Moody's expands its ESG ratings

Moody's Investor Services is expanding its "credit ratings, but for ESG" program to all currently rated airlines, restaurants and gaming companies globally.

Why it matters: Adding ESG ratings alongside Moody's traditional risk analysis puts some weight behind putting those ESG plans into quantifiable action.

State of play: Before the SEC disclosure rules were approved on Monday, the push to net zero in the U.S. has been driven largely by for-profit companies and non-profit organizations.

• Absent a universal standard to measure an organization's climate risk or commitment to reducing emissions, ESG programs and net-zero pledges are often fragmented and siloed between industries and companies, says Libby Toudouze, director at investment services firm IQ-EQ.
• Investors and stakeholders have pressured companies to include more data on the potential risks, but the initiatives are largely voluntary and rely on self-reporting measures.
• Moody's and S&P Global have gone on a shopping spree for companies that model climate risks, which could lead to reduced access to such information, Axios previously reported.

How it works: Moodys looks at the likelihood of loss or default stemming from environmental, social or governance risks to determine whether climate poses a "material" risk to a rated company.

• Companies are then assigned a credit impact score based on their material ESG risks. The issuer-specific rating rates the exposure to the same set of ESG risks, and is included in credit ratings.
• In one example provided to Axios, a prolonged drought would negatively affect a city's tax revenue and costs of getting water to its residents.

• The assessments are based largely on near-term risk given the unpredictability of environmental factors.

Of note: The proposed SEC disclosure rules use similar terminology to Moody's, which could raise issues as some observers were uncertain as to how the SEC would determine materiality.

What they found: Airlines, gaming, and restaurants are all negatively impacted when the new impact scores are incorporated.

What we're watching: As more industries transparently adopt quantitative ESG measures, investors may opt for less risky industries and send public markets into a repricing frenzy.

• The risks aren't new. Investors are just getting a bit more transparency into exactly what risks they are taking.