Moody’s Investors Service says that changing environmental, social and governance considerations can affect sovereign ratings.

“Such considerations — commonly referred to as environmental, social and governance (ESG) risks — have become of increasing importance to investors over the last several years, and Moody’s has a long track record of assessing these considerations, focusing on their impact on a government’s ability to make debt payments,” says Gabriel Torres, a Vice President Senior Credit Office in Moody’s Sovereign Group.

“Certain ESG risks are already captured directly as indicators in our sovereign rating methodology, while others influence subfactors and indicators that support our credit analysis,” adds Torres. “At the same time, we acknowledge that it is rarely possible to identify the precise impact of such risks on a particular sovereign’s rating.”

Moody’s conclusions are included in its just-released report “Sovereigns — Global: Environmental, social and governance risks influence sovereign ratings in multiple ways”.

Moody’s report points out that, while ESG is often spoken of as a single, homogeneous category of risk and while the three overlap in some respects, they are also quite distinct from one another.

Accordingly, it is important to appreciate their distinctness if they themselves are to be properly understood, and measures to address each are to be properly assessed.

Of the three E, S and G risks, G has the strongest quantitative relationship with both sovereign ratings and Moody’s four methodology factors: economic strength, institutional strength, government fiscal strength, and susceptibility to event risk.

Specifically, Moody’s assessment of institutional strength includes measures of government effectiveness, rule of law, and control of corruption.

Governance risks are also relevant to Moody’s assessment or political risk, since weak governance raises the risk that political tensions or conflict have an impact on a country’s economy or public finances.

Meanwhile, both E and S can influence Moody’s assessment of economic, institutional and, to a lesser extent, fiscal strength.

Environmental credit considerations relate to the physical conditions in which societies operate, both at present and in the future. The latter draws in the impact of climate changes, as well as the global transition to less carbon-intensive economic development.

And social considerations encompass threats to a sovereign’s credit profile that derive from society’s characteristics and structure. Such considerations include, among others, the fiscal, economic and political implications of social conditions such as poverty, inequality or violence and crime.

About the author

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Sign Up for Our Newsletter

Get notified of our weekly selection of news

You May Also Like

How will US interest rates affect emerging markets?

While the rate hikes were initiated to help the US domestic economy, higher interest rates are nevertheless likely to impact emerging markets.

How long can the Bank of Thailand stay dovish?

The BOT is one of the few major Asian central banks to have kept rates at record lows since the pandemic began, but it recently signaled a policy shift as inflation surged to a near 14-year high in May.

SEC tightens regulations on digital assets to enhance investor protection

In case of a withdrawal or transfer of fiat money at an amount from 2 million baht to not exceeding 50 million baht, digital asset business operators shall seek approval from two authorized persons.