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The ESG Pulse: 2021 Lookahead

COMMENTS

COVID-19 Impact: Key Takeaways From Our Articles

COMMENTS

The Hidden Risks Of Supply Chain Financing And Partial Asset Selldowns

COMMENTS

Global Actions On Corporations, Sovereigns, International Public Finance, And Project Finance To Date In 2021

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Global Auto Sales Forecasts: The Recovery Gears Up


The ESG Pulse: 2021 Lookahead

CMBS actions dominated ESG-related rating activity in December

The total number of actions trended down to 87 (see chart 1). This included further downgrades in U.S. (48) and European (7) CMBS. ESG-related rating actions in Corporates and Infrastructure fell to 23, of which eight were downgrades.

Chart 1

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Our recent industry review and rating actions on the O&G sector reflect the growing importance of energy transition risks

We conducted an ESG-driven review of our 38 corporate and infrastructure industry scores. This led us to revise our assessments of long-term secular change and substitution risks, and the related effects on growth and profit margin trends for 10 sectors (see "ESG-Driven Industry Risk Assessments Update For Corporate And Infrastructure Ratings," published Jan. 27, 2021 and "Industry Risk Assessments Update: Jan. 27, 2021").

Our review triggered an overall change to our industry scores for the O&G exploration and production as well as midstream sectors. This resulted in rating actions on some of the highest rated O&G majors (see "S&P Global Ratings Takes Multiple Rating Actions On Major Oil And Gas Companies To Factor In Greater Industry Risks," Jan. 26, 2021).

Notably, our industry assessments include a prospective analysis of competitive risk and growth for each sector, and are one of the ways we capture long-term trends and uncertainties in our ratings. While we saw extreme slumps in oil prices, to below $20 per barrel (/bbl) in the middle of last year, the recovery has been equally steep--back to $60/bbl today. Our revised industry risk scores, however, take into account our more fundamental long-term view that hydrocarbon prices will exhibit greater volatility and headwinds from energy transition policies and customer behavior, even if it remains difficult to predict whether oil demand will peak closer to 2030 or to 2040.

Beyond hydrocarbon supply-demand and the ongoing shift to competitive renewable power, our credit focus on environmental factors is first and foremost the evolution of government policies. Now that the Biden Administration has re-joined the Paris Agreement, we can expect further changes to emissions and efficiency standards, even if we think the recent Executive Order on new federal O&G leases will have limited impact (see "Credit FAQ: How The Executive Order Suspending New Leasing Of U.S. Federal Land Will Affect Oil And Gas Companies," Feb. 11, 2021). Longer term, the possibility of seeing carbon border taxes implemented by the EU, and equally supported by the Biden Administration, could be an important development. Also, China plans to launch its long-awaited national emission trading scheme (ETS) in 2021, albeit initially only covering thermal power plants. In Europe, we will be monitoring CO2 developments not least because European ETS prices have recently spiked at €38/tonne from about €24/tonne a year ago.

Social factors will remain a (more) important credit consideration in 2021 and beyond

Last year, the bulk of our ESG-related rating actions (over 96%) stemmed from the direct effects of the COVID-19 pandemic on business activities.

In the first half of 2021, we could still see some rating downside if there is a wider-than-expected spread of more contagious variants and if the efficacy of vaccines reduces, or if there are substantial delays to vaccine distribution or adoption (if a significant percentage of the population is more reluctant or refuses to be vaccinated). Looking at the glass half full, though, China's economy has resisted well with GDP growth in 2020 of 2.3%. Meanwhile, markets seem to be factoring in a return to more normal social and economic activity in the U.S. toward the middle of this year, and in Europe in the second half, as we approach widespread immunization. The latter assumes at least 70% of the adult population is vaccinated, which still might not be sufficient for herd immunity and indicates that getting back to normal is going to be a gradual process. Moreover, any full global recovery will take several years, not least because widespread immunization in emerging markets is not anticipated to happen until well into 2022 or beyond.

Sectors in which credit quality is most sensitive to the pandemic could face further near-term pressure if widespread vaccination only looks likely after summer (rather than by mid-year) or if more contagious variants force governments to take more restrictive actions. In 2020, pandemic-related rating actions mostly centred on developing market sovereigns, air travel and public transportation, hotels, restaurants and retail, entertainment and higher education, and commercial mortgage backed securities. For example, the International Air Transport Association (IATA; the trade association for the world's airlines) recently presented an alternative scenario for global air passenger traffic (see chart 2). Measured in revenue passenger kilometers (RPKs) it reveals traffic could reach only 38% of 2019 levels in 2021 if new COVID-19 variants further disrupt or delay a recovery. This is much lower than the 50% average recovery (from 2019 volumes) IATA predicted in its baseline December 2020 forecast.

For sovereigns and public finance entities, the effect of the pandemic on the cohesiveness of civil society, as well as its direct effect on government finances and macroeconomic indicators, particularly without additional federal support in the U.S., will remain high in the coming months.

Other social credit risks we are focused on relate to the more lasting effects of the pandemic. These include new remote working habits and sweeping cuts to business travel, which could have longer-term implications respectively for the office real estate and travel sectors. We also anticipate that pre-pandemic sales for brick-and-mortar retailers will not return, and that there will be additional shifts in consumer spending driven by environmental and social behavior changes.

Chart 2

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Sustainable debt issuance is set to more than double compared to 2019

We expect global issuance in sustainable debt to surpass $700 billion in 2021, up one-third from 2020 and double the 2019 level (see chart 3). Our projection reflects the acceleration of green-labeled bond issuance (of up to $400 billion in 2021) driven by climate policies and the transition to a low-carbon economy, combined with momentum in social and sustainable debt instruments as the pandemic highlighted the need for these amid rising unemployment, income inequality, and strains on housing, health care, and education systems (see "Sustainable Debt Markets Surge As Social And Transition Financing Take Root," Jan. 27, 2021).

Chart 3

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The use-of-proceeds model could be further extended to transition bonds for companies operating in more carbon-intensive, transitional sectors. This could include those in the materials, O&G, chemicals, and transportation sectors, who are still largely absent from the market because they do not have sufficient green assets to issue green bonds. Transition bonds, while not "green", can provide a potential solution by enabling carbon-intensive companies to raise capital and use the proceeds for activities that help them reduce their carbon footprint. Only a few transition bonds have been issued so far, such as the recent €500 million bond issuance by Cadent, the U.K.'s largest gas distributor. Cadent will partly use the proceeds to replace pipelines with ones that will help carry hydrogen and other low-carbon gases in the future, as well as reduce methane leakage. Other transition financing examples relate to LNG-fueled ships, and even gas-fired power generation projects in markets where they replace much more polluting coal-fired generation. We believe these transition bonds and credit facilities could play a much more important role in the sustainable debt market in 2021, particularly as and if standards for transition instruments become more comprehensive and robust.

ESG Report Card: Global Sovereigns

Social factors are becoming even more important.  The COVID-19 pandemic, for example, has revealed varying degrees of resilience and responsiveness to health and safety risks. By and large, sovereigns with stronger governance credit factors, including from robust monetary policy, have been better able to withstand the credit impact from measures to contain the pandemic.

Environmental risks are tangible and increasingly from the energy transition.  Environmental credit factors are the most complex to capture and, due to climate change and efforts to contain it, the most rapidly evolving. Physical risks pose a limited direct threat to our ratings on sovereigns with advanced economies, since advanced economies with exposure to natural catastrophes also tend to have solid adaptation strategies, resilience records, and infrastructure. Our ratings on many emerging-market sovereigns, on the other hand, already reflect potential risks arising from future natural disasters. This can be seen in the overall good alignment of our economic assessment with the Notre Dame Global Adaptation Initiative (ND-Gain) index.

Chart 4

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For full article see "Environmental, Social, And Governance: ESG Overview: Global Sovereigns," Feb. 2021.

S&P Global Ratings believes there remains high, albeit moderating, uncertainty about the evolution of the coronavirus pandemic and its economic effects. Vaccine production is ramping up and rollouts are gathering pace around the world. Widespread immunization, which will help pave the way for a return to more normal levels of social and economic activity, looks to be achievable by most developed economies by the end of the third quarter. However, some emerging markets may only be able to achieve widespread immunization by year-end or later. We use these assumptions about vaccine timing in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Related Research

ESG in ratings industry-related commentaries

Cross-practice: 

Sovereigns and supranationals: 

International public finance: 

U.S. public finance: 

Corporates and infrastructure: 

Banks: 

Insurance: 

Structured finance: 

ESG in ratings criteria-related commentaries

Cross-practice: 

Sovereigns and local and regional governments: 

U.S. public finance: 

Corporates and infrastructure: 

Banks: 

Insurance: 

Structured finance: 

This report does not constitute a rating action.

Primary Credit Analyst:Karl Nietvelt, Paris + 33 14 420 6751;
karl.nietvelt@spglobal.com
Secondary Contacts:Patrice Cochelin, Paris + 33144207325;
patrice.cochelin@spglobal.com
Joydeep Mukherji, New York + 1 (212) 438 7351;
joydeep.mukherji@spglobal.com
Lori Shapiro, CFA, New York + 1 (212) 438 0424;
lori.shapiro@spglobal.com
Nora G Wittstruck, New York + (212) 438-8589;
nora.wittstruck@spglobal.com
Matthew S Mitchell, CFA, Paris +33 (0)6 17 23 72 88;
matthew.mitchell@spglobal.com
Kurt E Forsgren, Boston + 1 (617) 530 8308;
kurt.forsgren@spglobal.com
Michael Wilkins, London + 44 20 7176 3528;
mike.wilkins@spglobal.com
Nicole Delz Lynch, New York + 1 (212) 438 7846;
nicole.lynch@spglobal.com

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