Moody’s Expands Impact Scoring Coverage for Credit Ratings

Rating agency Moody’s has expanded its “credit impact score” system for environmental, social and governance (ESG) issues to include financial institutions and US counties, among other sectors.

The scoring system assesses bond issuers’ exposure to ESG risks and how these could impact the creditworthiness of companies. ESG scores are widely used by investors and asset managers to rank and select providers and securities on sustainability issues.

“Market participants are increasingly focusing on ESG issues and their potential to affect credit risk and investment decisions,” said Brian Cahill, managing director of ESG at Moody’s Investors Service.

The expansion has led to a range of economic sectors and industries being rated in ESG criteria for the first time. The impact of such criteria on tobacco companies was “very highly negative”, Moody’s reported, due to exposure to “negative social risk”.

The impact on airlines was “moderately negative” due to the high level of emissions from air travel and companies’ “limited ability to lower their CO2 emissions”, Moody’s said.

Most financial institutions, however, would experience “limited” impact on their creditworthiness from ESG criteria, the rating agency said.

Moody’s assesses companies on a number of factors including risks from the physical impact of climate change, the amount of waste and pollution produced, and how firms stand to be affected by the move to low-carbon energy sources.

On the social side, Moody’s assesses health and safety issues, customer relations, and responsible production practices such as supply chain management, among other factors.

The Securities and Exchange Commission announced in February that it was raising the importance of ESG criteria for credit rating agencies. The regulator has previously raised concerns about disclosure standards among rating agencies with regard to sustainability factors.