January 16, 2020 - In a recent webcast “ESG and Cyber in Credit Ratings”, Jim Hempstead, Managing Director, Global Project & Infrastructure Finance and Brendan Sheehan, VP-Senior Analyst-Environmental, Social & Governance, presented on how Moody’s Investors Service incorporate ESG considerations in Moody’s credit ratings. To start, it is important to understand that E (environmental), S (social) and G (governance) are separate and distinct risks and considerations. Sometimes they may overlap, but often they do not. Moreover, each of these risks can affect different companies differently.  It is also important to remember that Moody’s has always incorporated the most material risks into its credit analysis and if those risks included ESG risks, then they would have been included in the relevant credit rating. The change is not then in the assessment of ESG risk, but rather tin the labeling of these risks and an effort to be more transparent as to how specific ESG risks factor into any given credit rating. Given the increasing interest around ESG globally, in the absence of standards and harmonization, Moody’s has sought to create an integrated vision of ESG and credit focused on leveraging data and analytics across asset classes and geographies. This means that ESG considerations when material to the credit will be incorporated as part of the relevant credit analysis (i.e. on the front-end, not as a notching exercise after the credit rating has been determined). The intention being that there be consistency in the approach to ESG (and Cyber) without requiring undue rigidity in its application.  In order to do this, Moody’s has developed a number of tools to answer the question: How should I define ESG and how do I determine where it matters? The first part is addressed through the (publicly available) credit-relevant taxonomy Moody’s developed to give credit analysts a common language to describe ESG risks. Then, ESG heat maps have been developed which show the relative ranking of sectors globally as to how their credit is exposed to a particular risk consideration as defined in the taxonomy. Cyber risks have also been addressed in its own heat map. Here the focus is on two sets of risk factors – the vulnerability of the sector and the impact of a successful attack. (The heat map shows that financial institutions are particularly vulnerable and corporate sectors like utilities.)  Finally, assessments, which are issuer-specific scores that provide rank ordering of issuers along a single ESG risk, have been developed to avoid a company in a particular industry that has higher risk, e.g. the auto industry, being painted with a broad brush. A Carbon Transition Assessment and a Corporate Governance Assessment are already available with a Cyber Assessment in development.  All of this analysis is then communicated throughout Moody’s ratings and research. This webcast was the second in a dedicated ESG and credit risk webcast series. The first webcast in the series was presented by S&P Global Ratings and the third series will be presented by Fitch Ratings.