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The ESG Pulse: Reimagining Accounting To Measure Climate Change Risks


COVID-19 Impact: Key Takeaways From Our Articles


As European Hotels Grapple With Prolonged Restrictions, Are Operators And Landlords Sharing The Pain?


Pharma Outlook: Eighth Straight Year Of Credit Deterioration In 2021


Servicer Evaluation: PGIM Real Estate Loan Services Inc.

The ESG Pulse: Reimagining Accounting To Measure Climate Change Risks

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In our report, "Reimagining Accounting To Measure Climate Change Risks," published Dec. 4, 2020, we opine on the benefits of greater balance-sheet recognition of actual and potential climate-related liabilities. This would enable users of financial statements to shift qualitative measures of climate exposures to more quantitative assessments.

IFRS only requires an entity to recognize an on-balance-sheet provision if the payment is "probable" (that is, the likelihood of payment is greater than 50%) and the amount can be estimated reliably. Under U.S. GAAP the interpretation of "probable" has an even higher threshold. If the identified present obligation would only result in "possible" cash outflows, no provision would be recognized but a contingent liability needs to be disclosed. And the disclosure requirement falls away when the payment becomes even less likely or "remote".

With the current strict provision-recognition criteria requiring future cash flows to be probable or more likely than not, most climate-related risks do not result in on-balance-sheet accrual. Today, both climate physical and transition risks tend to fail this test due to the unpredictability of the timing and quantum of their impact.

S&P Global highlights three potential improvements:

  • Set a lower threshold than "probable" for the provision recognition criteria in order to crystallize liabilities earlier.
  • Apply a probability-adjusted approach to measure the liability, such that events carrying a 51% versus 49% likelihood get proportional rather than binary recognition.
  • Redefine/introduce disclosure norms for carbon pricing or, more generally, a pollution pricing mechanism (PPM) given that emissions will increasingly become a transition risk in view of net zero carbon commitments by many countries. Even if the effect may not be material today, more forward-looking information--explaining how potential future carbon-pricing risks affect an issuer's income and cash flow statements--could notably enhance the understanding of credit-relevant risks.

We believe a bolder reimagining of financial reporting could be even better so that capital markets can be driven more by sustainability considerations. Harvard Business School has recently developed a concept called Impact Weighted Accounts. These are line items in a set of financial statements (including the income statement, balance sheet, and statement of cash flows) that supplement the standard picture of a company's financial health and performance with additional information about how the company is affecting employees, customers, the environment, and wider society.

Sovereigns And International Public Finance

COVID-19 continues to weigh on budget deficits and debt increases, while underscoring the importance of inequality and social stability

Table 1

Sovereign ESG-related rating actions
Oct Nov Apr-Nov % of total ratings affected
Downgrade 5 2 18
CreditWatch Neg 0 0
Negative Outlook revision 1 1 40
Total ESG-related rating actions 6 3 60 27
ESG--Environmental, social, and governance. Data as of Sept. 30, 2020. Source: S&P Global Ratings.

Table 2

International Public Finance ESG-related Rating Actions
Oct Nov Apr-Nov % of total ratings affected
Downgrade 1 1 8
CreditWatch Neg 0 0 1
Negative Outlook revision 4 4 58
Total ESG-related rating actions 6 5 68 20
Data as of Sept. 30, 2020. Source: S&P Global Ratings.

U.S. Public Finance

Health and safety social risks continued to dominate ESG-driven rating actions in October and November

Table 3

U.S. Public Finance ESG-Related Rating Actions
Oct Nov Apr-Nov % of total ratings affected
Downgrade 20 17 153
CreditWatch Neg 0 0 95
Negative Outlook revision 3 1 491
Total ESG related Rating actions 23 18 740 4
o/w State and local governments 7 4 292 2
o/w Higher Education 5 5 193 32
o/w Health Care 0 0 51 11
o/w Utilities 0 0 30 2
o/w Housing 0 0 25 7
o/w Charter Schools 0 1 17 5
o/w Transportation* 11 8 132 54
Data is as of Nov. 30, 2020. *Excludes 187 negative outlook revisions on March 26 on almost all public transportation infrastructure issuers. Source: S&P Global Ratings.

Health and safety factors dominated our ESG-driven rating actions in U.S. public finance (36 out of a total of 41) in October-November. We also took five actions influenced by governance weaknesses.

Of the 36 health and safety rating actions, 31 were in higher education and not-for-profit transportation enterprises--showing the ongoing pandemic-related pressures these sectors face. We downgraded to 'CCC' from 'B' a higher education housing project at the University of North Texas in Denton, Texas, reflecting the project's continued weak and speculative business fundamentals amplified by the pandemic and its effect on occupancy during fiscal 2021. As of fall 2020, occupancy was 73.5% compared to 95.0% in spring 2020--a direct result of COVID-19. We anticipate further pressure, including a potential default that could occur as early as fiscal 2022 should occupancy remain weak or the housing corporation experiences further pressure.

We also took two state-level rating actions in October and November, rare throughout the pandemic (see case studies). Both actions demonstrate the long tail of recovery expected for the leisure and hospitality sector, even if a broader economic recovery occurs by mid-2022 as recently detailed by S&P Global Ratings Economics' report "Staying Home for the Holidays," published Dec. 2, 2020.

Corporates And Infrastructure

ESG-driven rating actions continue to be influenced by COVID-19, especially in transport, media, entertainment, and leisure

Table 4

Corporates And Infrastructure ESG-Related Rating Actions
Oct Nov Apr-Nov % of total ratings affected
Downgrade 11 16 329
CreditWatch Neg 0 0 44
Negative Outlook revision 9 11 202
Total ESG related Rating actions* 28 33 617 16
o/w Transportation 4 4 92 40
o/w Hotels and gaming 5 8 85 68
o/w Media and Entertainment 3 5 65 50
o/w Retailing 1 1 55 43
Data as of Sept. 30, 2020. *Including 42 positive actions. Source: S&P Global Ratings.

During October and November, ESG-driven rating actions slightly trended down to about 30 actions per month (down from above 40 in previous months). Roughly half of them related to the transport, media, entertainment, and leisure sectors, in which businesses continue to be slammed by COVID-19. See "The U.S. Lodging Sector: A Slower Recovery Could Take Until 2023," published Nov. 5, 2020 and "As COVID-19 Cases Increase, Global Air Traffic Recovery Slows," published Nov. 12, 2020.

Notable rating activity driven by health and safety ESG factors in these sectors included:

  • Hotels: We downgraded Playa Hotels & Resorts N.V. to 'CCC+', yet several hotel companies, including Marriott International Inc., Hyatt Hotels Corp. and Host Hotels & Resorts Inc. managed to stay at 'BBB-', albeit now with negative outlooks.
  • Gaming: We affirmed and removed from CreditWatch our ratings on several gaming companies, including Las Vegas Sands Corp., Century Casinos, Inc., and Churchill Downs Inc., yet we assigned negative outlooks to reflect ongoing sector challenges.
  • Entertainment: We downgraded The Walt Disney Co. to 'BBB+' from 'A-'; see case study. Live Nation Entertainment Inc. was downgraded to 'B' from 'B+' as the company continues to suffer from the global cessation of music concerts. We now believe that a substantial return to live events is not likely until mid-2021.
  • Transport: We downgraded Lufthansa again, to 'BB-' from 'BB', reflecting further uncertainty about the recovery of air traffic. Travel restrictions have been renewed in response to a spike in COVID-19 cases and virtual meetings continue to replace face-to-face. SAS AB defaulted on its senior unsecured bond, which it converted partly to common shares, partly into new hybrid notes. We also lowered our ratings on Dutch state-owned railway operator NS Group N.V. to 'A' from 'A+'.

Environmental factors influenced three rating actions. We lowered Peabody Energy Corp. to 'CCC-' from 'CCC+' because of covenant concerns. Declining domestic demand for coal--given coal plant retirements and competition from natural gas and renewable fuels--have kept weighing on the long-term cash-flow sustainability of domestic thermal operations. We downgraded regulated utility Entergy to 'BBB' on storm risks. On the positive side, Public Power Corp. S.A.'s upgrade to 'B' from 'B-' was influenced by both environmental and governance factors. The company's strategic repositioning involved the conversion of its generation mix toward lower carbon dioxide (CO2) emissions, improving its fleet competitiveness and long-term prospects.

There was a silver lining (if at all possible in a pandemic) for 14 issuers. We upgraded outdoor sporting goods retailer Bass Pro Group, LLC to 'B+' from 'B' as more consumers embraced socially distanced entertainment options and hobbies. We upgraded Home Group Inc. for the second time this year, to 'B' from 'B-', on continued strong customer demand for its home decor merchandise amid stay-at-home restrictions. We revised our outlook for Thor Industries, Inc. to positive from negative on an anticipated surge in demand as consumers appear to see RVs as a safe way to enjoy leisure time during the pandemic.

Financial Services

Financial services experienced very few direct* ESG impacts, while COVID-19 triggered widespread negative outlook revisions

Since the onset of COVID-19 and the oil-price fall, the banking and insurance sectors have seen hardly any rating or outlook changes directly attributable to ESG factors. That said, they have been susceptible to indirect impacts, namely rising credit risks and financial market volatility resulting from the pandemic. As of Oct. 16, 2020, we had taken rating actions on 236 banks for reasons indirectly related to COVID-19 and oil prices, with about three-quarters being outlook revisions. For the insurance sector, we took actions on just under 10% of rated entities (three-quarters of which were outlook changes).

*See Appendix for our approach to direct ESG impacts and indirect non-ESG impact of COVID-19

Structured Finance

ESG-related rating actions in October and November remained concentrated in CMBS

Table 5

Structured Finance ESG-Related Rating Actions
Oct Nov Apr-Nov % of total ratings affected
Downgrade 26 60 426
CreditWatch Neg 6 0 375
Negative outlook revision 0 0
Total ESG-related rating actions 32 60 801 1.5
o/w ABS 1 0 41 1
o/w CMBS 25 54 527 19
o/w Linked 0 0 21 0
o/w Non-Traditional* 0 0 200 16
o/w RMBS 6 6 12 0
Data as of Nov. 30, 2020. *Nontraditional structured finance asset classes include wholesale, aircraft, container, railcar, timeshare, small business, and triple-net lease securitizations. ESG--Environmental, social, and governance.

ESG-related rating actions in October and November included 79 downgrades related to commercial mortgage backed securities (CMBS), with several tranches experiencing multi-notch downgrades. In addition, six tranches in three Japanese residential mortgage-backed securities (RMBS) were placed on CreditWatch negative in October, and subsequently downgraded in November, due to non-COVID-19-related health and safety considerations (see case study below). As most of the initial CreditWatch placements following the spread of COVID-19 have now been resolved, ESG-related rating actions may come down.

However, we anticipate collateral performance of consumer asset classes in structured finance will start to deteriorate by the second half of 2021. This is as financial support measures end and unemployment rises. Similarly, greater credit stress among borrowers in corporate transactions could put pressure on related ratings, including on collateralized loan obligations.


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 Nov. 17, 2020; "COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, International Public Finance, And Project Finance To Date," published Nov. 17, 2020, and "COVID-19 Activity In Global Structured Finance As Of Oct. 16, 2020," published Oct. 22, 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 have 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 14 420 6751;
Nicole Delz Lynch, New York + 1 (212) 438 7846;
Patrice Cochelin, Paris + 33144207325;
Nora G Wittstruck, New York + (212) 438-8589;
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Secondary Contacts:Imre Guba, Madrid + 442071763849;
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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 + 905306817943;

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