Evidence of credit rating agencies intensifying ESG focus

Below are some examples that provide evidence of how ESG factors are gradually becoming more prominent in CRA rating commentaries or relevant in contributing to rating opinions, clarifying methodologies and in sector research.

They are complemented by eight case studies that demonstrate how ESG consideration helped investors to assess the creditworthiness of selected companies and subsequently make investment decisions.

Corporate issuer: Deutsche Bank
Date: 17 November 2017 Action: Rating downgrade to BBB+ from A- ESGfactor: Governance Key rationale: One reason for the rating action was related to heightened concerns regarding the group’s governance in the context of senior management changes aiming to address strategic restructuring. Source: Scope Ratings AG

Corporate issuer: Deutsche Bank

Date: 17 November 2017

Action: Rating downgrade to BBB+ from A-

ESGfactor: Governance

Key rationale: One reason for the rating action was related to heightened concerns regarding the group’s governance in the context of senior management changes aiming to address strategic restructuring.

Source: Scope Ratings AG

Corporate issuer: Aberdeen Roads (Finance) Plc
Date: 23 February 2016 ESG factor: Environmental physical risk Action: Outlook revised to negative from stable Key rationale: Construction delays following flooding, utility diversion delays and uncertainty on whether the construction joint venture will be held responsible for the delays. Source: S&P Global Ratings

Corporate issuer: Aberdeen Roads (Finance) Plc

Date: 23 February 2016

ESG factor: Environmental physical risk

Action: Outlook revised to negative from stable

Key rationale: Construction delays following flooding, utility diversion delays and uncertainty on whether the construction joint venture will be held responsible for the delays.

Source: S&P Global Ratings

Issuer: TransCanada PipeLines Limited (TCPL)
Date: 13 March 2018 ESG factor: Environmental transition risk Action: Outlook revised to negative from stable, affirms A3 rating Key rationale: TCPL faces uncertainty around its capital expenditure plans, most notably the KXL pipeline, which continues to be challenged by environmental opposition related to carbon dioxide emissions and climate change. Source: Moody’s Investors Service

Issuer: TransCanada PipeLines Limited (TCPL)

Date: 13 March 2018

ESG factor: Environmental transition risk

Action: Outlook revised to negative from stable, affirms A3 rating

Key rationale: TCPL faces uncertainty around its capital expenditure plans, most notably the KXL pipeline, which continues to be challenged by environmental opposition related to carbon dioxide emissions and climate change.

Source: Moody’s Investors Service

Corporate issuer: Israel Electric Corp. (IEC)
Date: 20 July 2017 ESG factor: Human capital management Action: CreditWatch negative placement Key rationale: We placed IEC on CreditWatch following the recent strike by IEC’s employees, which led us to revise IEC’s liquidity assessment to less than adequate from adequate, exposing the rating to a multi-notch downgrade. Source: S&P Global Ratings

Corporate issuer: Israel Electric Corp. (IEC)

Date: 20 July 2017

ESG factor: Human capital management

Action: CreditWatch negative placement

Key rationale: We placed IEC on CreditWatch following the recent strike by IEC’s employees, which led us to revise IEC’s liquidity assessment to less than adequate from adequate, exposing the rating to a multi-notch downgrade.

Source: S&P Global Ratings

Sector analysis: Asset management
Date: 5 April 2018 ESG factor: Gender pay gap and corporate governance Highlight: UK gender pay disclosures will drive better corporate governance for asset managers, a credit positive Key finding: The public disclosure of the gender pay gap will bring more transparency to compensation inequality, which Moody’s Investors Service expects will drive better corporate governance, despite some disruption at first, because of substantial discrepancies. Source: Moody’s Investors Service

Sector analysis: Asset management

Date: 5 April 2018

ESG factor: Gender pay gap and corporate governance

Highlight: UK gender pay disclosures will drive better corporate governance for asset managers, a credit positive

Key finding: The public disclosure of the gender pay gap will bring more transparency to compensation inequality, which Moody’s Investors Service expects will drive better corporate governance, despite some disruption at first, because of substantial discrepancies.

Source: Moody’s Investors Service

Corporate issuer: Yabang Investment Holding Group Co., Ltd.
Date: 14 February 2016 ESG factor: Weak corporate governance Action: Rating downgrade from A to CC – outlook negative Key rationale: Due to weak corporate governance, the CEO of Yabang Investment Holding Group was under investigation, which triggered banks calling in their loans and limited the company’s access to bank financing. Meanwhile, the company had lost most of its external support and faced an acute shortage of liquidity. The credit risk increased significantly. The rating downgrade was based on China national scale. Source: Dagong Global Credit Rating

Corporate issuer: Yabang Investment Holding Group Co., Ltd.

Date: 14 February 2016

ESG factor: Weak corporate governance

Action: Rating downgrade from A to CC – outlook negative

Key rationale: Due to weak corporate governance, the CEO of Yabang Investment Holding Group was under investigation, which triggered banks calling in their loans and limited the company’s access to bank financing. Meanwhile, the company had lost most of its external support and faced an acute shortage of liquidity. The credit risk increased significantly. The rating downgrade was based on China national scale.

Source: Dagong Global Credit Rating

Corporate issuer: Baltic Coast
Date: 22 July 2016 ESG factor: Environmental physical risk Action: Baltic Coast Company rating D confirmed and revoked (Raex Moscow national scale) Key rationale: JSC Baltic Coast used to carry out processing and conservation of fish and seafood. The default of the company – which was preceded by a series in downgrades – was triggered by significant losses of the company’s main subsidiary - PJSC Russian Salmon - due to the spread of infectious diseases and mass fish death in Q3 2015. Source: Rating-Agentur Expert RA

Corporate issuer: Baltic Coast

Date: 22 July 2016

ESG factor: Environmental physical risk

Action: Baltic Coast Company rating D confirmed and revoked (Raex Moscow national scale)

Key rationale: JSC Baltic Coast used to carry out processing and conservation of fish and seafood. The default of the company – which was preceded by a series in downgrades – was triggered by significant losses of the company’s main subsidiary - PJSC Russian Salmon - due to the spread of infectious diseases and mass fish death in Q3 2015.

Source: Rating-Agentur Expert RA

Corporate issuer: Eurasian Natural Resources Corporation (ENRC) Plc
Date: 31 January 2012 ESG factor: Weak corporate governance Action: Rating downgrade from Ba2 to Ba3 – outlook revised to negative Key rationale: Aggressive acquisition and financial policy, likely deterioration in the issuer’s financial profile. Source: Moody’s Investors Service

Corporate issuer: Eurasian Natural Resources Corporation (ENRC) Plc

Date: 31 January 2012

ESG factor: Weak corporate governance

Action: Rating downgrade from Ba2 to Ba3 – outlook revised to negative

Key rationale: Aggressive acquisition and financial policy, likely deterioration in the issuer’s financial profile.

Source: Moody’s Investors Service

Corporate issuer: Vattenfall
Date: 7 June 2017 ESG factor: Environmental transition risk – Policy and legal risk Action: Outlook Revised To Stable On Reduced Power Price Volatility; Affirmed At ‘BBB+/A-2 Key rationale: Improved business risk profile due to the sale of lignite assets, regulatory changes in Sweden and Germany around nuclear waste and increased commissioned capacity from the expansion in wind production under different supportive subsidy schemes. Source: S&P Global Ratings

Corporate issuer: Vattenfall

Date: 7 June 2017

ESG factor: Environmental transition risk – Policy and legal risk

Action: Outlook Revised To Stable On Reduced Power Price Volatility; Affirmed At ‘BBB+/A-2

Key rationale: Improved business risk profile due to the sale of lignite assets, regulatory changes in Sweden and Germany around nuclear waste and increased commissioned capacity from the expansion in wind production under different supportive subsidy schemes.

Source: S&P Global Ratings

Corporate issuer: IBL Banca Spa
Date: 12 March 2018 Action: Assignment of BBB issuer rating, with stable outlook ESG factor: Governance Key rationale: One rating driver was related to the bank’s governance: the key-man role of the bank’s CEO. Source: Scope Ratings AG

Corporate issuer: IBL Banca Spa

Date: 12 March 2018

Action: Assignment of BBB issuer rating, with stable outlook

ESG factor: Governance

Key rationale: One rating driver was related to the bank’s governance: the key-man role of the bank’s CEO.

Source: Scope Ratings AG

Corporate issuer: Banque Fédérative du Crédit Mutuel SA
Date: 6 February 2018 Action: A+ issuer rating affirmed ESG factor: Governance Key rationale: Regarding the contemplated breakout of the Arkea Group from the Crédit Mutuel Group, Scope believes that the Crédit Mutuel Group’s governance and strategy will not be impacted. Source: Scope Ratings AG

Corporate issuer: Banque Fédérative du Crédit Mutuel SA

Date: 6 February 2018

Action: A+ issuer rating affirmed

ESG factor: Governance

Key rationale: Regarding the contemplated breakout of the Arkea Group from the Crédit Mutuel Group, Scope believes that the Crédit Mutuel Group’s governance and strategy will not be impacted.

Source: Scope Ratings AG

Corporate issuer: Pacific Gas & Electricity Company (PG&E) and PG&E Corp.
Date: 20 March 2018 ESG factor: Governance and environmental physical risk Action: Downgrade PG&E to A3 and PG&E Corp to Baa1, negative outlooks Key rationale: The credit rating incorporates the [California] state’s demanding public policy goals and an elevated level of political risk, especially given the company’s history of safety and governance issues as well as potential substantial exposure to rising climate change-related liabilities such as wildfires. Source: Moody’s Investors Service

Corporate issuer: Pacific Gas & Electricity Company (PG&E) and PG&E Corp.

Date: 20 March 2018

ESG factor: Governance and environmental physical risk

Action: Downgrade PG&E to A3 and PG&E Corp to Baa1, negative outlooks

Key rationale: The credit rating incorporates the [California] state’s demanding public policy goals and an elevated level of political risk, especially given the company’s history of safety and governance issues as well as potential substantial exposure to rising climate change-related liabilities such as wildfires.

Source: Moody’s Investors Service

Methodology clarification: How social risks and opportunities feature into global corporate ratings
Date: 11 April 2018 ESG factor: Social Action: Two-year review of how social factors incorporated into S&P Global Ratings’ analyses and how these have affected corporate and infrastructure ratings from July 2015 to August 2017. Key finding: Social factors contributed less frequently to rating actions than environmental and climate (E&C) factors. However, when material, they were overwhelmingly negative to credit quality compared to E&C factors; in particular, human capital and safety management have affected companies’ credit quality more frequently than other social factors. Source: S&P Global Ratings

Methodology clarification: How social risks and opportunities feature into global corporate ratings

Date: 11 April 2018

ESG factor: Social

Action: Two-year review of how social factors incorporated into S&P Global Ratings’ analyses and how these have affected corporate and infrastructure ratings from July 2015 to August 2017.

Key finding: Social factors contributed less frequently to rating actions than environmental and climate (E&C) factors. However, when material, they were overwhelmingly negative to credit quality compared to E&C factors; in particular, human capital and safety management have affected companies’ credit quality more frequently than other social factors.

Source: S&P Global Ratings

Methodology update: Bank Ratings
Date: 10 May 2018 ESG factor: Mainly governance Action: Introduces explicit reference to cyber and ESG risks. Key rationale: Investors in bank debt are increasingly sensitive to governance which in Scope’s view is particularly relevant in an ESG context. Banks’ cyber risk is becoming of paramount relevance and cannot be discounted by credit investors, even if there are very few metrics for a credit analyst to measure it. Source: Scope Ratings AG

Methodology update: Bank Ratings

Date: 10 May 2018

ESG factor: Mainly governance

Action: Introduces explicit reference to cyber and ESG risks.

Key rationale: Investors in bank debt are increasingly sensitive to governance which in Scope’s view is particularly relevant in an ESG context. Banks’ cyber risk is becoming of paramount relevance and cannot be discounted by credit investors, even if there are very few metrics for a credit analyst to measure it.

Source: Scope Ratings AG