acquisitions and has issued debt mostly to anticipate or comply with regulation. This prudent approach further supports our view of Euroclear's solid management and governance.

Euronext NV / Netherlands / Philippe Raposo.   Euronext's ESG risks are broadly in line with peers, and we see the company as one of the first movers to grasp new market opportunities in sustainable finance. The company's ESG strategy focuses on developing new indices, becoming a liquidity hub for green and blue bonds, ESG ETFs, and more recently corporate services to help clients with their carbon transitions. As with other FMIs and service companies Euronext has a limited environmental impact as a low direct emitter of greenhouse gases and user of scarce resources. Any failure, either operational, technical or because of cyber-attacks, could be damaging to market participants and Euronext's franchise, and as such solid governance is central to our rating. To this end we view the company's governance as robust. Its recent series of acquisitions require some integration and have led to increased group leverage, but so far we see a strong track record of execution. Euronext does not directly serve retail customers.

Intercontinental Exchange Inc. / U.S. / Prateek Nanda.   ICE faces broadly similar ESG risks and opportunities similar to major global FMIs. With a dominant market share in energy trading and clearing, trends linked to carbon transition pose risk for ICE in the long term, in our view, given the contribution of Brent and other oil contracts to group revenues. That said, relative to peers such as CME, ICE has made early inroads in environmental markets, and supports sustainable finance through products such as carbon and renewable energy futures and options contracts. ICE also provides ESG reference data, and climate risk data for investors in the municipal finance market, and ESG-linked contracts for sustainable investors. We see ICE, like other FMIs and non-bank financial institutions, as a low direct emitter of greenhouse gases, and a low user of natural resources. The governance risk profile of ICE, like other FMIs, begins with its role of preserving the financial integrity of the markets by providing risk management services and facilitating price discovery for its customers. Failure to discharge these key responsibilities, could precipitate customer dissatisfaction and regulatory interventions, eroding ICE's market position. We believe ICE's governance is largely consistent with that of other well-managed FMIs, as illustrated through robust risk management controls of its clearinghouses. Although ICE has a high appetite for large-scale M&A and material leverage, the company has a strong track record in integrating large acquisitions.

Liquidnet Holdings, Inc. / U.S. / Robert Hoban.   We believe Liquidnet faces ESG risks mostly in line with other FMI companies. Liquidnet's environmental risk is low because, like most FMIs, it is a low direct emitter of greenhouse gases, and a low user of natural resources. We see no broader environmental challenge in its role a venue for bond and equity trading. Liquidnet does face considerable regulatory compliance and reputational risk, and has a fairly good, but not blemish free, compliance track record. For instance, Liquidnet was cited by the SEC in 2014 for disclosing client's confidential information. However, these issues were addressed and did not cause material erosion of its franchise. Liquidnet is also potentially exposed to regulatory reforms, although it has benefited from previous reforms, notably its growing market share in Europe since implementation of MiFID II. As with all FMIs, governance is an important risk factor, although we view its governance frameworks as being broadly in line with peers'.

London Stock Exchange Group PLC, LCH Ltd, and Banque Centrale de Compensation (LCH SA) / U.K., France / William Edwards.   We see ESG credit factors for LSEG as in line with FMI peers. As a key hub for financing in the UK, whether through fixed income or equity markets, and a provider of information services to international markets, LSEG has the opportunity to support sustainable finance, and create novel products. We see LSEG, as with other FMIs and non-bank financial institutions, as a low direct emitter of greenhouse gases, and a low user of natural resources. LSEG's governance risk profile begins with its unique roles in the middle of complex global and regional financial systems. The group has to manage a broad range of stakeholders, and its role as the UK's financial hub comes with the need to manage product pricing and access fairly -- with any failure likely to precipitate customer dissatisfaction and possible regulatory interventions. LSEG's governance is robust in our view – most notably through the unique risk control strengths of the group's UK and France domiciled clearinghouses, LCH Ltd and LCH SA. That said, M&A has long played a key role in LSEG's growth strategy, and its pending Refinitiv deal presents significant opportunity and risk for the group over the medium term, as it seeks to integrate and realize synergistic growth from the deal.

Mastercard Inc. / U.S. / Brendan Browne.   We believe Mastercard faces ESG risks that that are broadly similar to other FMI companies. That said, Mastercard's ubiquity with consumers and merchants makes governance factors very important and elevates its social risk profile against other FMIs. As the operator of the second largest retail payment network outside of China, the company facilitates trillions of dollars of payments annually from the bank accounts of consumers and merchants. In this context at the heart of a global payment network Mastercard has repeatedly faced lawsuits and regulatory challenges, which included allegations of anti-competitive behavior following which it has paid some large settlements. Over roughly the last decade, many governments have also capped the fees merchants must pay to use the card networks, and we cannot rule out further government intervention. Governance is a crucial risk factor and we believe Mastercard's governance is largely consistent with that of other well-managed FMIs. The company guarantees settlement among its clients for its branded products, which creates settlement risk for the company. Defending against cyber breaches and maintaining constant operation of its network are also key to Mastercard's success. Mastercard is not a large emitter of greenhouse gases or a major user of natural resources but faces some environmental risk.

Nasdaq Inc. / U.S. / Thierry Grunspan.   Nasdaq faces a range of ESG risks and opportunities, and we see the company as well placed among peers to address them as it continues to develop its suite of ESG products and services, not least in its Corporate Platforms division. As with other FMIs and non-bank financial institutions, Nasdaq is a low direct emitter of greenhouse gases and a low user of natural resources. Focused on high tech companies, the Nasdaq index has a very small percentage of its weighting towards fossil energy and materials. The governance risk profile of Nasdaq, like other FMIs, begins with its role in preserving the financial integrity of the markets and services it operates. Failure to discharge these key responsibilities, either due to its inability to manage pricing or because of events related to cyberattacks and other operational risks could potentially precipitate customer dissatisfaction and regulatory interventions. To this end, we see Nasdaq's governance as generally robust. Nasdaq faced significant challenges at its Nordic clearinghouse subsidiary after a member default in 2018, but the remediation is now largely complete and the incident did not affect our ratings. On a positive note, Nasdaq is the first Wall Street company to have both their CEO and CFO roles filled by women, and has recently proposed rules, which remain subject to SEC approval, under which listed companies would be required to have at least one female board member, as well one from an underrepresented minority.

Options Clearing Corp. / U.S. / Prateek Nanda.   OCC faces broadly the same ESG credit factors as the rest of the FMI sector, although its governance risk is somewhat elevated against market peers. We view risk governance as a crucial factor for OCC because of its role as a systemically important financial market utility in promoting financial stability of the U.S. financial system. In September 2019, OCC entered into settlement orders with the SEC and the CFTC to remediate deficiencies related to the implementation of policies involving financial risk management, operational requirements, and information systems security. We reflected these deficiencies by lowering the long-term rating to 'AA' from 'AA+'. As a clearinghouse, OCC has a low impact on the environment, in line with FMI and non-bank institution peers. The key context for OCC's governance profile is its role as a sole provider of clearing for equity options in the U.S. and the need to balance the interests of the company's various stakeholders--including, shareholder and nonshareholder exchanges, and clearing members. As an industry utility OCC needs to manage the pricing of its products and the value it provides to clearing members. We believe failure to provide efficient clearing services, either due to its inability to manage pricing or because of events related to cyberattacks and other operational risks, could potentially precipitate customer dissatisfaction and regulatory interventions.

PayPal Holdings Inc. / U.S. / Thierry Grunspan.   PayPal's ESG risks and opportunities are broadly in line with the industry – although, as with other payment network providers, PayPal's ubiquity with consumers and merchants elevates governance risks, and makes social factors a more material concern than for other FMIs. The prices PayPal sets for the use of its network affect the earnings of the merchants who pay to use PayPal's network and this may in turn impact consumer prices and affordability. Furthermore, we note that PayPal faces retail consumers directly through its credit business and subsidiaries, and as such would be potentially exposed to significant reputational risk and regulatory scrutiny in the case of a leakage of consumers' or merchants' data. As with other non-bank financial institutions, PayPal is a low direct emitter of greenhouse gases and a low user of natural resources. PayPal's governance is robust in our view. That said, we note that PayPal is an acquisitive business, and has seen some failings of due diligence in its past – notably in its acquisition of Tio, whose intangibles it impaired in 2019 following cybersecurity issues.

SIX Group AG / Switzerland / Philippe Raposo.   We see ESG credit factors for SIX as being broadly in line with the industry. Like other financial institutions and service industries we believe its environmental footprint, including greenhouse gas emissions, are less material to our credit analysis compared with other sectors. Still, with SIX at the center of the Swiss financial industry, the accelerating trend for sustainability is increasingly important for the company's strategy, in particular for its indices and data businesses. The group's governance responsibilities are significant as it operates the Swiss stock exchange, and because of the services it performs for the local financial industry. SIX operates Swiss Interbank Clearing--the country's central payment system--on behalf of the Swiss National Bank (SNB); is the largest provider of debit card issuer services to local banks; is the service provider of TWINT (mobile payment system); and an important operator of Swiss ATMs. As such, SIX has a role in Swiss households', corporates', and banking institutions' daily activities. In this context, we believe SIX's governance standards to be robust. In addition, the group works under a user-owned and user-governed model, which reinforces the alignment of SIX with its stakeholder's interests in our view.

VISA Inc. / U.S. / Brendan Browne.   We believe Visa faces ESG risks that that are broadly similar to other FMI companies. That said, Visa's role as a global payments network elevates the importance of governance and social factors to an extent. As the operator of the largest retail payment network outside of China, the company facilitates payments annually from the bank accounts of millions of consumers to millions of merchants. In this context, Visa has repeatedly faced lawsuits and regulatory challenges -- including allegations of anti-competitive behavior and has paid some large settlements off the back of this. Over roughly the last decade, many governments have also intervened to cap the fees merchants must pay to use the card networks. Governance is a crucial risk factor and Visa's governance frameworks are largely consistent with that of other well-managed FMIs. For instance, Visa has successfully managed the significant settlement and technology and cyber risks it faces. Defending against cyber breaches and maintaining constant operation of its network are also key to Visa's success. Visa is not a large emitter of greenhouse gases or a major user of natural resources but faces some environmental risk.

Related Criteria & Research

The Role Of Environmental, Social, And Governance Credit Factors In Our Ratings Analysis, Sept. 12, 2019

This report does not constitute a rating action.

Primary Credit Analysts:William Edwards, London + 44 20 7176 3359;
Giles Edwards, London + 44 20 7176 7014;
Secondary Credit Analysts:Thierry Grunspan, New York + 1 (212) 438 1441;
Devi Aurora, New York + 1 (212) 438 3055;
Pierre Gautier, Paris + 0033144206711;
Lisa Barrett, Melbourne + 61 3 9631 2081;

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