The impact of environmental, social and governance (ESG) issues in financial markets will grow this year as the effect of government stimulus, decarbonisation policies and greater disclosure requirements overlap, says ratings agency Moody Investors Service.
"As the global economy recovers from the coronavirus pandemic, ESG issues will assume greater importance in the actions of policymakers, regulators, investors and corporate decision-makers. The increasing interaction of these issues will amplify their impact on credit quality, while the positive credit implications of being well positioned to adapt to ESG trends will become more apparent," says Moody's Investors Service senior VP James Leaton.
Moody's this week published its first global 'ESG Outlook' report, which states that green stimulus packages are attaching environmental conditions to bailouts or focusing on the development of low-carbon services and technologies, like electrified transport.
"The effectiveness of government policies aimed at supporting jobs and incomes, and new sectors emerging after the pandemic, will shape sovereigns' credit profiles," Leaton notes.
Moody's states that financial systems are facing a new landscape of transparency requirements. Greater transparency around material ESG issues will increasingly affect access to capital and asset values in high-risk sectors.
A growing landscape of sustainability standards and disclosure requirements through the financial and corporate systems will expose financial flows to greater scrutiny and oversight, and is expected to start having greater influence on investment decisions at all levels, from banks to asset managers to consumers, it points out.
"The growing landscape of measures to align investment with sustainability goals will hit home in 2021, with increasing disclosure requirements improving the ability to differentiate on sustainability issues.
"The events of 2020 will have lasting credit impacts, with green stimulus a priority in advanced economies post-Covid, consumers paying more attention to sustainability issues, and international alignment on climate policy restored," says Leaton.
Further, corporate governance initiatives will increase board diversity. Moody's expects board diversity initiatives to start driving higher turnover on corporate boards.