ESG Framework by Sector

Overview

The following section provides a high-level overview of how we incorporate ESG factors and related considerations in our analytical framework when assigning or maintaining credit ratings.

  • Environmental

    Governments may be exposed to long-term risks associated with their own policies toward the environment. Changes to environmental regulations that corporations and households are required to undertake can have both positive and negative effects on an economy and on public finances. Unless policy changes are particularly dramatic, however, the potential long-term consequences are unlikely to affect credit ratings. Policy adjustments often address unintended adverse consequences before they do permanent damage to government credit fundamentals. Governments are also exposed to risks associated with the environmental policies of other governments, depending on the natural resources, geographic location, topography, and climate of a government’s territory. For example, if the major economies shift rapidly and simultaneously to renewable energy sources, this could have an impact on fossil fuel exporting countries. With regard to the climate impact of GHG emissions, the higher the percentage of a government’s land mass that is vulnerable to flooding, extreme weather events, high temperatures, or drought, the greater the long-term costs will likely be.

  • Social

    Governments are responsible for establishing social policies as well as the laws and regulations that govern corporations. As such, because they set these policies, several social factors are not applicable to governments. Nonetheless, the quality of governmental social policies and services may be observed in the overall level of labour productivity, labour participation, and productivity growth. A primary issue for governments is whether social policies are broadly acceptable to the majority of their populations. If not, social unrest or other conflicts will likely arise. If handled poorly, such conflicts may have a detrimental impact on economic performance, capital flows, public finances, and the overall stability of the political environment.

  • Governance

    Many macroeconomic indicators that are relevant to the analysis of governments largely reflect the overall quality of governance. We may also use credible survey-based indicators similar to those used in the Global Methodology for Rating Sovereign Governments. The quality and independence of government auditors, statistical organisations, and fiscal oversight bodies can affect the credibility of government financial reporting and projections. The governance and independence of central banks and other financial regulatory bodies is also paramount to macroeconomic stability and, therefore, will likely affect government credit ratings. Competitive elections and an independent media can help to hold government officials accountable, limiting opportunities for corruption and preventing or correcting policy errors. Corruption and a disregard for the rights of a territory’s residents may ultimately undermine the degree of public confidence in a government and can leave governments vulnerable to unrest and major political upheavals.

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ESG Factors by Sector

The primary ESG factors listed in Exhibit 1 and their implications across the various sectors are discussed in the examples below. In some cases, investors in a given sector (Structured Finance, for example) may be exposed to passed-through ESG factors of guarantors, key counterparties, or the underlying financial obligations of entities in other sectors.

Environmental
Social
Governance

Morningstar DBRS Considers ESG Important to a Responsible Capital Market

Globally, financial markets are becoming increasingly active with regards to ESG. Markets are moving toward greater transparency and better disclosures from issuers, investors, and rating agencies regarding ESG risks and their impact, and Morningstar DBRS will continue to play an active role in this change.
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ESG Contacts

Business Development

Media