Below are examples showing how ESG factors are becoming more explicit in CRA commentaries, adding to the list that the PRI published in part two. Corporate and sovereign credit risk examples are offered in chronological order, showing that rating or outlook changes, which are directly influenced by ESG factors, can be positive as well as negative.
Corporate examples
| Corporate issuer: Taiyo Life Insurance, Daido Life Insurance, and T&D Financial Life Insurance |
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Country: Japan Sector: Insurance Date: 12 February 2016 ESG factor: Governance Action: Upgraded insurance claims paying ability from A+ to AA- credit rating; outlook: stable (hyperlink not available) Key rationale: T&D Life group fully introduced group-wide enterprise risk management (ERM) and incorporated it into the management’s decision-making process. The management team is also highly conscious of ERM operations. Source: Rating and Investment Information, Inc. |
| Corporate issuer: Lloyd’s of London Ltd. |
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Country: UK Sector: Insurance Date: 12 October 2017 ESG factor: Environmental Key rationale: Announced and estimated losses from hurricanes Harvey and Irma that are large compared with existing capital buffers and relative to those of peers. Source: S&P Global Ratings |
| Corporate issuer: Wynn Resorts |
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Country: US Sector: Casino and gambling Date: 30 January 2018 ESG factor: Social and governance Action: Outlook revised from stable to negative; BB- credit rating affirmed Key rationale: Reputational and legal/regulatory risks associated with sexual misconduct allegations against founder/CEO. Source: Rating and Investment Information, Inc. |
| Corporate issuer: William Hill plc |
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Country: UK Sector: Gaming Date: 22 May 2018 ESG factor: Social Action: Outlook changed to negative from stable; affirmed Ba1 credit rating Key rationale: Action reflects the UK government’s Triennial Review announcement on 17 May 2018 that the maximum stake on B2 games will be reduced from GBP100 to GBP2 following a consultation with the public and the industry, seeking to balance sector profitability with social responsibility. Source: Moody’s Investors Service |
| Corporate issuer: Wells Fargo Corp. |
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Country: US Sector: Banking Date: 7 February 2018 ESG factor: Social and governance Action: Credit rating downgraded from A to A-; outlook stable Key rationale: Asset growth capped until the company further enhances its governance and compliance and risk management to the standards required by the regulator; the downgrade also reflects ongoing ramifications of its retail sales practices issues. Source: S&P Global Ratings |
| Corporate issuer: JSC Rusnarbank |
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Country: Russia Sector: Banking Date: 25 May 2018 ESG factor: Governance Action: Credit rating affirmed at B+; stable outlook Key rationale: The rating continues to be restrained by challenges related to execution of the bank’s new strategy, given current industry economic developments in the banking industry. Source: Rating-Agentur Expert RA GmbH |
| Corporate issuer: AMN Healthcare, Inc. |
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Country: US Sector: Gaming Date: 28 May 2018 ESG factor: Social Action: Credit rating upgraded to Ba1 from Ba2; stable outlook Key rationale: Moody’s expects that over the long term AMN will benefit from favourable industry trends, including growing demand for health services due to an ageing population and a shrinking pool of healthcare professionals. Source: Moody’s Investors Service |
| Corporate issuer: Kinder Morgan, Inc. (KMI) |
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Country: US Sector: Oil and gas - midstream Date: 17 August 2018 ESG factor: Environmental and governance Action: Outlook changed to positive from stable; affirmed Baa3 credit rating Key rationale: Sale of Trans Mountain has reduced KMI’s exposure to environmental opposition to the liquids pipeline expansion, which is credit positive. With respect to governance, KMI faces some challenges to provide more disclosure around its exposure to carbon emissions and potential legislative or regulatory risks around climate change, as evidenced in its recent shareholder vote. Source: Moody’s Investors Service |
| Corporate issuer: Country Garden Holdings Company Ltd. |
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Country: China (domiciled in Cayman Islands) Sector: Homebuilding and property development Date: 2 August 2018 ESG factor: Social Action: No impact on credit rating, affirmed Ba1 Key rationale: Multiple fatalities and injuries associated with Country Garden Holdings Company Limited’s construction work at three projects in China over the last three months are credit negative, but will not immediately affect the company’s Ba1 corporate family rating (CFR) or the stable outlook on the rating. Source: Moody’s Investors Service |
| Corporate issuer: Toshiba Corp. |
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Country: Japan Sector: Electrical appliances Date: 29 August 2018 ESG factor: Governance Action: Upgraded credit rating from BB+ to BBB-; outlook stable Key rationale: Toshiba’s financial structure improved by selling off semiconductor memory business. R&I also confirmed its improvement in governance, including the enhancement of the board of directors’ composition. Source: Rating and Investment Information, Inc., |
| Corporate issuer: Hydro One Ltd. |
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Country: US Sector: Utilities Date: 13 September 2018 ESG factor: Governance Action: Credit rating downgraded from A to A- Key rationale: The one-notch downgrade reflects our reassessment of HOL’s management and governance structure, which in our view, has weakened following the Government of Ontario’s decision to exert its influence on the utility’s compensation structure through legislation, with the passing of the Hydro One Accountablility Act. Source: S&P Global Ratings |
| Corporate issuer: Tahoe Group Co., Ltd |
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Country: China Sector: Real estate Date: 10 October 2018 ESG factor: Governance Action: Long-term foreign currency issuer default rating downgraded to B- from B; outlook negative Key rationale: Two ratings drivers related to aggressive financial strategy and lack of transparency/visibility on sales (cash collections substantially lower than contracted sales). Source: Fitch Ratings Ltd |
| Corporate issuer: Signet Jewelers Ltd |
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Country: US (domiciled in Bermuda) Sector: Luxury goods Date: 8 October 2018 ESG factor: Social Action: Outlook revised to negative; long-term issuer default rating affirmed at BB Key rationale: Rating drivers impacting top line sales include consumer sentiment following recent diamond swapping and female employee treatment allegations, as well as failure to adapt to changing consumer preferences. Source: Fitch Ratings Ltd |
| Corporate issuer: Kemble Water Finance Limited |
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Country: UK Sector: Water and waste management Date: 31 October 2018 ESG factor: Environmental Action: Senior secured debt downgrade to BB- from BB; outlook stable Key rationale: Ratings driven by opco performance (Thames Water) where poor regulatory performance on leakage and customer service have led to significant performance penalties (£230 mi) and a need for higher spending in the next regulatory period. Source: Fitch Ratings Ltd |
| Corporate issuer: Yes Bank Limited |
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Country: India Sector: Banking Date: 27 Nov 2018 ESG factor: Governance Action: Foreign currency issuer downgraded to Ba1 from Baa2; outlook changed to negative Key rationale: Action considers the resignation of various members of the bank’s Board of Directors - which, when seen in conjunction with the Reserve Bank of India’s (RBI) directive in September 2018 to restrict the term of the bank’s Managing Director and Chief Executive, as well as founder Rana Kapoor, till 31 January 2019 - have raised Moody’s concerns over corporate governance. Source: Moody’s Investors Service |
| Corporate issuer: Edison International (EIX), Southern California Edison Company (SCE) |
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Country: US Sector: Regulated electric and gas utilities Date: 3 December 2018 ESG factor: Environmental Action: Outlook changed to negative from stable; affirmed Baa1 issuer rating of EIX, and A3 of SCE Key rationale: Cumulative exposure to wildfires exacerbated by the effects of climate change are materialising faster than we originally expected. Efforts to insulate the utilities, in the form of new laws or regulations, will be slow and drawn out, putting downward pressure on its credit rating. Source: Moody’s Investors Service |
Sovereign examples
| Sovereign issuer: Turks and Caicos Islands |
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Date: 28 June 2018 ESG factor: Environmental Action: BBB+ rating affirmed; outlook revised to stable Key rationale: Estimates for total damage, losses, and other costs associated with hurricanes Irma and Maria of about 55 per cent of Turks and Caicos Islands’ GDP. Source: S&P Global Ratings |
| Sovereign issuer: Russia |
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Date: 17 February 2017 Action: Outlook changed from stable to negative, Ba1 rating affirmed ESG factor: Social Key rationale: In the absence of structural reforms that address high poverty levels, the declining working age population and the multitude of factors that constrain investment, the rating agency that expects potential growth will remain at 1.5-2 per cent. Source: Moody’s Investors Service |
| Sovereign issuer: Turkey |
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Date: 13 July 2018 ESG factor: Governance Action: Downgraded to BB from BB+, outlook negative Key rationale: Drivers of the downgrade included deterioration in economic policy credibility, and policy actions which increased economic uncertainty. Source: Fitch Ratings Ltd |
| Sovereign issuer: Fiji |
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Date: 6 September 2017 Action: Upgraded to Ba3 from B1, outlook changed to stable from positive ESG factor: Environmental Key rationale: Despite government measures to mitigate the impact of climate change, Fiji’s economy and public finances will remain highly vulnerable to both sudden climate events and gradual climate change trends, a constraint on its rating. Source: Moody’s Investors Service |
| Sovereign issuer: US |
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Date: 21 September 2018 ESG factor: Governance and social Action: Credit rating affirmed at AA; stable outlook Key rationale: Qualitative governance-related assessments on “recent events and policy decisions” and “geo-political risk” are assessed as “weak”. “Macro-economic stability and sustainability” is assessed as “neutral”, balancing a very diversified economy with heightened inequality. Source: Scope Ratings GmbH |
| Sovereign issuer: Federal Republic of Germany |
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Date: 2 November 2018 ESG factor: Governance and social Action: Credit rating affirmed at AAA; stable outlook Key rationale: Governance-related factors are explicitly captured in Scope’s quantitative model in Germany’s high WGI scores. Social-related factors are captured in Germany’s high GDP per capita (US$ 44,769 in 2017) and record-low level of unemployment but increasing old-age dependency ratio. Source: Scope Ratings GmbH |
| Sovereign issuer: Indonesia |
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Date: 23 October 2018 ESG factor: Social and governance Action: Upgraded to BBB- from BB+; outlook stable Key rationale: Government’s new focus on realistic budgeting and better data collection, combined with plans to address the existing shortfall in infrastructure and basic services. Source: S&P Global Ratings |
| Sovereign issuer: Sri Lanka |
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Date: 3 December 2018 ESG factor: Governance Action: Downgrade to B from B+; outlook stable Key rationale: Heightened external refinancing risks, an uncertain policy outlook, and the risk of a slowdown in fiscal consolidation contributed to the downgrade, also driven by a political crisis, following the President’s sudden replacement of the Prime Minister on 26 October 2018. Source: Fitch Ratings Ltd |
Download the report
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Shifting perceptions: ESG, credit risk and ratings: part 3 - from disconnects to action areas
January 2019
ESG, credit risk and ratings: part 3 - from disconnects to action areas
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Currently readingCRA examples
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