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The ESG Pulse: Texas Storm Highlights Need For Preparedness

Table 1

ESG-Related Rating Actions
Sovereigns International public finance U.S. public finance Corporates and infrastructure Structured finance Total
Downgrade 2 5 3 23 42 75
CreditWatch negative -- -- 8 12 9 29
Downward outlook revision 1 -- 3 4 -- 8
Upgrade/upward outlook revision -- -- 1 5 -- 6
Total ESG-related rating actions* 3 5 15 44 51 118
Of which social§ 3 4 6 21 42 76
Of which governance§ -- 1 10 3 -- 14
Of which environmental§ -- -- 8 20 9 37
*Rating actions comprise rating, CreditWatch, and outlook changes over January-February 2020. Since March 30, 2020, S&P Global Ratings references in its press releases when rating changes have been influenced by ESG factors. §The sum of social, governance, and environmental actions exceed total ESG rating actions because some actions were influenced by multiple factors. ESG--Environmental, social, and governance.

Chart 1


The pandemic has heightened the need for effective crisis management and emphasized the importance of stronger board engagement and oversight of ESG issues, as we highlight in the ESG-related reports "Six Key Corporate Governance Trends For 2021" (published March 22, 2021) and "Rising Shareholder Activism Mostly Harms Credit Quality" (published March 17, 2021).

2020 was very much a litmus test for governance and preparedness by management and boards.   The pandemic laid bare companies' resilience (or lack thereof) in dealing with a crisis and being responsive and adaptable. There will be a lot to draw from the experience in the coming years, particularly when assessing how ready companies are to prepare for another systemic challenge: climate change. The recent events caused by February's winter storm, which left millions of homes in Texas without power (see chart 2), have shown the need to prepare for the unexpected. Compared with the last extreme climate event in February 2011, the number of consecutive hours with subfreezing temperatures was multiplied by 2.3x. Power prices are known to spike at extreme levels for a few hours, but before the Texas storm they had never averaged highs of $6,600 per megawatt hour (/MWh) over a six-day period. During the event, 60% of generation capacity was knocked out, including due to gas supply interruptions, since production equipment froze. While it may be unrealistic to expect this level of disruption, ESG is about scenario analysis and trying to factor in how companies and their boards are prepared and can mitigate or adapt.

Chart 2


We believe investors are increasingly taking a longer-term and more holistic view, and climate change is key to this.   About 15 years ago, investors campaigned for a "Say on Pay"; now they are demanding a "Say on Climate," asking companies to not only disclose their emissions, but also to provide concrete plans to address climate change and deliver the transition required by the Paris Agreement. Underpinning most of these campaigns is the search for value. This includes better management of social and environmental risks and opportunities, which are essential to long-term, sustainable value creation in the interests of all stakeholders. Our credit ratings, and

our ongoing transparency efforts to highlight ESG impacts on credit ratings, align with the increased credit importance of sustainability factors: for instance, we recently reassessed our oil and gas long-term industry risk and related rating actions on various oil majors (see "ESG-Driven Industry Risk Assessments Update For Corporate And Infrastructure Ratings," published Jan. 27, 2021).

Further illustrating investors' increasing focus on ESG is the threefold rise in environmental and social-driven campaigns (see chart 3).   While shareholder activism that targets mergers and acquisitions (M&A), company breakups, and capital structure tends to be strongly credit negative, we have yet to take rating actions as a direct consequence of environmental or social campaigns.

Environmental campaigns have primarily targeted U.S.-based oil majors, transportation, and restaurant/retail sectors, as well as financial services. Most of these campaigns focused on climate change, while a small number pinpointed deforestation and plastic usage. Following activist pressure, several companies, including Unilever PLC, agreed to allow annual shareholder votes on its progress toward climate targets. Unsurprisingly, as a result of the COVID-19 upheaval, a number of social campaigns targeted companies in the consumer products, restaurants, and retail sectors as well as financial services entities. Their focus was the implementation of human rights policies, improvement to workforce health and safety, resilience, and increasing diversity.

Corporate governance activism exceeded one-half of all campaigns for the first time in 2020 (see chart 3).  

Chart 3


Over the past six years, we took 12 rating actions resulting from governance-related activism (10 of which were negative). Abrupt changes in management, disagreements between existing board members and the new activist-nominated board member, or simply the change itself (laying bare past dysfunction or diverting management's attention from key strategic objectives) can be credit negative if we believe the company's ability to service debt will suffer as a result. One example of governance-related campaigns with a credit-positive development is our outlook revision in 2020 on agribusiness leader Bunge Ltd. from negative to stable, following a successful turnaround program.

ESG Analysis By Sector

Chart 4


Sovereigns And International Public Finance

Chart 5


Chart 6


Find a list of all rating actions in this sector here.

In our overview of ESG factors in sovereign ratings (see box below as well as "ESG Overview: Global Sovereigns," published Feb. 3, 2021), we offer a deeper look at the ESG factors that influence our sovereign credit ratings. Naturally, governance and social factors are at the heart of our sovereign risk analysis, but environmental risks, particularly climate and physical risk, are gaining prominence. For example, we noted in February the ongoing impact of recurrent extreme weather events on Mozambique's economic growth prospects.

Still, most ESG-driven rating actions taken in January-February 2021 in the Sovereign and International Public Finance sectors reflect the ongoing credit impact of health and safety risks posed by the pandemic on sovereign and sub-sovereign entities. For instance, we took negative rating actions on six Canadian airport authorities (of which four were downgrades), reflecting our expectation that activity levels at the airports will remain severely depressed and unpredictable due to the ongoing effects of the pandemic. A year after the onset of COVID-19, rate-setting mechanisms have not proven effective in the current low-volume environment, and headroom within the ratings has been depleted.

U.S. Public Finance

Chart 7


Chart 8


Find a list of all rating actions in this sector here.

U.S. public finance (USPF) ESG-driven rating actions slowed in January and February, but the severe winter storm in Texas presented unique challenges for utilities in that state. Even if health and safety social risks stemming from the pandemic continue to weigh on certain sectors, 10 of the 15 ESG-driven rating actions taken in USPF over the two months were related to the February storm, reflecting both environmental exposure to physical climate change (natural conditions) and related risk-management concerns (governance).

The most pronounced rating transition stemmed from the sudden bankruptcy and default of Brazos Electric Power Cooperative on March 1, 2021. Although details of the events that saddled this utility with a $1.8 billion bill for electricity purchase over the course of a week are still unfolding, it appears that the extreme weather, which disabled power plants at Brazos and across Texas, triggered major short exposures and drove wholesale power prices to $9,000/MWh (see "Winter Storm In Texas Will Continue To Be Felt In Utilities' Credit Profiles," published March 15, 2021).

For public power and electric cooperative utilities in Texas, February's severe winter event brought into sharper focus a spectrum of ESG-related risks that may inform our credit analyses and rating actions over the longer term. In our view, the specter of climate change may weigh more heavily as a credit risk factor for these not-for-profit utilities. In particular, we expect to consider the adequacy of management's counterbalancing measures to plan for, mitigate, or adapt to risks associated with extreme weather conditions that have the potential to disrupt power generation and transmission. Among these considerations are exposures under commodity hedging arrangements, plans relating to power plant weatherization and redundancy, and capital and liquidity sufficiency.

Corporates And Infrastructure

Chart 9


Chart 10


Find a list of all rating actions in this sector here.

The COVID-19 pandemic--which we classify as a health and safety factor when it directly influences an entity's business activity--continued to account for close to one in two ESG-driven rating actions over the first two months of 2021. Among these actions, media and leisure companies continued to be negatively affected by social-distancing requirements, including downgrades of Viking Cruises Ltd., Royal Caribbean Cruises Ltd., and Lago Resort & Casino. Aerospace issuers continue to be affected by ongoing weak commercial air travel, including downgrades of Hexcel Corp. and Embraer S.A. The extended impact of lockdowns also triggered downgrades of food services provider Elior Group S.A. and Dutch catering and hospitality provider, Vermaat (Vincent Topco BV).

A significant (40%) share of ESG-related rating actions in January-February was influenced by environmental factors, as follows:

  • We lowered the ratings on six highly rated investment-grade oil and gas players, including Exxon Mobil Corp., Chevron Corp., Royal Dutch Shell PLC, Total S.A., and ConocoPhillips, while revising the outlook to negative on two others, including BP PLC. Rating actions were triggered by a change in our industry risk assessment for oil and gas exploration and production and integrated companies, reflecting heightened uncertainty caused by the energy transition, including: gradual market share declines due to growth of renewables; pressures on profitability; and recent and expected higher oil and gas price volatility (see "The Change To The Industry Risk Assessment For Exploration & Production Companies And What It Means For Issuer Ratings," published Jan. 25, 2021).
  • Extremely harsh weather conditions in February (due to the storm in Texas) triggered negative rating actions affecting many electric and gas market participants in Texas and the U.S. southwest (see "Winter Storm In Texas Will Continue To Be Felt In Utilities' Credit Profiles," published March 15, 2021). Even if merchant generators and independent power producers have been less exposed to credit pressures than public electric utilities (see U.S. Public Finance, above), we placed Vistra Corp. and NRG Energy Inc. on CreditWatch with negative implications. Investor-owned gas utilities Atmos Energy Corp. and Gas One suffered a downgrade, after gas supply costs soared in the wake of supply disruptions and a spike in demand.

Financial Services

Financial services ratings have experienced very few ESG-related impacts over the past 12 months.  Over the past year, the banking and insurance sectors have seen hardly any rating or outlook changes directly attributable to ESG factors. The ESG trends we see as most relevant for financial services companies, and which are growing in momentum, are tackling climate change and the standardization of ESG reporting. As many countries target a green recovery post-COVID-19, banks and insurers have an opportunity to support this with regards to the way they allocate capital through lending, investing, or underwriting. This presents opportunities for growth and returns, but also poses challenges as firms look to manage their exposures to climate risks throughout their value chains. However, because banks and insurers are often dependent on the quality of disclosure from their underlying counterparties (for example, borrowers, policyholders, or investee companies), their ability to reliably assess their own exposures can be affected if there are gaps in the underlying data.

Structured Finance

Chart 11


Chart 12


Find a list of all rating actions in this sector here.

While all ESG-related rating actions in 2020 were driven by social credit factors, primarily due to health and safety considerations related to the pandemic, rating actions at the beginning of 2021 reflect some exposure to environmental credit factors. Six out of 43 rating changes in February were linked to the recent revision in industry risk in the oil and gas sector, and three more were downgrades attributed to the environmental risk of coal ash. However, 42 out of a total of 51 rating changes (36 of which were downgrades) in January and February stemmed from health and safety considerations. Commercial mortgage-backed securities (CMBS) remains the most affected sector, with a total of 39 ESG-related rating actions. Amid renewed waves of COVID-19 infections and the spread of new variants, social-distancing restrictions continue to weigh on the revenues and credit profile of properties that back loans in commercial mortgage-backed securities (CMBS), such as shopping centers (see case study, below).


COVID-19's direct (ESG) versus indirect (non-ESG) impact.   We consider the COVID-19 pandemic to be 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 pandemic-induced recession, 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 March 18, 2021; "COVID-19- And Oil Price-Related Public Rating Actions On Corporations, Sovereigns, International Public Finance, And Project Finance To Date," published Feb. 23, 2021, and "COVID-19 Activity In Global Structured Finance As Of Dec. 11, 2020," published Dec. 18, 2020.

We have tagged rating actions tied directly to health and safety concerns as ESG-driven.  One of the clearest examples is airlines, for which demand has significantly dropped 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 pandemic-induced recession

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-driven. Similarly, many corporate sectors are indirectly affected; for instance, many consumer products companies have had to reduce their advertising, thereby affecting 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:

This report does not constitute a rating action.

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Research Contributor:Yogesh Balasubramanian, CRISIL Global Analytical Center, an S&P affiliate, Mumbai

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