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ESG credit risks more prevalent in EM

Most emerging market public-sector ESG citations made by Moody’s were for debt issuers in Mexico, followed by China and Brazil.

Editor’s note: This article was first published on ESG Clarity Asia.

Out of the 1,800 rating actions made by Moody’s Investors Service made last year on debt issuers in emerging markets, 36% of them involved material ESG considerations, dominated by governance considerations, according to a report by Moody’s.

“ESG risks are often higher in EMs than they are in developed markets, while issuers’ capacity to respond to these risks are often also weaker,” Nishad Majmudar, assistant vice president and analyst at Moody’s, said in a statement.

“We expect ESG considerations to become even more material to debt issuers’ credit quality globally – and particularly in EMs – given the range and rise of ESG risks, such as climate change and public health,” he added.

An ESG citation indicates that the factor is material to the debt issuer’s overall credit quality, but does not necessarily mean that it was the primary driver of a rating action, the report noted. The rating action can be driven instead by factors unrelated to ESG, such as changes in economic growth, profitability or leverage ratios.

According to the report, ESG considerations were more prevalent in rating actions for public-sector debt issuers in emerging markets than for their peers in developed markets, reflecting generally weaker fiscal, financial and institutional characteristics.

“The difference is especially clear when comparing factors such as challenges to sustainable development and vulnerability and readiness for physical environmental risk,” the report said.

Most emerging market public-sector ESG citations were for debt issuers in Mexico, followed by China and Brazil, according to the report.

Meanwhile, governance was cited as an ESG risk across a broad range of private-sector ratings, indicating its importance and pervasiveness in Moody’s credit analysis. Governance considerations tend to be issuer or transaction specific, whereas environmental and social considerations tend to be more sector-specific.

The report noted that Asia-Pacific accounted for half of the total emerging market private-sector rating action announcements. Most of these Asia-Pacific announcements (67%) were from debt issuers in China, with China accounting for one quarter of the total private-sector emerging market announcements and 34% of emerging market announcements that cited ESG considerations.

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