Moody’s Incorporate ESG into Ratings

The U.S. Securities and Exchange Commission (SEC) registers Moody’s Corporation as a Nationally Recognized Statistical Rating Organization (NRSRO) which permits other financial institutions and relevant stakeholders to refer to Moody’s Corporation’s analyses for certain regulatory purposes given Moody’s Corporation’s role assessing the creditworthiness of an obligor as an entity or with respect to specific securities or money market instruments. Moody’s Corporation, in these assessments, determines the qualitative and quantitative creditworthiness’ materiality on a variety of metrics, including evidence for and understanding the role of off-balance sheet metrics. Given that:

• The SEC considers climate change risks material;

• The Intergovernmental Panel on Climate Change and the International Energy Agency have stated that, in order to achieve the international goal of limiting global warming to 2˚C, the world will need to live within a set carbon budget financed through capital markets;

• As indicated by  the more than 1200 signatory members of the Principles for Responsible Investment,  including financial services industry ratings agencies, and others such as MSCI and Morningstar, representing over $35 trillion in assets under management, institutional investors are concerned about the qualitative and quantitative materiality of ESG considerations in evaluating and comparing risk across the credit markets; and

• S&P, Moody’s Corporation competitor, recently updated its overall credit rating methodologies for assessing management and governance credit factors to now qualitatively and quantitatively incorporate systematic approaches to including ESG risks incorporated into traditional governance factors;

Furthermore, in a recent Institutional Investors Group on Climate Change survey, asset managers who manage greater than USD $14 trillion stated that 69% considered climate change a material risk that influenced their selection decisions. CDP (formerly Carbon Disclosure Project) supports 722 institutional investors holding US$ 87 trillion in assets in revealing the climate risk in their investment portfolios.

 

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