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

    Environmental risks are becoming increasingly important to companies as new standards and regulations are imposed and stakeholders demand more transparency and consistency in reporting. Some industries are particularly vulnerable to environmental and climate factors, including O&G, oilfield services, mining, automotives, and airlines. In terms of climate change the more extreme weather volatility the world is now experiencing, can damage economic and social infrastructure. Although the exact timing and severity of physical effects are difficult to estimate, the extent of the potential damage from climate change is becoming increasingly apparent and nearer term. This has led government organisations to implement stricter financial measures to induce companies and individuals to reduce their GHG footprint or adapt existing plans to be more impactful or realised within a shorter timeframe. Companies face costs not only to transform their operations to a low-GHG environment but also adaptation costs to improve the resilience of their infrastructure in order to withstand greater climate volatility. Large remediation costs or GHG-offset efforts can be expensive and adversely affect short-term profitability. An assessment of corporate strategies’ resilience to climate change risks may lead to capital expenditures for mitigation and adaptation, which will help to protect future revenues but may have a negative financial impact in the near term.

  • Social

    Several corporate industries may be subject to social factors, affecting companies’ customer and employee bases and, if not effectively managed, can have knock-on effects on the sale of goods and services. Social factors can also affect a company’s financial position in the form of litigation costs. The consumer products industry, for example, may be sensitive to changes in consumer behaviour and trends, such as increased health concerns or heightened awareness of certain materials in a company’s products. The social impact of products and services, human capital, and related regulation may influence credit ratings in other sectors, including O&G, mining, industrial products, and automotives.

  • Governance

    An analysis of governance includes the examination of board or governing-body composition, senior management, external auditors, company ownership and stock structure, history of legal or regulatory actions, and the nature of any regulatory issues. Strong governance with positive employee relations and the balancing power of an able chief executive officer improves the likelihood of long-term financial health. Certain structures can also pose governance challenges; for example, those that are owned or controlled by a family, or by a limited number of private owners, often involve more complex ownership structures and potential conflicts of interest. In relation to climate risk, issuers with governance frameworks including direct oversight of climate change risk reduction efforts are more likely to mitigate such risks and impacts whilst better understand opportunities when present.

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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